It was inevitable that the question of deflation and productivity would lead to Elmer J. Fudd. Millionaire, owner of mansion and yacht, the longtime Warner Bros. cartoon foil explains (literally, starting around 5:00) the virtuous circle of productivity, profit, reinvestment, growth and more productivity, in this strictly-for-completists short, based on the Grimm story of the shoemaker and the elves, from 1956:

Though I actually saw this short as a kid (and remembered only the Jehosaphat/Rumpelstiltskin gag), I owe the discovery to Mark Vargus, who uses it in an excellent rebuttal of the old argument that profits resulting from better productivity are always hogged by the bosses:

We no longer live in the age of tenant farmers, where the ability of workers to move in search of new and better jobs was greatly limited by technology and politics. Today a worker who feels that the local job market is not willing to pay him fairly for his efforts is not prevented from moving long distances in search of better paying employers. This forces companies to pay closer attention to how well they pay workers. If they fail to recognize the most productive of their workers, they could lose them to other companies.

My question: Is there some equation for the effects of inflation/deflation on productivity measures? I mean, you could argue that a lot of the very strong worker productivity growth of the U.S. this decade has been illusory, because the value of what was being produced was overstated. On the other hand, despite the downward stickiness of wages Vargus describes above, for the past few years it has been quite difficult to tell the boss man to shove it and get another job.

Vargus has another interesting point in an aside:

Sadly, some of this short lecture is no longer true due to government interference in markets as the payment of dividends to investors is no longer common. Instead companies work to increase their market valuation and stock holders look to see their portfolio values increase, rather than holding stocks for the dividend payments. However, that argument belongs in an article all its own.

I have owned a few stocks over the years, but I don't recall ever receiving a dividend, and I'm not even sure what the mechanism is for paying a dividend on an equity product, so ascendant is the psychology of increasing market valuation. (Yes, I know there are some fancy dan stocks out there that still pay dividends, or are supposed to.) In fact, it's only through popular culture, in the form of movies and TV where Charles Coburn or Mr. Drysdale rub their hands over stock dividends, that I know this was once a really important feature of the market.

Speaking of which, the above cartoon, with the meaningless title Yankee Dood It, has an interesting provenance. Per wikipedia, it's one of three Warners cartoons sponsored by the Alfred P. Sloan Foundation. Given his disinterest in cartoons, it's unsurprising that Jack Warner didn't mention it in his memoir My First Hundred Years In Hollywood, where he does spend a lot of time talking about the political contexts of his more propagandistic films. But it's still an interesting window on the politics of the fabulous fifties: not just that somebody felt the need to argue that productivity benefits somebody besides greedy bosses, but that they made the argument through the commander of a militarized corps of elves.

NEXT: Barack Obama, Tax Reformer

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  1. In most states IIRC, a company’s board of directors can “declare” a dividend to be paid to the company’s shareholders. The dividend need not be cash — for example, a poison pill is typically a dividend distribution of the right to acquire dilutive shares — but has been historically.

  2. Something I’ve advocated for quite a while is eliminating the double taxation on corporate dividends. In a free market, the valuation of a stock is supposed to depend on the dividend and the investors’ expectation of future dividends. Removing dividends from the feedback loop makes for much higher volatility, especially on the down side.


  3. One of the other 3 cartoons commissioned by the Alfred P. Sloan foundation is By Word of Mouse. Shit, I haven’t seen that in years, but it’s fondly remembered.

    Also… Isadore “Friz” Freleng directed the classic Three Little Bops short.

  4. Another advantage of dividends is that it forces honesty in bookkeeping (to a certain extent) on companies. You cant lie about your profits and then bounce dividend checks.

  5. Was this before or after they made “NaziSupermenAreOurSuperiors”?

    Oh, sorry, wrong company.

    Meanwhile, perhaps Cavanaugh could be honest enough to weave how things are practiced in the recent real world to his analysis. Where – just as an example – major corporations pay off legislators and other thought leaders, with some of the latter – just as an example – morphing their ideology to fit what the corporations want. Just as an example!

    P.S. In case anyone replies to this, their responses will almost assuredly be ad homs, thereby conceding my points and showing the childish, anti-intellectual nature of libertarians. Most libertarians are juvenile and cowardly. Rather than attempting to engage me in debate (and losing), they choose to smear.

  6. I see what you did there.

    Clever little Too Much Joy reference, Tim.

  7. I’m not even sure what the mechanism is for paying a dividend on an equity product, so ascendant is the psychology of increasing market valuation.

    Since the transformation of shareholders from owners to suckers*, dividends have become unnecessary. In the late eighties, when I was in business school, the consensus of opinion seemed to be that any payment of dividends was an admission management might not actually be discernibly smarter than the actual owners, and was to be avoided at all costs.

    Re- double taxation; this could easily be remedied by eliminating the corporate income tax.





  8. I figured LoneWacko would show up on this thread, but only to bitch about WarnerBrothers advancing the Reconquista agenda with those evil SpeedyGonzales cartoons.

    ?Callate lo sico, LoneWacko!

  9. Krakel: You saved my ass back there man!
    Pop: Yeah,yeah man I know.
    Krakel: They came out of the trees man,they came out of the trees!
    (both sip drinks)
    Krakel (to Snap): Man,to Snap!
    (both toast glasses)

  10. If you’re a believer in efficient markets you don’t want dividends.

    You want the company to take the money they would’ve disbursed via dividends and instead repurchase shares of the company on the open market (aka: stock buyback). This raises the equity value of your shares, in theory by exactly as much as you would’ve received in dividends. So you’ve now converted a dividend payment to a capital gain, which has MUCH more favorable tax treatment.

  11. What are the tax rates on dividends vs. capital gains by the way?

    It would seem to me that dividends would be more desirable on the “bird in the hand” philosophy. Unless capital gains are less heavily taxed.

  12. Is Glenn Reynolds even dumber and more childish than Reason? You decide; I call it a tie.

  13. Dividends are taxed at your marginal income tax rate, in the year that you receive the dividend.

    Capital gains, on the other hand, are only taxed when “realized” – i.e. when you sell the stock. So the first advantage of CG is that you control when you take the tax hit. Secondly, CG are classified as short term (you held the stock less than a year) and long term (more than a year). Short term gains are taxed at your marginal income tax rate. Long term gains, OTOH get preferential treatment, and are taxed at rates less than your marginal rate – currently 0% or 15% depending on your tax bracket (10% and 15% brackets pay the 0% rate; 25%, 28%, 33%, and 35% brackets pay the 15% rate). So the second advantage of CG is that they are potentially taxes at rates way less than your marginal income tax rate.

  14. Productivity growth can be measured by relating output to some other stable commodity without resorting to inflation/deflation statistics. We can ask, say, how many ounces of gold could you buy with a year’s typical wages today, compared with 60 years ago? How many hours do you have to work to make enough money to buy a Big Mac? Or a bag of flour?

  15. Of the Sloan-backed cartoons, I prefer “Heir-Conditioned.”

  16. Hazel Meade asks:

    What are the tax rates on dividends vs. capital gains by the way?

    For the most part the Federal income tax rate on both dividends and capital gains on investment holdings is currently 15%. For some detail, see here for dividends and here for capital gains.

  17. I get dividends all the time. They’re automatically rerolled into the funds, but I do get them.

  18. Vargus is a financial illiterate.

    There are many ways to return cash or other value to shareholders apart from the classic dividend stream:

    1. Stock buybacks on the open market.
    2. Tender offers to buy back stock.
    3. Spin-offs and spin-outs.
    4. Selling the company to, or merging it with, another company.

    It is just-plain-dumb to think that all “return” to equity now comes solely in the form of price appreciation.

  19. If we all really want to be rich rich rich, we will lose the silly crown which keeps falling off Elmer’s gourd, and we will dispense with the shoemaker nouveau riche tycoon embodying the Peter Principle.

    Hierarchy is the problem. Peaceful anarchy is the answer.
    Glad you asked.
    I’ll move on now.

  20. Tax aside dividends act as a mitigation of risk as well. This is of course lessened with tax. CApital gains require time, time equates to less accurate estimates and an increase in potential risk. Dividends pay now, or in shorter time frame than the capital gain. It’s a slower longer run process spreading your future expected income over a long period in small increments.

    The largest part of any equity, risk seems to be omitted from a lot of the discussion. If the equity goes to zero and you were counting on a capital gain you lose, if the equity goes to zero and recovered a portion of your loss in dividends you lose less. It’s just not as flashy or exciting as capital gains.

    Of course taxes fuck this all up, like everything else.

  21. I am getting tired of the treatment of slashing dividends is an inherently bad thing. Any responsible board, and investor for that matter, sees dividends as more than just the health of the company. It’s the health of the company in comparison to the market (a pseudo beta). If the market or sector is headed south and your company is not shoring up its balance sheet and saving money then you need to find a new company. The companies that kept pumping out dividends in the face of a collapse are irresponsible at best or catering to the whims of select investors rather than running their business. Or more common as of late they are just planning on getting in bed with government.

  22. The wife and kids must be gone for the weekend. Some people seem to putting up a lot of articles this weekend.

  23. Thanks to govt encouraging home ownership and the resulting crash in prices, people can’t sell and move, so because of govt they are tied to their jobs so govt must exercise more power to counter that.

    Oh, I forgot, EXTERNALITIES!!!!!!!!!!!

  24. I have all those sloan cartoons on volume 6 of Looney Tunes Golden Collection. That particular DVD set also has a bunch of the wartime propaganda cartoons, as well as some seriously politically incorrect Bosko black and whites.

  25. Is Glenn Reynolds even dumber and more childish than Reason? You decide; I call it a tie.

    Is my butt even dumber and more childish than LoneWacko? You decide; I call it a tie.

  26. hmmm,

    European (and Alcoa) style dividends solve the problem you were referring to. Alcoa has (circa late 90s, havent owned it in a decade) a small “base” dividend and a floating dividend that depends on the previous years earnings. Thus, their dividend goes up and down with earnings.

    This, or a dividend that is a set percent of earnings, is much more common in Europe.

  27. I know. The US and the major institutional investors are the ones that have pushed the absurd fixed continuous dividend that companies feel obligated to meet at all costs.

    While I agree with percentage and even split percentage dividends I still feel a “fixed” dividend based on managements decision is better. As an investor I’m looking for any insight into what management is thinking and where the company is going. With a dividend that fluctuates per managements decision I am given a fairly direct line to their thinking.

    Fucking humans and their straight lines and consistent numbers. They keep screwing things up.

  28. Is there some equation for the effects of inflation/deflation on productivity measures?

    I think they call it “re basing the dollar”, or something like that.

    Like the same thing they do to account for the real value of a dollar right after the Titanic sank, compared to this very moment now, when things are much better.

    It ought to be a simple application of the good old ROR (rate of return) formulas. And you don’t need any Greek letters to use them. It’s just simple algebra. This puts it about as simply as I’ve seen it put, at least mathematically (though it’s a little brief on explanation).

    btw how do you turn that into a live web link? I can solve differential equations but don’t ask me about HTML.

  29. btw Tim those are discrete time formulas, but there are also continuous time equivalents. And other variant exist. But the discrete time versions are simplest to understand and get the basic idea across, Re: the time value of money and how you go about accounting for it.

    I don’t see why you’d need anything other than this to adjust productivity indexes. Or any others for that matter.

  30. THANK YOU.
    I’ve been trying to find this for years. I’m certain it’s the inspiration for South Park’s ‘Underpants Gnomes’

    1 collect underpants
    2 ???
    3 profit

  31. I have all those sloan cartoons on volume 6 of Looney Tunes Golden Collection. That particular DVD set also has a bunch of the wartime propaganda cartoons, as well as some seriously politically incorrect Bosko black and whites.

    I skipped Vols. 6 and 4. They really seem like weak sisters compared to the other volumes.

  32. Thanks for your useful info, I think it’s a good topic. So would you like the info about the air jordan shoes

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