Opinion

Felix Salmon

Counterparties: Corporate America’s miserly ways

February 13, 2013

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The arguments over the value of Apple’s cash are symptomatic of a much bigger issue: the corporate world’s cash hoards. According to Factset, they recently hit $1.23 trillion for nonfinancial companies, more than double pre-crisis levels.

The argument this time is about how this cash stockpiling may be hurting the rest of us. Since the crisis, the left has liked to blame corporations for not using these growing cash piles to create jobs, under the assumption that big companies are sitting on this money like children refusing to share their toys.

It’s more complicated than that, and Paul Krugman and Tyler Cowen (and others) are in a bit of a spat over the matter. Cowen’s position is, basically, that corporate cash hoards always lead to some sort of economic benefit — this money isn’t literally “going in the cupboard”, it’s always invested somewhere, even if it’s just safe assets like Treasuries. “If there is a proCorblem,” he writes, “it is because no one sees especially attractive investment opportunities”. Izabella Kaminzka agrees; Cullen Roche notes that corporate debt levels may justify these cash piles.

Krugman’s more Keynesian view, on the other hand, sees corporate cash as a kind of economic “sinkhole”. Corporations are actually using some of their money: even given the slow economy, business investment, he writes, is “about as high a share of GDP as in the middle Bush years”. But corporate profits are near a record and that money isn’t being put to productive use. Paying workers does a lot more good than investing money in a safe haven, he says: “The point is that buying goods and services is one thing, adding directly to aggregate demand; buying assets isn’t at all the same thing”.

Matt Yglesias sees the cash piles as an after-effect of the Fed’s massive, post-crisis money-printing operations: corporations have more money just because there’s more money sloshing around. But research suggests corporate cash levels began growing long before the financial crisis. Bruce Bartlett points to studies that suggests companies began holding more cash in the last few decades because they built up cash-flush R&D arms, because they plan future investments, and because they’re able to cut their tax bills by parking cash overseas. Other research has linked cash hoarding to technological changes that have meant broadly lower inventory levels, and the strategic advantages that cash mountains provide in fending off rivals and takeovers.

There’s a reason to believe all this may be coming to an end, however. Investors don’t want companies to save money any more: they’ve regained their pre-crisis appetite for capital expenditures. Now the companies in question just need to find something worthwhile to spend their trillion dollars on. — Ryan McCarthy

On to today’s links:

Investigations
“Monte Paschi was important to the entire Italian system. It had to be defended” – Rachel Sanderson

Housing
Banks accused of abusing homeowners will now help decide who gets foreclosure aid dollars – Dealbook

Wonks
Paul Krugman: “I am not ‘prickly’: I’m aggressive and annoying…” – NYT

Hope/Change/Etc.
Ezra Klein on Obama’s “incredibly ambitious second-term agenda” – WaPo

Alpha
The extreme optimism of Wall Street earnings forecasts – Eddy Elfenbein
BlackRock has two new funds focused on the bond bubble – Bloomberg

Big Ideas
High-skilled immigrants entering the US produced 10-20% of productivity growth from 1990-2010 – WSJ

Try the Veal
Ladies and Gentlemen, say heeeeeey and jellooo to Bart Chilton! – CFTC

Charts
The rise of *cough* and *sigh* – John Gruber
The most useless, baffling chart supporting Obama’s State of the Union address – Business Insider

Listicles
All of the Popes – Datablog

Leaders
Proximity to “levers of influence is a necessary but not a sufficient condition for being powerful” – Understanding Society

Beer
The 19th century British brewing bubble – Organic Consumers

Trends
Baby food for adults is so hot right now – WSJ

Wonks
Why Adam Smith loved the inheritance tax – Spectator

Pivots
Amex will soon provide you with what you never wanted: the ability to buy stuff on Twitter – WSJ

Investigations
Investigators are having problems with SAC’s automatically deleted emails – Bloomberg

Cephalopods
Lloyd Blankfein has no other interests other than Goldman – Bloomberg

Stuff We’re Not Linking To
Slideshow: “The Real Cost of Luxury Train Travel” – Bloomberg

Comments
7 comments so far | RSS Comments RSS

Cowen is right as far as I can tell. The only unproductive cash in on a banks balance sheet is the tiny fraction actually sitting in the vault waiting to cash checks.

Every cash or near cash asset on a corporate balance sheet is invested in something unless it is physically sitting in Walmart’s or mom and pops cash registers.

Posted by y2kurtus | Report as abusive
 

y2k, most corporate cash is not being used by other companies, or the government. It’s sitting under virtual mattresses. The money is not being lent out, and government borrowing is offset by government printing.

Hoarding is the worst thing for the economy, as it takes money out of circulation. It used to be that money deposited in bank accounts was lent back to businesses and mortgages for new construction, but that is less true in the last five years. Banks, which assumed any risk in the last decade, now avoid risk, and usually only lend to businesses that don’t really need the money.

If all of those profits were being re-circulated, there would be growth, but they’re not. Profits are being extracted from the economy and taken out of what’s supposed to be an endless loop, which is why the economy is effectively shrinking (growing slower than the population).

Businesses are hoarding cash because a) their managers don’t know what to do with it, and b) they don’t want to pay taxes twice if they distribute the profits (o.k. management also likes the giant buffer to allow them to recover from their bonehead mistakes).

I haven’t had the opportunity to talk about this on this site lately, but the tax system has to be changed to reward re-distribution of profits and income, and penalize its accumulation. Every dollar that is not re-invested, distributed, paid as salary, or even spent by a company, is ultimately covered by the government. When they stop covering the shortfall, there are political, and sometimes societal, consequences. Our current system only hopes people will re-invest profits, but has no mechanism to make that happen.

Posted by KenG_CA | Report as abusive
 

When the trillion dollar Bush tax cuts were passed a decade ago, I figured that money would all wind up parked in treasury debt and become economically unproductive. That’s just simple Keynsian economics. Unless middle and lower class incomes start rising, there is no point in investing, so the money just sits. Now everyone is talking about a trillion dollar cash hoard. What a surprise. Next we’ll hear that water runs downhill and there’s a whole lot of it in the oceans.

Posted by Kaleberg | Report as abusive
 

@y2kurtus wrote “The only unproductive cash in on a banks balance sheet is the tiny fraction actually sitting in the vault waiting to cash checks.”

U.S. Depository banks now have $1.5 trillion sitting at the Fed as “excess reserves”, up from $0 in 2008. It is there because banks have no better risk-adjusted use for that money. It is not circulating because productive economic transactions are not occurring (for many reasons). That seems to me to be unproductive money by definition

“Every cash or near cash asset on a corporate balance sheet is invested in something unless it is physically sitting in Walmart’s or mom and pops cash registers.”

Some of that excess cash is deposited at banks, who deposit it at the Fed, where it sits – $1.5 trillion worth. You might have a macro-economic argument about how the Fed’s balance sheet affects investment decisions downstream, but that’s a different argument than the one you are making (incorrectly, IMHO).

Posted by SteveHamlin | Report as abusive
 

Let’s see if I understand this correctly:

BAD = Insufficient Basel capital levels by mega banks
BAD = Corporations with excess levels of cash
BAD = Companies hoarding cash, not using it to create jobs
BAD = Middle and lower class wages stagnating

But I’ve also been told:

BAD = Corporations creating consumer products which use non-renewable natural resources
BAD = Corporations create pollution as by-product of creating consumer products
BAD = American consumers incurring huge amounts of consumer debt to purchase products which pollute the environment

How does a nice proper thinking/Krugman reading American liberal manage all the inconsistencies in these talking points?

Posted by Nichols7 | Report as abusive
 

Nichols7, there aren’t inconsistencies, unless you think the only options for businesses are to hoard cash or create more consumer products.

Consumers wouldn’t be incurring so much debt if income was more broadly distributed.

Producing and selling consumer products may not be the best use of capital by society, and is certainly not the only alternative to hoarding.

Posted by KenG_CA | Report as abusive
 

@KenG_CA, what part of the financial system represents this virtual wallet? Apple’s cash is invested in treasury bonds, federal agency bonds (money the government is using,) corporate paper, corporate bonds (money other corporations are using) and a small % is on deposit at money center banks like JPM. All of it is invested somewhere. I absolutely share your view that corporate profits not likely to be used by the corporation in the next 24 months should be paid out in dividends and taxed.

@ SteveHamlin I think your point is perhaps correct. I can see how excess deposits at the federal reserve are somewhat wasted. Would you agree that the London Whale issue arose from JPM trying to limit the excess reserves it held at the Fed. In my view JPM held all those bonds (which they failed miserably at hedging/trading) because they could not lend out the flood of short-term deposits fast enough.

Also @ Stevehamlin: My small bank has excess reserves on our balance sheet. We are currently paid a quarter point on those reserves. Doesn’t that mean the Fed must be “investing” that money in something to pay us? I hope you somehow miraculously see this late late addition to the comment thread because your comments are always among the most inciteful on this blog!

Posted by y2kurtus | Report as abusive
 

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