Could the private sector stage a stimulus plan?

November 26, 2012

Since the financial crisis, the federal government has implemented a fiscal stimulus plan and the Federal Reserve took to the road of monetary stimulus, actively seeking new routes to revive the U.S. economy.

The private sector, however, has been laggard in adding its muscle to the revival efforts. Private firms have added employees, but very cautiously, and wages are stagnant. Meanwhile, a huge amount of cash sits idle on corporate balance sheets.

“Capital expenditure plans are being retrenched,” notes Dan Heckman, senior fixed income strategist and senior portfolio manager at Minneapolis, Minnesota-based US Bank, with $80 billion in assets under management. “Most major corporations are sitting on tons of cash. They have no appetite for borrowing and credit line utilization is at all-time lows.”

So what would happen if U.S. corporations, who sometimes return cash to shareholders through share buybacks or special dividends, initiated their own economic stimulus plan, giving a $3,000 bonus to every single one of their employees before year end?

“A corporate bonus wouldn’t be all that different in impact than if the federal government were to do it,” says Dean Baker, economist at the Center for Economic Policy and Research. “Presumably the price of the corporation’s stock would fall a little and some people who owned the company’s stock would be a little less wealthy; but the propensity for people to consume out of income would be much greater than for stockholders to consume out of wealth,” he said.

As of the end of October, the market capitalization of the Wilshire 5000, the broadest measure of U.S. stocks, was about $17 trillion.

“If corporations gave $3,000 to each of 100 million workers, that capitalization would diminish by $300 billion,” Baker said.

But the price tag for such a stimulus would probably be somewhat lower. There are about 134 million U.S. payroll employees, but subtracting government workers and employees of small businesses, franchises and non-profits, the number people working in publicly traded corporations is probably closer to 80 million to 90 million, Baker said.

One catch to such a plan is that a corporation’s fiduciary responsibility is to its shareholders, cautions Edward Leamer, professor of management, economics and statistics at UCLA. Still, shareholders are just one segment of stakeholders in a corporation. The community in which the corporation operates is another; and so is its workforce.

“A corporation needs to worry about the happiness of their workers so a stimulus bonus would create good will, but the reality is that the corporation’s cash is currently owned by the shareholders so transferring it to workers does not create a net increase in wealth,” Leamer said. “You would be taking money from one group and giving it to someone else so the stimulus impact on the economy is not so clear-cut.”

Leamer believes the issue for the economy is not to manage demand, but rather to develop the workforce.

The microprocessor has destroyed the value of a high school education, meaning workers need to be life-long learners. We need to focus on the workforce and the quality-of-life infrastructure. We’ve neglected public assets for too long. Our homes were our castles and we neglected everything else in the community.

Another issue, says James Galbraith, professor of government at the Lyndon B. Johnson School of Public Affairs at The University of Texas at Austin, is that neither the private sector nor the Federal Reserve has a way to generate inflation which would effectively create a tax on cash.

“If anything is going to happen, it has to be the government that does it,” he said.

But Galbraith says when it comes to stimulus in general, he’s a skeptic.

“You don’t want to spend money for the sake of spending money. You need to have a strategic direction,” he said. Corporate bonuses to their workforce could be stimulative, but only in a limited fashion, Galbraith said.

Buying a car supports an assembly job. If you’re buying a computer, you’re only supporting distribution. It’s a bit of a mug’s game.

It would be more effective for the government to provide funds for home health care workers, Galbraith said.

If you’re supporting home health care services, you’re absorbing lots and lots of workers. You move workers that are already there, into homes that already exist, to benefit patients that are already there. You need minimal net resources, but you provide employment, income and a useful service that leaves everyone better off. These are common sense solutions for the problems we’ve got.

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Please don’t forget — as Galbraith hints at, if this windfall is spent on imports, the domestic growth and hiring benefits will be minimal. And as a colleague and I wrote in the NY Times in 2010, failure to keep this in mind explains much of the failure of White House and Fed stimulus policies: http://www.nytimes.com/2010/09/10/opinio n/10Tonelson.html?_r=0

Posted by Tonelson | Report as abusive

Please don’t forget — as Galbraith hints at, if this windfall is spent on imports, the domestic growth and hiring benefits will be minimal. And as a colleague and I wrote in the NY Times in 2010, failure to keep this in mind explains much of the failure of White House and Fed stimulus policies: http://www.nytimes.com/2010/09/10/opinio n/10Tonelson.html?_r=0

Posted by Tonelson | Report as abusive