Corporate profits and cash piles have never been higher. But it’s not just an economic imperative that firms get spending and investing, it’s their social and moral responsibility to do so.
Three of the four sectors that make up the economy got battered by the global financial crisis and Great Recession:
- Households: millions of workers lost their jobs, households retrenched their finances and times got extremely tough
- Governments: they rescued and guaranteed the global economy and financial system at a cost of trillions
- Banks: often vilified for their role in causing the crisis and apparent lack of punishment or contrition, they’re being forced to undergo huge structural change that will cost them billions
The one sector that flourished – even more than banks (and bankers) – is the corporate sector. By some measures, it has never had it so good – profits, cash reserves and share prices have rarely been higher:
The problem is, hardly any of that is being reinvested and relatively few are enjoying the spoils. Management and shareholders are sitting pretty, thanks to dividend payments and share buybacks. According to financial market consultant and author Andrew Smithers, US companies invest barely twice as much as they pay out to shareholders. In the 1970s that ratio was as high as 15:1.
Smithers argues this is largely down to the distorted and myopic monetary short-termism of management incentives.