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Big Profits Drove a Stock Boom. Did the Economy Pay a Price?

“Eggertsson and his colleagues built an alternative model of the American economy by doing away with the assumption of perfect competition” writes Eduardo Porter for nytimes.com. They pad corporate profits and send stock prices sky high.In a more orthodox economy, declining rates on corporate bonds would encourage a surge in corporate investment.In this economy, stock prices don’t just reflect the future stream of normal economic returns that would accrue to a company’s capital investment.They also include a claim to a stream of rents that generate “pure profits.” These profits can’t be replicated by another company’s capital investment.
 
Source: nytimes.com



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