Marketplace - Divide the company and conquer

Episode Date: December 26, 2024

General Electric broke its business into three separate public companies this year, putting a higher profile on corporate spinoff strategies. We’ll explain why spinoffs are hot right now. Hint: It has a lot to do with rewarding investors and managing debt burdens. Also in this episode: Congress may struggle to pass tax reforms despite a GOP majority next year, AI agents might be tech’s next big thing and why the Fed tracks the U.S. money supply.

Hey everybody, it's Kai. Time is running out to give a tax deductible donation to Marketplace before the end of the year. Donate today to support the public service journalism that you rely on. Every donation and every dollar helps us plan for the new year ahead. Go to Marketplace.org slash donate and invest in news you value and trust. That's Marketplace.org slash donate or you can follow the link in the show notes. How much money is floating around in this economy and why it matters? From American Public Media, this is Marketplace. In Washington, D.C., I'm Kimberly Adams in for Chiara's Doll.

It's Thursday, December 26. Good to have you along. Here on this program, we spend a lot of time on the major economic reports and data dumps, think jobs numbers, inflation data, retail spending. But there are plenty of economic releases that don't get as much attention. One of those is the Federal Reserve's tally of the country's money supply, that is, how much money is circulating in this economy. It's called the M2, and this afternoon the Fed said that number is sitting at $21.5 trillion. So Marketplace's Justin Ho looked into why we keep tabs on the country's money supply. The Federal Reserve has a few different tallies of how much money there is floating around. The first is what it calls M1.

George Perks with the Bespoke Investment Group says you can think of this as money that's really easy to spend. Checking accounts and cash held by the private sector, generally speaking. Then there's M2, which takes M1 and adds in money that's not quite as easy to pull out and spend, but not too hard either. Savings accounts and other liquid savings vehicles that you wouldn't use to transact day to day, but can very easily be transferred into accounts that can then be used to transact. There are a couple reasons why tracking M2 is important, says Ernie Tedeschi at Yale's Budget Lab.

One, it just gives us a sense of the amount of spending potential in the economy at any given time. And money supply can be a tool to steer the economy. Tedeschi says back in the 70s and early 80s, the Federal Reserve controlled the money supply before shifting to target inflation more directly. But even now, the Federal Reserve can still affect the money supply by buying huge amounts of bonds. The Fed creates money. It sends that money out into the broader economy and it gets bonds back in return. Early in the pandemic, the Fed bought over a trillion dollars worth of bonds, causing

the money supply to pick up quite a bit. Kathy Bostjancic, chief economist at Nationwide, says that money went right into the banking system. That then could be used for loans and used for eventually businesses or consumers. Bostjancic says that was one factor that helped to push inflation higher too. To be clear, there were plenty of other factors at play, including low interest rates early in the pandemic. At the same time, supply chains were impaired, so that hurt the supply side of the economy,

just as you were providing all this money for demand. Still, Boss Jancik says the amount of money floating around can be an indicator of economic activity and inflation. I'm Justin Ho for Marketplace. Wall Street today relatively light trading after the holiday. We'll have the details when we do the numbers. It is December, ages away from April, and so probably the last thing you want to be hearing about is tax season. And yet, some people are thinking about it now,

namely members of Congress. And even though there will be a Republican majority in Congress come January, we can still expect quite a bit of debate over the shape of tax policy. Here to talk about this is Owen Zidar, a professor of economics at Princeton University. Thanks for joining me. Great to be here. a professor of economics at Princeton University. Thanks for joining me. Great to be here. So set the table for us. Why is 2025 going to be such a big year for tax policy?

2025 is going to be quite important because the last major reform in 2017, the Tax Cuts and Jobs Act, set a lot of provisions that were going to expire at the end of 2025. And so if the administration and Congress doesn't do anything, a lot of us will have tax increases starting in 2026. And so that's a big impetus to try to create new tax legislation that either extends a lot of the cuts that are going to expire or brings back things that

were left out and almost happened in recent legislative debates like the child tax credit or incentives for research and experimentation and research and development and the tax code that a lot of people think might make sense in a tax reform. Lauren Henry Republicans control the White House, the House and the Senate, and yet a lot of folks are predicting some pretty big fights over how this is going to play out. How would you break down kind of the different camps when it comes to what they are trying to get out of any new tax law?

Yeah, it's quite interesting. There's a few different groups in terms of what people want to prioritize. You hear some members who focus on deficit reduction and the debt saying, we can't afford any of this. Why are we talking about this? A second camp is kind of, it's Christmas and everyone wants a present. You can understand the appeal of that where there's trillions of dollars from extending the Tax Cuts and Jobs Act plus a range of promises that were made over the campaign. They were also quite costly that add trillions of dollars more to the overall price tag. But still, the big picture on what's going on with 2025 is just how expensive it's going

to be because just extending it is going to be something like $4 trillion, adding a lot of things that are promised in the campaign or depending on who's counting up to $10 trillion. And the numbers are just staggering so the tension between tax reform like it's Christmas and the deficit camp you know what that ultimate cost will be will kind of tell you something about who won. Let's take that deficit slice on its own because the US deficit is upwards of 1.8 trillion dollars and a lot of Republicans or I should say some on its own because the US deficit is upwards of $1.8 trillion. And a lot of Republicans, or I should say some Republicans, are claiming that tax cuts

pay for themselves and won't add to that figure. Many economists respectfully disagree with that. What role do you see the deficit playing in this debate over what happens with taxes moving forward? I think it's a real key player in the debate going forward. We're in a much worse fiscal position than we have been in prior discussions in 2017, for example. So investment is a key driver of growth, and if we have big deficits, it's going to be hard to encourage a lot of private sector investment

if the government is paying high interest rates because we have to do that to encourage a lot of private sector investment if the government is paying high interest rates because we have to do that to finance a really big debt. So I think the deficit camp is worried about our fiscal health and overall what the effects on growth will be if we treat this tax reform like it's Christmas. How do you see members of Congress kind of prioritizing what should be the most important consideration when shaping tax policy? Is it to stimulate growth in the economy? Is it to reduce the deficit?

Is it to kind of, you know, reward people who voted for them and interests that support them? I think all of those are reasonable things. From a policy point of view, the goal is to have a big pie with equitable slices. We want economic growth and we want it to be broadly shared. Hopefully representatives recognize that a thriving economy that's doing a lot of investment and generating growing wages for people at the middle and the bottom of the income distribution is really what will pay off most. And so I hope that we see reforms oriented towards growth more so than things that pay

off narrow constituencies, even if they are basically just adding to the deficit and not really adding much to the deficit and not really adding much to the overall well-being of America. Owen Zidar is a professor of economics at Princeton University. Thank you so very much. Thank you very much. If you're into an intensive sport like biking or hockey or rollerblading, head protection is usually highly recommended. And putting on a helmet can be more complicated than you might think.

That brings us to our latest installment of our series, My Economy. TINA SINGH, OCCUPATIONAL THERAPIST, BRAMPTON, ONTARIO My name is Tina Singh. I'm an occupational therapist and the founder of Bold Helmets, and I'm from Brampton, Ontario. I became an occupational therapist I think in 2007. I have been practicing in the area of head and brain injury ever since. I did a lot of work in the community and got to know people and their injuries and the impact of the head injuries on their lives. injuries on their lives. This idea of making helmets that would work for kids like mine really actually just came from my real life experience.

I'm the mom of three kids. They are now 12, 11, and nine, but when my oldest son was three years old, he was a kid who was really quick on a two-wheeled bike, no training wheels, whipping down the street and giving me a heart attack. And so when I tried to find a helmet that would work for him, I couldn't find anything because we are a Canadian Sikh family and my kids have long, uncut hair that they keep in a top knot. And so because of that, the traditional helmets just didn't fit. And so a few years ago I decided to take action to create a product that would work for kids like mine.

My husband and I, we sat back and thought about what this helmet would look like. We looked at safety standards and tried to figure out would a helmet that was modified in the way that we were thinking actually work. And when we discovered that yeah there's a pretty good chance we can make this work, that's when we found a design engineer who believed in our vision and what we were doing. When I shared this idea with my kids, they were excited, they were intrigued, they were, you know, thinking like, look how easy this is, like it wasn't even a

thought, they could put on a helmet without having to think twice about it. Whereas in the past, it was always something in the back of my mind. I got to make sure I tie their hair back in a way that they're not used to, that they don't like. And so the ease of it, I think, was the most surprising thing for them. Sharing this with other parents in my community, other parents who are part of the Sikh faith and have struggled with the same issue, many of them were relieved. Like, oh my goodness, I can't believe it's taken so long and I can't believe this actually

fits. So I think it's that relief they expressed to me, I think has been the most common thing that I've seen. I really want to focus on children because I think that's where we can create the greatest impact and we can help kids participate in sport and build more equity into the systems we have in place. Tina Singh, the founder of Bold Helmets in Brampton, Ontario. We can't do this series without you, so tell us what's happening in your economy. If you started a new business or changed careers, we want to hear from you at marketplace.org slash my economy. Coming up... Most people don't know that they pay to 14 different governments.

Let's break that down, but first, let's break down the numbers. The Dow Jones Industrial average gained 28 points, less than a tenth of a percent, to finish at 43,325. The Nasdaq fell 10 points, again, less than a tenth of a percent, to end at 20,020. And the S&P 500 slid two points, you guessed it, less than a tenth of a percent, to close at 6037. The Labor Department reported today that continuing claims for U.S. unemployment benefits hit 1.91 million in the week that ended December 14.

That's the highest figure in more than three years, and it's a sign that it's taking longer for jobless people to find work. Bond prices fell, the yield on the 10-year T-note remained at 4.58%, and you're listening to Marketplace. This is Marketplace. I'm Kimberly Adams. There have been a couple of business trends this year, some big, obvious ones, like the increasing use of AI, which we'll get to in a minute, but there have been some other trends in the corporate world

you might not have noticed as trends, like the increase in spin-offs, breaking up bigger companies into smaller, more focused versions. FedEx announced plans last week to spin its trucking business off into its own publicly traded entity. Honeywell is exploring doing the same with its aerospace business. And you might remember earlier this year, both Comcast and General Electric announced their own self-divisions into new, separate companies. As Marketplace's Henry Epp reports, more companies are finding reasons to follow this path with some investors egging them on.

It's not necessarily the folks in the C-suite who are pushing to break apart their businesses, says Nell Minow at Value Edge Advisors. CEOs love to buy new stuff. I mean, it's a lot more fun than just figuring out a way to cut costs or develop new products. Instead, it's often activist investors who push for spinoffs, she says. Activists who are on the outside,

who are looking at the balance sheet, can see that as they say on Sesame Street, one of these things is not like the other and it doesn't belong. So say a company runs a freight trucking business, but also a package delivery business and a printing business, which kind of doesn't belong. Jared Harford is at the University of Washington. The company may actually be more valuable if it wasn't bundled with those assets. A lot of this is happening in industries that are changing quickly, says Jay Brown at the

University of Denver. Cable TV and package delivery, for instance. They're evolving and they're reconfiguring from what they were before. And so people are trying to reallocate their assets in a way that will allow them to compete more effectively. But it's a guess, right? And those guesses, he says, could prove to be wrong. Not every spin-off works out. But a recent one really has worked so far. General Electrics.

GE Vernova, the new name of the former conglomerate's energy business, just announced an investor dividend and stock buyback. And its competitors have noticed, says Asif Surya, who runs a website and newsletter called Inside Arbitrage. They saw the playbook work and they said, this is a company in the same space in the industrials, and we could potentially try to do the same thing. One other reason companies might want to pursue a spinoff now, analysts expect interest rates to remain higher for longer, meaning the cost of debt will stay higher, Surya says. Spinoffs are an excellent way of offloading debt, especially to the spun-off company.

Which can make the balance sheet of the parent company, the one not getting spun off, look a whole lot better. I'm Henry App for Marketplace. Just as companies' business models evolve, so too does technology, along with the fast-changing terminology businesses use to keep up with the latest developments. Take the field of artificial intelligence, which has its own rapidly expanding vocabulary. For example, AGI, or artificial general intelligence, which is basically a robot smarter than any of us humans. Or there's hyperscalers, a term which refers to big tech firms rich

enough to create their own AI. But if you had to pick the most important AI buzzword for next year, agentic AI may very well be the winner. Marketplace's Matt Levin has more. Let's say you're the head of an investment firm like Doug Clinton at Intelligent Alpha. In prehistoric times like last year, you might tell a junior analyst, hey there Billy, can you go through the SEC filings of company X, figure out the risks of their business, and then email them some questions? Now though in 2024, an AI agent can do a lot of that on its own, and its emails will probably have fewer grammatical errors than

Billy's. So the email says, could you provide me some detail on Pacific Initiatives Company X is undertaking to attract and retain a more diverse consumer base? That's a real email an AI agent wrote and sent to a real company for Clinton. He's withholding the real company's name. I think these agents have been pretty good. Often I would say they look like reports that I would expect to see from a human analyst. With AI chatbots like ChatGPT, you can say, plan me a trip to Ireland for a budget-conscious family of four, and it'll give you a hypothetical agenda.

With AI agents, you say, plan that trip to Ireland, and it'll go ahead and book the discount flights and Guinness Brewery Tour for you. Alkesh Shah is at Bank of America. You're creating software that can actually do things in the real world, multiple steps where you don't actually have to write all of the code and give it exact directions on what to do.

Businesses are salivating over agentic AI. Rishir Puri at IBM says the speed at which AI agents are adopted within a company will depend partly on how employees react to them. It's about the trust of the system. Until I come to trust the system totally, I'm still in the driving seat, I'm driving. Puri is talking about employees trusting

that the robot won't make a mistake, not necessarily trusting that the robot won't, you know, just replace you. I'm Matt Levin from Marketplace. Earlier in the show, we were talking about what's coming up in terms of federal tax policy. But, of course, federal taxes aren't the only ones we pay. There are state and local taxes. And one particular pain point for a lot of folks these days, property taxes. That's the case in Chicago's South Suburbs, where property tax bills jumped

nearly 20 percent for the median homeowner there. That's the largest increase in three decades. WBEZ's Adora Namigade reports. Glynnis James Watson moved from the affluent northern suburb of Evanston, Illinois, to the less well-off south suburb of Harvey in 2021. She had just graduated from seminary and hoped the move would lead to a pastor position. I felt a call to move down here, I'll put it like that. The job didn't pan out, but she's still glad she moved. The South suburbs are an under-invested portion of the Chicago area.

She lives in Harvey, a city sprinkled with a few abandoned buildings from an industrial past. But in her neighborhood, she has a strong sense of community. James Watson likes her brown brick house, and she has great neighbors. Everything was going well, and payments were well within my means. And and so I had no issues up until recently. What happened recently is James Watson got her second tax bill installment. The increase was even more than the median for the area.

Her bill was more than $8,000, some seven times what she paid in the first installment. I was flabbergasted. Cook County Treasurer Maria Pappas says this is a common reaction to the latest property tax installment, and the reasons for the sudden spike are complicated. Most people don't know that they paid to 14 different governments.

They have no idea. Each jurisdiction bills a little differently and homes in the South suburbs were recently reassessed. Plus there are a couple of economic trends at play here. Residents are tending to move out and commercial investment in these neighborhoods has decreased over time. That means property taxes are rising when property values are not. The thing is, these governments still have to pay the bills.

That's why levies exist. The levy is just another word for the total tax bill of a jurisdiction. That is, how much property taxes does a particular jurisdiction collect? Chris Berry is head of the Mansuetto Institute for Urban Innovation at the University of Chicago. He says think of a levy as a community bill that's divided among homeowners in a jurisdiction.

The more people who live there, the more people amongst whom to divide the load. But when some people move out, those who remain pay more. Berry says this situation is untenable. The tax base is shrinking, the spending is going up, and those two things cannot continue to happen simultaneously for very long before a jurisdiction goes bankrupt or people move out. The problem most severely impacts black residents in the South Suburbs. Of the 15 suburbs with the largest property tax hikes, the vast majority are home to mostly

black residents like James Watson. In these suburbs, homeowners saw their property taxes rise at least 30 percent. Barry says elected officials and residents do have the power to turn this around. In the short run, it's the job of the elected officials who determine the levy. So each each of the jurisdictions determines its own levy. I would say in the long run, it's really the job of the voters to determine this if they are unhappy with these trends. Still, some of the reasons that taxes are higher, not enough new residents, lack of commercial investment, that adds up to opportunities for this part of Chicago. Bo Kemp runs the Southland Development Authority, a nonprofit.

He says developers and government shouldn't overlook Chicago's South suburbs. The Western suburbs, the northern suburbs are already built. And so we present ourselves as the best opportunity for that kind of growth and growth that can be done in a way that maintains the legacy residents who've been here for 10, 20, 30, 40 years. While also, he says, making room for newcomers to move in. In the South suburbs of Chicago, I'm Adora Namigade for Marketplace. This final note on the way out today, sticking with the topic of taxes. While some people are surprised by an unexpected jump in what they owe, about a million taxpayers are in the opposite situation. The IRS announced it's going to be sending out payments within

the next few weeks to people who were eligible for a pandemic era recovery rebate credit, but didn't claim it when they could back in 2021. The payments will be automatic via check or direct deposit and could be as much as $1400 per person. John Buckley, John Gordon, Noya Carr, Diantha Parker, Amanda Peacher, and Stephanie Seek are the marketplace editing staff. Amir Babawi is the managing editor. And I'm Kimberly Adams.

We'll be back tomorrow. This is APM.