Head's Amateur Economics Hour: Corporate Cash

Last week there was a lot of debate about why corporations were accumulating an inordinate amount of cash and choosing to sit on it rather than make investments or hire workers. Well now it turns out that this really isn't anything new:

So to me the question is now: What is driving this long-term trend? It seems obviously less than ideal to me for companies to be earning money and then holding it rather than injecting it back into the economy. It would seem, for instance, to be a natural drag on the velocity of money.

A couple possible causes come to mind:

1. Corporate taxes are too low, or insufficiently or inefficiently distributed across different sized companies. There has obviously been a lot of emphasis on lowering corporate taxes in this country to keep us competitive internationally and to minimize the drag of taxes on business. But this graph certainly makes it seem like businesses (or at least some of them) could afford to have the government skim a little more off the top without hurting the economy. A consideration here is that it would seem that globalization is making many companies less tied to our own tax laws; perhaps tax evasion could also be an explanation here.
2. Corporations are hedging against what they see as greater economic risk over the last few decades. The argument here would be that CEOs are looking at the economy and worried about their ability to weather a downturn, and so are hoarding cash for that purpose. This seems unlikely to me. I suppose you could argue that the boom/bust cycle of the economy has increased since Republicans started slashing regulations, but I'm not at all confident that businesses en masse would (1) realize and (2) act on that trend. And either way, as a group they certainly seem to be holding far more money than they need to survive - even the very severe 2007-2009 downturn only cut into about an eighth of their cash holdings.
3. The marketplace is insufficiently competitive. The obvious implication of the trend toward corporate savings is that corporations are making more money than they can invest in opportunities that they see as being financially worthwhile. This would suggest that (1) established companies feel secure enough in their hold on their position in the economy that they do not need to invest in new fields and (2) there are not enough potentially profitable private investment opportunities. Both seem, to me, to point to an imbalance between the economic viability of established companies and start ups - sort of the economic equivalent of the incumbent bias in politics.

I think the last explanation is my favorite. It seems to get at the root of the problem, and there's a relatively handy policy explanation: The modern conservative movement, which dominated politics for most of the last three decades, has too often been more about supporting big business than the principal of free enterprise. See, for instance, the relative inaction of the FTC in antitrust cases during the Bush years.

But I'm not an economist, so I'm probably entirely wrong about this. Thoughts from those of you with actual training in this area? SS? BD2? Hell, maybe we can even get KOTJ back up in here...

July 23, 2010

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