Counterparties: Corporate America’s miserly ways
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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:
Stuff We’re Not Linking To
Slideshow: “The Real Cost of Luxury Train Travel” – Bloomberg