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Our New York Times Op Ed on the Corporate Savings Glut

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Rob Parenteau and I have an op-ed at the New York Times today. Rob’s last post here argued energetically that the now-established trend of the corporate sector to save, as opposed to invest in growth, in advanced economies, and even most emerging economies, was tantamount to capitalists abandoning their traditional role. It reminded me of an article I had written in 2005, “The Incredible Shrinking Corporation,” for the Conference Board’s magazine Across the Board, on how companies were trying to starve themselves into attractive- looking performance though the then-unprecedented act of saving in a time of economic expansion, which is tantamount to disinvestment. Rob’s post made further key points about the macroeconomic implications of corporate savings (given the norm of households savings as well) and made some policy recommendations.

I wish the headline were different (“Are Profits Hurting Capitalism?“), since the article is clearly about the corporate savings glut.

Rob and I thought readers would be interested in the how the draft we submitted compared with the edited version. The draft was titled “It’s the Corporate Savings Glut, Stupid! The Hysteria of Marching to Austeria”:

A series of disappointing data releases in recent weeks, including flagging consumer confidence and meager private sector job growth, is leading more and more experts to worry that the recession in the US and abroad is coming back. At the same time, many policymakers, particularly in the Eurozone, are slashing government budgets, which they contend will lower debt levels, and thereby restore investor confidence, reduce interest rates, and promote growth.

Yet many miss the fact that fiscal deficits are a nearly inevitable result of actions by corporations and households. Failure to understand these dynamics and address root causes is sure to make a bad situation worse.

Unbeknownst to most commentators, corporations in the US and many advanced economies have been underinvesting for some time.

The normal state of affairs is for households to save for large purchases, retirement and emergencies, and for businesses to tap those savings via borrowings or equity investments to help fund the expansion of their businesses.

But many economies have abandoned that pattern. For instance, IMF and World Bank studies found a reduced reinvestment rate of profits in many Asian nations following the 1998 crisis. Similarly, a 2005 JPMorgan report noted with concern that since 2002, US corporations on average ran a net financial surplus of 1.7 percent of GDP, which contrasted with an average deficit of 1.2 percent of GDP for the preceding forty years. Companies as a whole historically ran fiscal surpluses, meaning in aggregate they saved rather than expanded, in economic downturns, not expansion phases.

The big culprit in America is that public companies are obsessed with quarterly earnings. Investing in future growth often reduces profits short term. The enterprise has to spend money, say on additional staff or extra marketing, before any new revenues come in the door. And for bolder initiatives like developing new products, the up front costs can be considerable (marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors). Thus a fall in business investment short circuits a major driver of growth in capitalist economies.

Companies, while claiming they maximize shareholder value, increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in financial speculation. They turn their backs on the traditional role of a capitalist – to find and exploit profitable opportunities to expand his activities

Some may argue that lower investment rates are the result of poor prospects, but the data does not support that view. Corporate profits have risen as a share of GDP since the early 1980s, reaching unprecedented levels right before the global financial crisis took hold. Even now, US profit margins are nearly two thirds of the way back to their prior cyclical high, despite a subpar recovery.

What happens when corporations on balance are saving, and households in aggregate try to save too? Families and individuals typically tighten their belts and bolster their bank accounts in bad times; the tendency is even more acute now, since many are trying to pay down borrowings, which is a form of saving,

If households and corporations are both saving, it must be balanced by the other two sectors of the economy, the government sector and the import/expert secto. In other words, the foreign and government sectors must spend more cash than they are taking in. In lay terms, that means running a trade surplus and having the government incur budget deficits.

Therefore, when both domestic households and the corporate sector are saving at the same time, then you need to have a VERY large trade surplus, a very large government deficit, or some combination of the two. There is no other way to square this circle – anyone who tries to tell you otherwise does not understand double entry book keeping, which the West has used for at least the last five centuries with some success.

And what if a government embarks on an austerity program in the face of private sector efforts to deleverage? Income growth will stall, and if the austerity program is large or sustained long enough, falling household wages and business profits can result.

That result might not sound bad, since lower wages and prices would make US goods more competitive abroad. But in economies suffering from a debt hangover, as incomes fall, it becomes even harder to make payments on outstanding loans. Defaults and bankruptcies cascade through the financial system, leading to even more reluctance to borrow and lend. In other words, the result of Austerian fiscal policies, is deflation – falling wages and prices – which can easily snowball into a depression.

So rather than marching toward Austeria by pursuing what are being presented as “sustainable” or “sound” spending policies requiring immediate budget retrenchment – and such assertions can only be made by those willfully blind to the interdependence of cash flows at the macro level – we need to kill two birds with one stone. Rather than blindly marching to Austeria, we need to set fiscal policy to the task of incentivizing the reinvestment of corporate profits in business operations rather than games at the casino.

Possible measures to achieve these aims include:

1) an aggressive tax on retained earnings that are not reinvested with a 24 month period after they have been booked (this provision needs to be designed carefully to defeat efforts to circumvent it through artful accounting);

2) a financial asset turnover tax that raises the cost to management (and others) of speculating rather than reinvesting profits in productive capital investment;

3) a reinvigorated public or public/private investment program that helps speed up the shift to new energy technologies (as scaling up usually induces a drop in unit costs of production).

The entrepreneurial pursuit of profitable growth has been the vital engine of prosperity since the Industrial Revolution. Yet incentives for both managers and investors now favor myopia and speculation, undermining the very operation of capitalism. We need tax and regulatory policies to counter this destructive development, along with wider recognition that government deficits are necessary and salutary if the corporate sector is under-investing to boost its short-term profits and households are prudently refusing to increase borrowing to accommodate it.

When both households and businesses attempt to net save, the adoption of Austerian School fiscal policies in highly leveraged economies, is well nigh certain to bring back our grandparents’ experience of debt deflation and economic depression. We must stop and seriously ask ourselves, in whose interest might these Austerian policies be? None dare call it malpractice, malfeasance, or even outright madness

The NYT op ed is here. Enjoy!

.

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134 comments

  1. vlade

    Well, I’d say that dividends to shareholders may increase shareholder value.
    That is though about the only nitpick I have with it.
    I agree that fewer companies invest – but I find it very unsurprising. What we have now is not really a shareholder capitalism, it’s more management(agent) capitalism, and there’s little surprise it’s run to the benefit of management rather than anyone else. Shareholder power is scattered and even if they get reasonable stake it’s easier to sell than fight management (good grief, it can be hard even to replace the board, not to say about really making difference to managers).

    I’d even go as far as to argue that the famous shareholder short-termism is the result of the lacking power – if you can’t influence something, shortermism is the optimal approach.

    I’d add one more thing to your mix – raise wages. IIRC they have been stagnant for a very long time. The way it is now the money is of little use to just about anyone. If the wages would go up reasonably, I suspect that after a while it would filter to the economy. Unfortunately, I see no mechanism to do so which would affect majority of compenies and would not be overly prescriptive (and thus likely inefficient), or prone to gaming.

    1. Yves Smith Post author

      I’d love a way to raise wages, and agree that’s actually the best fix. A related post today talks about that in the service sector context.

      Also agree the discussion of dividends was oversimplified due to space constraints. In fact, I’d much rather own a company that threw off a lot of cash and was in a nice stable business (if such a thing exists, but actually, there are some like that hidden in public companies. Hair color is a marvelous horribly lucrative recession resistant duopoly. Massive margins).

      1. vlade

        I think it’s interesting that shareholders wanting “growth” rather than dividends is a relatively new concept.

        Well, they always wanted both, but knew that dividends are a safer bet than growth. I wonder how much of it was management talking up the growth (I’m not sure whether wha some would argue as favourable environment was really that favourable compared to say 1950s, which was apretty growth environment too) vs. dividends, as it’s much easier to manufacture growth than to manufacture dividends.
        If you’re borrowing to cover dividends, it’s easy to see it. If you cut muscle to pay dividends, it gets noticed rather quickly too. Growth can be always promised in the future. Some may argue that debt would show this as well, but debt is easier to roll IMO.

        To a large extent I think it’s also due to the debt vs. equity differentiation, which I personally dislike quite a bit – I wonder when historically the differentiation started.

  2. Victor

    Dear Mr. Smith,
    May I offer an alternative investment for the increased profits.

    Hire America!

    Ask business owners to make a strategic investment in their future and, “Hire America?”

    Starting NOW, today, suggest strongly that every business, without any government incentives, hire or rehire, at least, one, additional, new employee regardless of current hiring plans and in difference to their immediate, short-term bottom lines. Further, it means truly creating a job – someone extra to sweep the floor, paint the walls, be a trainee, an apprentice, build more products, start-up that needed project, whatever. And yes, the new employee is to be emphatically informed that this is a “Hire America Job” and they can only expect continued employment based on their productive work ethic while contributing to growing our economy.

    Businesses – little, small, big and bigger – need to say YES to “Hire America.” Our politicians should heartily support this non-partisan effort by agreeing, saying YES, and then, shouting encouragement. Small businesses could and should start with a new, part-time employee; moreover, the conglomerates should, at least, add one new hire at each location – plant, division, unit, subsidiary and corporate office – and then, brag about it, loudly. Call it what you like – pride, patriotism, American Spirit, good business, sound investment…?

    This is a stimulus that works NOW – more employees, begets more spending, begets more investment, begets more fair taxes. No more fear excuses about what the Government might or might not do in the future – because – the future is now. Yes there are unknowns, potential dangers, but, not acting is sure to bring the negative unintended consequences of doing nothing. More importantly, those of us who are truly in need of hiring now, because we have the orders, and are not hiring because of that unknown “Government Whatever Factor,” Get Over It And Start Hiring America Today. And, if it is a true statement; that, there is between 1.5 and 2 trillion dollars waiting on the side lines ready to be invested – let’s get it invested in people.

    Of course an objective; how about 94% employment by December 31, 2010 or at least, a goal, of returning, by year-end 2010, 50% of the eight million jobs lost during the recession? And please note, we currently have 15 millions currently unemployed.

    Mr. Smith please feel comfortable sharing this thought with any and all adults willing to take a responsible stance and take personal ownership in Hire America.
    Victor

  3. bob goodwin

    I do not necessarily agree that high profits imply a good investment environment. MacDonalds can streamline stores to squeeze profit, and yet still determine that the market for fast food is saturated. I know that each industry has a somewhat different story, as many of the highest profit industries have high barriers to entry compared to historical patterns. I am sure many of these companies still expect profits to slow, and will respond to growth opportunities in the future with acquisitions.

    1. Jim Haygood

      Same reaction here. This year’s profits have little to do with the projected discounted cash flow from future years which determines ROI.

      Corporate underinvestment is likely a rational response to poor growth prospects. Insolvent social programs (tens of trillions in negative net worth) imply ever-rising taxes, a growth drag, perhaps even a reversal of in-migration to out-migration in the future.

      Forcing corporations to invest at gunpoint with a retained earnings tax is an incentive to expatriate to less hostile climes. Meanwhile, effective Jan. 2012, Obamacare requires 1099 forms to be filed for ALL corporate transactions exceeding $600 annually, as the tax monitoring net intrudes into the micro-minutiae of daily life. Talk about a disincentive to invest!

      Electing corpgov warmonger clowns who continue expanding the welfare-warfare state means that the corporate sector stagnates or downsizes: simple economics. Bad political decisions have real-world consequences.

  4. attempter

    That’s yet another excellent account of how so-called “capitalism” is today nothing but looting. Asset stripping. The guy you paid to fix your car instead strips it and leaves the burned-out husk on blocks.

    The NYT’s headline is typical. There’s nothing capitalistically, let alone morally, legitimate about such “profits”, which are simply cannibalism. The guy who’s supposed to be a hunter is by now too stupid and lazy to hunt, so he’s been killing the children and the elderly to “provide” food for the ever-diminishing tribe.

    Rob’s last post here argued energetically that the now-established trend of the corporate sector to save, as opposed to invest in growth, in advanced economies, and even most emerging economies, was tantamount to capitalists abandoning their traditional role.

    I’ve been reading Tocqueville’s Ancien Regime and the French Revolution. He pegs the major driver of the people’s rage as being the fact of a fat, bloated wealth class which was completely parasitic, which served absolutely no purpose at all.

    So today we have something similar but far worse. Today’s rich/corporatists are not only utterly worthless, but are still stealing at a rate far beyond even the Ancien Regime.

    (On the other hand, do we have any sort of resistance and counterattack class the way the bourgeoisie constituted in 1789? Or do we have nothing but a servile rabble seemingly happy to be enlaved? There was an NYT piece this past weekend on that theme as well.)

    1. sgt_doom

      I agree overall with your comments and thinking, attempter, but have been involved in volunteer political activism for most of my adult life, and take exception with you final sentence as I have researched the situation mightily.

      Today, unlike that period, we are assaulted by an extraordinary array of financed networks of misinformation, disinformation and misdirection to confuse and bewilder many.

      There are many, far too many, individuals falsely describing themselves as liberals, or democrats, or (even worse) progressives, who are anything but: they mix facts with absolute misdirection and end up misleading and confusing the many (who believe themselves slow on the uptake as they find those the “truly believe in” to be bewildering and frequently incomprehensible).

      If one is a progressive, do no listen to a Jane Hamsher, or a Thom Hartmann, or a Dean Baker or a number of others who may sound similar to you on one day, but are utterly confusing and bewildering the next with the repitition of the neocon/neolib talking points and acceptable spin.

      They will support the consolidation of power and greed in the health insurance and pharmaceutical industry (so-called health insurance reform), proclaiming it a win for Obama.

      They will support the consolidation of power and greed in the financial sector (the “financial reform” bill) while proclaiming it a win for the dems.

      They will back Obama’s “deficit committee” which moves to privatize Social Security, which has absolutely nothing to do with the deficit.

      There are countless foundations, think tanks and myriad groups, committees, associations, funded by the same ones who own the media, who promote their own agendas while spewing forth endless amounts of misinformation, disinformation, and propaganda, following the highly successful Edward Bernays model.

      For example: the typical strategy of the Team One/Team Two, whereby Team One (the republicans, or neocons) strongly attack a corporate shill’s appointment to the Supreme Court, thereby provoking the predictable response of many on Team Two (ostensibly democrats) who think she must be one of us if they are against her.

      This same strategy has been used time and time again, and successfully so. There is no Team One and Team Two when both teams have the same owner.

      Know that, realize that….

      1. attempter

        I sure agree with that. As you’ve no doubt seen in my comments many times, nobody’s more harsh toward the treason and lies and insidious malevolence of corporate liberals than I am.

        But while that can explain many among the young being turned into liberal teabaggers, and while elite astroturfing by the likes of Paul Krugman can explain how even allegedly more experienced “progressives” are so often so stupid, that’s still epiphenomenal of the bigger problem.

        Even aside from political chicanery, there’s this bedrock brainwashing on the part of this inert mass of ex-middle class and ex-consumers who simply refuse to believe that that’s all over, and that their only choice now is to fight really hard to reconstitute a more sustainable but also human society, or just keep dreaming and be herded inexorably downward into serfdom and re-feudalism.

        For that humongous glop of petty bourgeois inertia, I don’t primarily blame even the liberals (although they played a big role in producing it in the first place). It’s existential by now. Whatever cracks it open, if anything can, is probably going to be some accidental confluence of forces that hit this “middle class” in just the right way.

        And even then, it’s more likely they’ll go fascist…

  5. RichB

    Thanks for writing this.

    It’s very frustrating that in all of the stimulus vs. austerity arguments based on the national accounts equation (GDP = Consumption + Investment + Gov’t Spending + Net Imports), investment is being viewed as fixed, meaning that any fall in consumption must be made up in an increase in gov’t spending. This is a false trade-off, there are other options.

  6. Lasthun

    Companies might be saving:

    a) Because their expected returns from marginal investment in an excess capacity / deflationary environment (output gap?)are less than from holding cash

    b) Because they expect to have problem borrowing in the future deflationary environment when the credit channel via the banking system is impaired

    c) Reduced leverage makes the corproate less vulnerable to cascade payment / default shock therefore the decision maker is less likely to get sacked

    d) there is less risk capital around so corporate restructurers find it increasingly difficult to secure the funding to carry out their societally valued fuction

    My personal opinion is that a) and b) should be weighted at least twice the others, however I’d love to hear others.

    1. Yves Smith Post author

      Lasthun,

      Please reread the piece. It stresses that the corporate sector saving started LONG before the financial crisis. It was well established in advanced economies, and even widespread in emerging economies, at a time when the world was simply awash in cheap leverage. No one was expecting deflation or less access to borrowing.

      1. gordon

        I’m sure I remember people complaining (including in books) about listed companies paying big dividends and/or engaging in highly geared merger/acquisition behaviour back in the 1980s, both in preference to investment. Sadly, I can’t remember any comprehensive references.

  7. Michael Wasserman

    You describe a classic prisoner’s dilemma. Everyone has to deleverage, because if you don’t, you’re going to get cut to pieces by deflation. But collective deleveraging is precisely what will bring about deflation. This sort of problem is what governments were invented to solve–providing a mechanism for the prisoners to agree on a course of action that is most mutually beneficial. Unfortunately, most of the prisoners seem to think that their collective action should mirror what they are doing individually.

  8. Bruce

    This post is way below your normal standard. First, you make an assertion with no proof at all, just some list of a few companies with cash on their balance sheet. You should at a minimum look at the spx balance sheet over time, and on a net basis. Second, you must know why companies that hold cash do so, yet you don’t even acknowledge these as being possible reasons, much less provide any systematic framework for parsing why a given company may be holding extra cash. They are saving because they are worried about declining revenue and/or future expansion projects with an acceptable IRR. If neither of those appear likely, they will just dividend it out or buyback shares. Finally, the whole thrust of the article is essentially that private corporations ( and by extension individuals) shouldn’t be allowed to save, no matter what their reason. Is that what you honestly believe? That mcdonalds should build more hamburger outlets because the government passes some mandatory profit reinvestment scheme? Usually I quite like your posts, but this is one of the most ridiculous ideas I have heard in a long time. I would like to think I am missing something, so in the future please include some real examples, ie cisco has too much cash and should build more router factories or whatever.

    1. whatever

      “Similarly, a 2005 JPMorgan report noted with concern that since 2002, US corporations on average ran a net financial surplus of 1.7 percent of GDP, which contrasted with an average deficit of 1.2 percent of GDP for the preceding forty years. Companies as a whole historically ran fiscal surpluses, meaning in aggregate they saved rather than expanded, in economic downturns, not expansion phases.”

      As for how to spend the money, that is what they are making the big bucks for.

      1. Bruce

        I would hope so. Most of them wouldn’t be around today if they were running deficits. In any case, I would like some concrete examples of companies “over hoarding” or whatever you want to call it. Is that too much to ask?

        1. whatever

          You’re just demonstrating your ignorance, as well as your complete lack of “people skills”. You would make a great CEO.

          Read, understand, then talk (or type).

    2. attempter

      On the contrary, this is an excellent post expressing a profound point. The fact that you start out with such censorious nonsense proves everything you’re about to say is a lie.

      With the economy so far below capacity, and such high unemployment, no alleged “capitalist” has any business whatsoever extracting anything beyond the bare minimum as alleged profit. If he does so, according to capitalism itself he’s a parasitic looter.

      That’s the point of the post – by its own technical and “moral” lights capitalism has abdicated. What’s left, rentier extraction, is just parasitic thievery. (So that’s before we even get to whether or not true capitalism has any moral validity.)

      The fact that the system has been revamped to do nothing but rob in the form of short-term alleged “profits”, in order to appease and further enrich organized crime in the form of the finance sector, is an utterly intolerable state of affairs with zero authority, zero legitimacy, zero morality, total criminality.

      Under these conditions justice and morality allow and demand one and only one imperative: The people need to take back their stolen and trashed property and give it back to those who will actually use it productively.

      1. sgt_doom

        Perfectly articulated, attempter!

        And yet, many still argue about small business’ inability to gain loans from banks, completely ignoring the fact that the vast majority of banks’ loans were in the mortgage category (over 70% to 80% of their business).

        Obviously, when leveraged in that area, little was being directed towards free enterprise growth and sustainable small business growth.

        Then, the continuous spinning of unemployment data. If unemployment stats were really hovering only around 10% nationally, would so many states’ unemployment insurance funds be bankrupt by now? Doesn’t work out arithmetically if so many were still employed!

        Real unemployment has to be between 24% to 34% nationally.

    3. bystander

      Bruce, it’s no big secret (except to you, apparently) that, in aggregate, US companies have reinvested absolutely none of their cash in their businesses for around 10 years. How much of a 4,000 word op-ed should be expended on re-establishing this well known fact for in order to satisfy those who haven’t kept up (such as yourself)? Try this http://tinyurl.com/3y46zo4 for a 4 years picture during the boom. Or this http://tinyurl.com/3x4sgub. Or this http://tinyurl.com/38kqjlr. And so on.

      “They are saving because they are worried about declining revenue and/or future expansion projects with an acceptable IRR. If neither of those appear likely, they will just dividend it out or buyback shares.”

      In aggregate, all of them? For 10 years, no reinvestment opportunities whatsoever? How likely is that? I find this (from Parenteau/NC) http://tinyurl.com/279u5da, more persuasive.

      “Finally, the whole thrust of the article is essentially that private corporations (and by extension individuals) shouldn’t be allowed to save, no matter what their reason. Is that what you honestly believe? That mcdonalds should build more hamburger outlets because the government passes some mandatory profit reinvestment scheme? Usually I quite like your posts, but this is one of the most ridiculous ideas I have heard in a long time.”

      I agree – but it’s your idea; it’s not in the op-ed.

      “I would like to think I am missing something”

      Hold that thought.

      1. D. Warbucks

        Don’t worry you guys. There never will be any restrictions or taxes that would compel a corporation to do something ever again. We’ve got those pols where we want them, and we’re going to wring every last cent out of the economy before we abandon the wreckage.

  9. billwilson

    A tax on retained earnings? Accounting classes teach very early on that there is no such tangible thing as “retained earnings”. So how do you tax it?

    Take a small company that holds an apartment building financed with a mortgage.

    yr 0 assets $100,000 (building), liabilities $100,000 (mortgage), retained earnings 0
    yr 1 assets $ 98,000, liabilities $ 95,000, retained earnings $3,000

    How would you tax that?

  10. Toby

    “Corporate profits have risen as a share of GDP since the early 1980s, reaching unprecedented levels right before the global financial crisis took hold.”

    This puts me in mind of the question, posed by another reader here (under Rob’s last post): “what is profit?” Systemically speaking, this is an important question, as it also is in terms of the balanced 0 of double entry bookkeeping. To my mind profits are simply the uneven spread of the medium of exchange throughout an economy. Hoarding interrupting flow. To use an analogy; if money is like blood, and the human brain were afraid suddenly of possible future blood scarcity, it might hoard blood to itself. There would be ‘blood-profit’ for the brain, but the body would suffer, and then the brain. Are profits bad then, systemically? Or are they only bad if not recycled quickly and wisely? Or is this an unhelpful analogy?

    This brings me to another related question: why growth? Austerity to one side for a moment, why is decline bad? Lietaer and others point to usury as the property of our money systems which drives growth. Interest means money is always scarce mathematically speaking, a fact which fosters ever increasing competition, which means winners and losers, rich and poor and so on. This is not bad in and of itself, in isolation so to speak (though nothing exists in isolation), but because of the background scarcity, the inherent tendency over time is for the ‘victors’ to cement their positions and thwart competition and money-flow. That is, there can be no healthily functioning Invisible Hand and interest. Isn’t interest ultimately counter-productive, looking at economics and economies as systemically as we can? Do we have the wrong money-model?

    Also, if we resuscitate the consumerist model by freeing up profit, reinvesting it and raising wages etc., don’t we risk failing to look at the sustainability question? Again, why growth above all else? Or, more pertinently, what is growth? Is it zero-sum? Physics tells us energy is never destroyed or created (though there is entropy, but that is another question). If this is so, ‘growth’ in the human sphere along economic lines, until we’ve addressed waste/sustainability, can only be the one-way linear transformation of ‘resources’ (I have come to dislike this word – it implies ownership of the planet) into consumer items, and utlimately into useless waste. Why is this process necessarily good? Why do we need this process to expand and expand forever? Because economics says it should? Because ‘it’s always been that way?’

    Of course I have no answers, only ideas, but I do strongly feel that any discussions about hoarding, profits, investment etc., within the current usury/scarcity paradigm, are trapped by arbitrary parameters of a dangerously broken model. Our first priority should be a sober, deep and impartial look at sustainability, growth and decline, with orthodox economics kept well and truly outside. We should be developing a new economics, one happily embedded in the world, in nature, and in the universe. Nothing exists in isolation.

    1. liberal

      “To my mind profits are simply the uneven spread of the medium of exchange throughout an economy. Hoarding interrupting flow.”

      To really understand these issues, you need to understand the distinction between economic profit and economic rent. (Economic, as opposed to accounting.)

      Economic profit is a (fair) return to capital. Rent is a return based on scarcity. Best example of rent is natural resource rents, rents accruing from advantages of location for urban parcels, and monopoly rent.

      1. Toby

        Thanks, but I know that stuff. I just find it profoundly unsatisfying. It is couched in an ideological framework that seems totally defunct and wrongheaded to me. For example, I reject the idea that money is (or should be) a store of value, in fact I reject (as guided by Yves Smith, Steve Keen and many others) most orthodox economics. My questions therefore arise from a desire to look at things in as different a way as I am able, not passively accept tidbits from a discipline that can barely even agree on what inflation is, or value, is silent on the nature of money, assigns air a value of zero, and has encouraged humanity to transform real wealth to paper ‘wealth’ because, well … maybe because humans are greedy by nature?

        As far as I’m concerned, economics needs to be taken out and shot. What we might be able to do with its corpse is anybody’s guess. Right now I barely care.

        (Sorry, I’m in a bad mood, and your response seems flippant. Apologies if you meant it warmly!)

        1. attempter

          My moral derivation from MMT is that since money in itself has value only by government fiat (because government will accept it for taxation purposes), therefore it follows that money can never legitimately serve as a “store of value”.

          It can count as “property” only where it’s actually circulating or fermenting as truly productive investment, since only then is it participating in the public life of the society which gives it life in the first place.

          In effect, antisocial money, money being hoarded, money used as a “store of value”, has no right to exist at all, and should be restituted to its proper owner to be put to its proper use.

          Obviously, this applies to post-barter societies only.

  11. Richfam

    Companies and people should be free to decide what to do with their money. If you think companies save money to pay executives then your problem is with corporate governance unless the executives own the company (then I guess its okay if they pay themselves?). How do you spell hooey?

  12. Cindy6

    Declaring a war on savings is not going to solve the problems of the advanced economies. You can point your finger anywhere you want, but at the end of the day, an unsustainable living standard is, well, unsustainable.

  13. Viator

    No mention of tax cuts or regulatory relief. No mention that businesses from the smallest to the largest are frozen in uncertainty and burdened by ever burgeoning regulatory constraints by the legislative juggernaut in Washington. The cure for all this? More taxes and more regulation. That is the disease not the cure. If you get out into the country that lies between the coasts you will find that people ranging from the Business Roundtable types on down to the individual running a small business out of his house are discouraged, doing poorly, and are angry.

    1. D. Warbucks

      That’s the small business perspective. The regulations etc. are to run the small businesses out of business so that there is less competition for the big businesses. Sorry, viator.

    2. sgt_doom

      Whose payroll are you on, Viator???

      The Business Roundtable does everything possible to destroy small business.

      A typical example (while I’m using Micro$oft, any number of companies, and the entire pharmaceutical industry, can be substituted): Micro$oft buys a state law putting a cap on how much independent contractors can earn, as they employ many in that category. (No cap on their billionaires, though.)

      Next, Micro$oft buys a state tax break, giving them a $100 million break for developing software, ostensibly in that state (and that’s debatable), while the same state (Washington) raises taxes on independent small business people by 10% (as in indepedent software developers).

      Typical, typical, the super-rich and richest corporations are forever buying legislation and laws to run the smaller businesses out of biz.

  14. Bruce

    I am still waiting for someone to tell me which company (or even sector) is underinvesting for the sure-to-come-any-day-now expansion? IBM? Exxon? JP Morgan? Pfizer? P&G? 3M? Salesforce.com? Barrick? Apple? NY Times?

    Yves, proposing that companies expand just to expand is ludicrous, and most likely a violation of management’s fiduciary duty were they to do so. Companies don’t invest when the prospect for return on that investment is lower than their cost of capital. You know this, so please tell us, what are you really trying to say?

    The fact is that profits are up because costs are down more than revenues are down, ie margin expansion. There is no final demand recovery near term or even on the horizon, short of massive additional fiscal stimulus, aka QE. What are companies supposed to do – expand? For the “greater good”?

    I think you should clarif your position. If you are advocating state-directed expropriation of private resources, so be it. But just come out and say it.

    1. vlade

      If the company cannot invest (and I’m no arguing either way), one could make a point that it is almost their fiducary duty to return the cash to shareholders, as clearly there are no investment opportunities for the company that would generate the required IRR, but shareholders have more options than the company.

      Holding (a lot of) cash for a few years is very likely bad investment from the shareholders perspective – cash in company’s account is almost guaranteed to generate less than company’s WACC, not to mention targed IRR.

      Say Apple has about 35-40BN in cash/STI, MS about the same, google about 20BN, Intel about 15-20BN.
      This is not a warchest, or a rainy day reserves – all of these have about two years worth of cash (i.e. they could run the company on cash without receiving as much as a single dollar for two years, and sustain not only the operations but also current level of investment etc.), or about 1/5 of their complete market value.

      1. jdd

        If the shareholders face a higher tax rate for dividends (which they will next year) then they’d rather the company keep the cash.

        Now, there are legitimate issues with Delaware’s common law regarding poison pills and other anti-takeover defenses. Yet, if I recall correctly, command and control socialists, like Yves (the state should direct corporations to do what is the best interest of “society”), are generally supportive of anti-takeover legislation to protect “society’s interest” in “jobs.”

        Anti-takeover tactics that entrench management are a big part of the issue. Take those away and corporations that do not manage cash optimally will have management fired without facing all the bargaining issues that are so common in a hostile takeover attempt under current law.

        Outside of corporate governance issues, I think the post is utterly wrong. Corporations are creatures of state law and their property is that of the shareholders, not “society.” The government should have no position one way or the other on how that cash is used so long as the corporate form is not abused.

        Perhaps Yves should consider that poor, command and control, utilitarian-based tinkering with the free market and incentives has caused corporations to hold so much cash. High taxes, high regulation, increased uncertainty, a bogus banking system propped up by the federal government, high levels of entitlements, etc, make investment less attractive, future funding more difficult to assure, and so forth.

        I find it incredibly amusing that people looking at aggregate measures of massive corporations with highly incentivized management with superior “inside” information have systematically made the wrong decisions with what to do with their risk capital.

        Finally, if that capital is in “cash,” then that cash is somewhere, i.e., a bank, and can be borrowed to invest in all these positive IRR projects that the corporations seem to be overlooking.

        1. attempter

          I find it amusing…..command and control socialists, like Yves (the state should direct corporations to do what is the best interest of “society”)

          I find it amusing that anyone could be such a liar and idiot all wrapped up into one, if you really think:

          1. That an anodyne reformer like Yves is a “command and control socialist”. Have you ever actually read a page of history, or do you just stupidly throw around empty words?

          I suppose you think self-appointed savior of capitalism Keynes was a “socialist” too. And the hard-right Obama?

          2. And are you really claiming to be unaware that what we have today is command and control corporatism, where the state directs “society” to do what’s in the best interests of corporations? That’s paraphrasing your own words (including the quotation marks around the word society).

          Do you really think the Bailout, the war, Pentagon budgets, and Big Ag subsidies (just to name a few examples of massive corporate welfare) constitute anything other than a command economy for the benefit of private rents?

          That’s the economic definition of fascism. By definition if you support those things, or even if you’re “neutral” toward them while attacking pro-public measures, you are, in a very precise sense, a fascist.

          Now, will you stop lying like the coward you must be and have the guts to admit that? Or are you really so utterly ignorant that you don’t even know it?

        2. vlade

          Shares buyback is one of the options to get past that.

          There is a number of other creative ways that it can be distributed to shareholders as well while minimizing tax liabilities for them (depends on your shareholder base – institutional vs private, foreign vs. domestic etc.).

          Moreover, the “next year” argument makes paying the dividend out now even stronger (look at UK – almost every company that pays out dividend moved its date to help the shareholders avoid the new 50% top tax bracket).

    2. bystander

      “I am still waiting for someone to tell me which company (or even sector) is underinvesting for the sure-to-come-any-day-now expansion? IBM? Exxon? JP Morgan? Pfizer? P&G? 3M? Salesforce.com? Barrick? Apple? NY Times?”

      See my response above. This is a long term, aggregate behaviour that predates this latest recession by a handsome margin. Picking out the recent actions of particular companies would be an exercise in point-missing.

      “I think you should clarify your position. If you are advocating state-directed expropriation of private resources, so be it. But just come out and say it.”

      Does ‘taxation’ count as “state-directed expropriation of private resources”? I suppose it does, though I’m not sure how illuminating that equation is, nor why you would want to make it. Anyway, it seems to me that they did state their position with clarity:

      “Possible measures to achieve these aims include:

      1) an aggressive tax on retained earnings that are not reinvested with a 24 month period after they have been booked (this provision needs to be designed carefully to defeat efforts to circumvent it through artful accounting);

      2) a financial asset turnover tax that raises the cost to management (and others) of speculating rather than reinvesting profits in productive capital investment;

      3) a reinvigorated public or public/private investment program that helps speed up the shift to new energy technologies (as scaling up usually induces a drop in unit costs of production).”

      Looks clear enough to me.

      1. Bruce

        1 is the same as an asset tax, aka a wealth tax, unless the corporate spends the money on something. Why would I make that point? Because it is only one step removed from the state telling the corporate what to spend money on (think GM) and I happen to think it’s a very bad idea.

        I do thank you for pointing me to other blog posts which I think get at the heart of the fallacy. First, reported profits are after capex expenses and after new investment. I.e your evidence isn’t measuring new investment. Nor are reported earnings “cash”. Reported earnings could be simply the sale of assets at a profit, for example. But they don’t capture cash flows. And really, this is a company by company strategy.

        Which leads to the second fallacy, which is looking at companies in aggregate. What is that telling you? It tells me that large companies have fewer growth prospects. Does that strike you as inherently untrue? Do you think there are lots of locations that need a new walmart? Just one example of course, but aggregates are made up of lots of examples.

        So focus on cash-flow, and I think you will see that there is an entirely different story being told. For example, I just looked at IBM, and they had 20 billion of operating cash-flow, only 6 billion of which they used for investment cash-flow. The other14 billion or so they used to pay down debt and dividend back to shareholders. They had about 35 billion of cash equivalents to about 35 billion of current libilities of about

        1. Bruce

          Sorry I am henpecking on my iPad (yes the irony is galling), but what I mention to say was that quick ratio of 1 is not unusual, nor would I say it’s indicative of a new Corp attitude to liquidity. I know it’s just one example, but I picked it at random and then did the scan, and I m not going to do it for every company. Ok, one more. Msft has about 43 billion in cash equivalents, against current liabilities of 27 billion. So maybe they should go out and buy something? Invest it? In what please

          1. vlade

            So again, why can’t they return the cash to shareholders if they don’t have anything good to invest in and would have more than enought to have their liabilities and liquidity needs covered even after a hefty dividend?

        2. JTFaraday

          “proposing that companies expand just to expand is ludicrous, and most likely a violation of management’s fiduciary duty were they to do so”

          I didn’t read the article as saying they should expand just to expand.

          The way I see it, corporate leadership prefers to manipulate a short term profit by goosing quarterly numbers and cutting expenses, because it is miseducated in finance and doesn’t know how to productively innovate its way into real profits. The only thing most of these executives seem to know how to do, is manipulate their own pay day.

          I don’t think it’s outrageous to suggest that there is something drastically amiss in the land of grossly overpaid and underperforming executives, to suggest that they are yet another class of corporate looters, and that their collective failure has implications for the US economy.

          1. JTFaraday

            In other words, corporate executives have become the spitting image of their own portrayal of the inert government bureaucrat.

    3. D. Warbucks

      Yves’s plan makes a lot of sense IF you are interested in having a healthy economy. That’s a big IF, as many in these comments will agree.

      Of course, corporations chafe under any suggestion that they can’t do whatever they want, whenever they want. But letting them do that really wouldn’t do anything to lift the U.S. economy out of a depression. IF you want the U.S. economy to recover (some do, amazingly enough), the government is going to have to step in some time and tell some people what to do.
      Let’s hope that never happens!

  15. Toby

    I’d like to make one other point; past performance is no guarantee of future performance.

    Jared Diamond’s analysis of the collapse of civilizations lists a number of things to watch out for if we want to avoid collapse. One of his list is the stubborn refusal to recognise that the very strengths that got us to point X can become the weaknesses that threaten collapse. Properties of systems are ‘good’ in particular circumstances, not for all time. Adaptation is key to survival, not a stick-in-the-mud refusal to change. Hence:

    “The entrepreneurial pursuit of profitable growth has been the vital engine of prosperity since the Industrial Revolution.”

    and

    “There is no other way to square this circle – anyone who tries to tell you otherwise does not understand double entry book keeping, which the West has used for at least the last five centuries with some success.”

    surely cannot be absolute goods for all time. Changing circumstances like population growth, technological developments, improving understanding of how the universe works, etc., put them in a different light. We need not be emotionally/loyally attached to anything so unconcerned for humanity as an ideology or a paradigm. The strengths of circumstance-set A can easily become the weaknesses of circumstance-set B.

    1. Skippy

      The banking way of life is killing us and every thing else on this planet but, the solution in to stick N2O in its maw. How much time did it take stone welding people to off themselves and we use how advanced tools in our consumption…sigh.

      Skippy…our groundhog day.

  16. Larry

    Public companies are hoarding cash because (a) they can no longer be sure of access to finance (i.e., they may have to pay off their debt with internally generated cash, as they can no longer assume they will always be able to roll their loans), but more importantly (b) there are few attractive investment opportunities. The U.S. consumer is tapped out. He can’t borrow any more money, and now must deleverage. Corporations have built massive amounts of productive capacity over three decades to service consumers who were able to borrow, and borrow, and borrow. Much of that productive capacity is now well out of line with sustainable demand. Why then should corporations continue to further grow capacity for goods people can no longer afford to consume. Robust reinvestment by home builders led to a glut of housing stock and a real estate crash. Overproduction by automakers (fueled by cheap lease rates and over-optimistic lease residuals) drove vehicle production to seevral million annual units above sustainable levels.

    Are you actually looking to encourage more of this corporate behavior? Via consumer finance, the West has consumed several future decades of productivity, by now. Until productivity recovers, demand will not recover. As Viator pointed out, additional taxes and regulation will simply exacerbate the problem.

    State planning of the economy (via Soviet-style five year plans, or compelled investment in non-economic ‘green’ technology) won’t work – never has, never will. At best, government can help mitigate the pain. For example, a 21st century style WPA or CCC to temporarily employ private sector unemployed, to renew infrastructure, national parks etc. would make much more sense than continuing to bloat the permanent public sector.

    People keep assuming there is a way out of this, other than a substantial amount of time for recovery. There isn’t.

    1. Jim Haygood

      Keynes wrote about ‘animal spirits’; Jimmy Carter diagnosed ‘malaise.’ Economics (other than behavioral economics) hardly acknowledges collective sentiment, but it’s vitally important, driving both individual and corporate ‘toxic savings.’

      As Larry said, excessive debt has borrowed from future consumption. Meanwhile, wars drag on, the realistic specter of sovereign default has arisen, the political system is dysfunctional, and the US survives via unsustainably large imports of energy and capital.

      Planned liquidation is probably a rational option for corporations which can’t benefit from social chaos, confiscatory taxation, and demand destruction. Not only is financial investment not merited under such conditions; many people may decide that investing in the future by having children isn’t merited either. Deteriorating demographics will only accelerate the crack-up of defectively financed entitlement programs.

      Empires inevitably crumble. This one resembles the Austro-Hungarian kludge more every day. Invest? Not me!

  17. Jennifer Hill

    Question about this analysis-
    Did you calculate the revenue that could be raised from these measures? I’m working on some tax issues at the federal level and would like to see how much this might generate.
    Thanks!

  18. G. E. Kruckeberg

    Obviously, what you are seeing is a response to the impending expiratiuon of the Bush tax cuts. And your response is to impose more taxes? Wow! Brilliant!!

    1. D. Warbucks

      Clearly, the answer to everything is to cut taxes even more for the top 1%. Low taxes on the wealthy created the longest-sustained economic boom in the history of planet Earth.

      The current depression can be attributed entirely to expectation that those tax cuts may expire soon.

  19. i on the ball patriot

    From your article opening;

    “Failure to understand these dynamics and address root causes is sure to make a bad situation worse.”

    From your article close;

    “The entrepreneurial pursuit of profitable growth has been the vital engine of prosperity since the Industrial Revolution. Yet incentives for both managers and investors now favor myopia and speculation, undermining the very operation of capitalism. We need tax and regulatory policies to counter this destructive development, along with wider recognition that government deficits are necessary and salutary if the corporate sector is under-investing to boost its short-term profits and households are prudently refusing to increase borrowing to accommodate it.”

    Errrr … regarding “failure to understand these dynamics and address root causes” … it was the wholesale dismantling, change, and hijacking of TAX AND REGULATORY POLICIES that created the conditions for elite control driven Pernicious Greed to clean old fashioned profit driven Vanilla Greed’s clocks and change the dynamic to what we have now.

    Calling for the same gangster foxes to set things right only validates and further empowers those very same gangster foxes, but that is what The New York Slimes is all about, keeping the system game empowered. You are judged by the company you keep. Better to decline the invitation that so stains you.

    You should rewrite this as a blog post and take the dynamic change back to Ronny Reagan and his scum bag, commie bashing, GE boss Lemuel Rickets. That’s where the profit driven Vanilla Greed capitalism (read capitalism as decoy for gangsterism) first began to morph into elite, control driven, Pernicious Greed.

    Still waiting for the new topic tag; Vanilla Greed Lament … and you should also create one for; Useless Remedial Plan For Gangsters.

    TSTS — Too Sleazy To Save … Election boycotts as a vote of ‘No Confidence’ in this crooked government are in order.

    Deception is the strongest political force on the planet.

  20. b

    Yves makes the argument a couple of times, in the article and in the comments, that corporations began their hoarding prior to the current crises which therefore chips away at the protest by some that have made comments that corporations were reacting to the current financial crises.
    Would it be completely naive to suggest that perhaps corporations (at least the ones reviewed in the JPMorgan piece in 2005) may have seen some of the writing on the wall? Perhaps they could see that the lowering of interest rates by the Fed to such low levels for such a prolonged period of time was an obvious signal of trouble ahead? That maybe we never really came out of the DotCom triggered recession, or that at the very least we were witnessing a last gasp attempt to create artificial demand that they feared might end badly, therefore triggering a change in corporate behavior to saving rather than investing in a time period that what was considered to be a normal “expansion phase”?

    Also, this oped seems to contradict some of the arguments/comments made by Yves in a recent post regarding Steady State Economics:
    http://www.nakedcapitalism.com/2010/06/green-consumerism-largely-a-myth.html

    How does one square the circle of promoting Freegans on the one hand and supporting a tax on corporations if they don’t invest and expand on the other?

  21. Dave of Maryland

    Quarterly earnings vs: the rest of the world.

    In France, as is well-known, everyone gets two months vacation a year, but at the same time: Bastille to La Rentree.

    In England, everyone gets four weeks a year, one week at a time: Quarterly. You no sooner come back from one holiday, before you’re thinking about the next.

    I could use a week’s holiday about now. . .

  22. Chris M.

    And when reinvestment does occur, way too much goes toward building more and more factories, IT centers, and call centers in China and India and not enough in US operations. I would add trade policy changes to your list, starting with something along the line of Andy Grove’s plan.

    I get the feeling that the GOP will read this piece and will blame Obama and the democrats (as usual) and also demand lower capital gains taxes, lower top tax rates, more corporate welfare and more deregulation as their prescription for under-investment in the US by wealthy corporations. Maybe that’s what corporate executives are holding out for. In which case they really are taking a longer term view. Maybe they have decided that keeping the economy slow and keeping the labor market desperate is the best way to elect more republicans, which would favor them and their wealthy shareholders in the long run.

    By the way, I compared the 2 versions of your article n Word and was a bit disappointed with some of the NYT edits. They clearly watered down some of your edgier anti-modern-capitalist rhetoric and the insanity of encouraging austerity in all sectors of the economy simultaneously.

    1. D. Warbucks

      “Maybe they have decided that keeping the economy slow and keeping the labor market desperate is the best way to elect more republicans, which would favor them and their wealthy shareholders in the long run.”

      While this will, as you say, cause more Republicans to be elected, the Democrats are now further to the right than Republicans, so there’s no issue there.

      A desperate labor pool is also a very nice thing, but that’s not the final goal.

      The main idea rather is to suck all the wealth out of the U.S. and then move on to the next country.

  23. dzoner

    Why, why oh why isn’t the rogue elephant in the corner ever taken into account on economic blogs?????

    A year ago the US Joint Forces Command, folllowing a study, predicted a 10 million barrels a day shortfall in world oil production … and this is conservative compared to other NON official forecasts.

    http://www.guardian.co.uk/business/2010/apr/11/peak-oil-production-supply

    And that was before the GOM disaster.

    Any economic calculation that does not take that MOST significant emerging reality into account is, literally, based on delusional thinking and be inaccurate and misleading.

    1. RagingDebate

      Good.

      1) Growth during the Industrial Age was accelerated due to cheap, abundant energy.
      2) Therefore, the solution is in developing cheap, abundant energy.

      Everything else is just noise until the world leadership “gets it”. Unfortunately, pain is the ultimate catalyst and why war is likely to cause such leadership themselves tremendous pain to “get it”. See you on the other side :)

  24. ds

    good post. this underinvestment is really the standard amongst the so-called ‘high tech’ companies. Look at all of these giant corporations on the forefront of technological innovation — Google, Microsoft, Cisco, Amazon, Dell, Apple — all of these corporations have enterprise values lower than market cap. They are sitting on piles of cash so that, in the aggregate, their earnings are actually sucking demand out of the economy. Dell is the extreme example of this — they have almost $6 a share in cash and the stock is trading $12!!

    I am not sure if an earnings tax is the solution but this level of savings on the part of the tech sector is unsustainable — the negative effects on demand will inevitably ruin the very corporations whose savings are now considered examples of success. Either they must invest the profits, or let them recycle back into the economy by paying them out to workers or shareholders.

  25. Peter from New Ebngland

    I recall from reading in Simon Johnson’s “13 Bankers” that the profitability of American corporations has actually not performed all that well for the last 30 years if you exclude the financial sector. I worked in the U.S. telecommunications equipment industry for the last 30 years where huge investments brought little return due to intense price competition. Looking at other major U.S industries like automobiles the pattern repeats. Maybe we’re making bad investments but I don’t see the big surplus. Companies like Microsoft may tuck away a lot of their profits in U.S. treasury paper but is this really common in most U.S industry. I haven’t seen the data but it should be available.

    1. sgt_doom

      When discussing either economics or finance, I would never cite an IMF whore like Simon Johnson as an authoritative source. (If you’ve followed him closely, you will realize that on odd days of the week he has supported the widespread use of credit default swaps, while on even days of the week he has been against their use.)

      Period.

  26. Mickey Marzick in Akron, Ohio

    POSTSCARCITY [excess productive capacity and an ample natural resource-base] versus ARTIFICIALLY-INDUCED SCARCITY [Lack of investment/disinvestment and the perception of “scarcity”]

    FULL EMPLOYMENT versus AUSTERITY [High unemployment/underemployment, deleveraging, reductions in pensions, etc., in the name of fiscal responsibility to ensure market confidence]

    REDUCTION OF THE WORK WEEK [from technological unemployment to sharing the work] versus DEFLATION and decrease in aggregate demand which only makes for additional disinvestment… in a vicious feedback loop.

    ???????? versus CAPITALISM

    The ‘LEFT’ side of this equation is juxtaposed to that of the ‘RIGHT’ for explicatory purposes. It is an oversimplification of the debates we have rehashed again and again for the past nine months, if not longer. Depending on how one aligns himself/herself on these axes leads to the inescapable conclusion that either the world is made safe for CAPITALISM with the adoption of the first three on the RIGHT or we grope our way towards ????????? – a viable alternative that is equitable, sustainable, and “profitable”.

    Slice it, dice it however much you want, but this is where the deabte is at. Any one of the three on the ‘LEFT’ can be debated separately but each tends to subsume/include its successor – POSTSCARCITY –> FULL EMPLOYMENT –> REDUCTION OF THE WORK WEEK –> ??????????. Likewise on the ‘RIGHT’ – ARTIFICIALLY-INDUCED SCARCITY –> AUSTERITY –> DEFLATION –> CAPITALISM.

    IOf course it is bit more complex than I have portrayed it but this set of antipodes frames much of the debate. CAPITAL is on strike because it sees no need to expand capacity based on its ‘guidance’ for AUSTERIA. Only by refuting the assumptions on which AUSTERIA is based with those centered on postscarcity, full employment, and a reduction in the work week, and then devising a strategy for their effective implementation will this strike be broken. Otherwise, AUSTERIA will make the world safe for capitalism, marginalizing the technopeasantry in the center much like it already has with the peasantry in the periphery.

  27. Hondo

    I have to say I disagree. An aggressive tax on retained earnings is the same kind of nonsense FDR tried to pull (generally the same with the rest of the interference in the private sector). Consumption is heading much lower in the over indebted developed word. Why on earth would a company want to expand into that scenario? You assume that they won’t or haven’t expanded to areas where demand is higher……..I say they have…. The only rational point made is give or pay out the excess earnings to shareholders……..who do in fact need the proceeds to possibly pay down leverage, live in retirement on or even consume if they wish.

  28. Gerald Muller

    This is a very interesting discussion. Some take the economist attitude, looking at double entry bookkeeping, savings and aggregate finance, while others take a more lofty point of view, wondering whether we should not change our entire paradigm and stating that this run for growth and more growth is simply unsustainable and will drive us into the wall.
    Both point of view are valid because we have to get out of the mess we’re in and bean counting is essential. However, looking a bit further should help reshaping our world. Two points seem obvious to me: there are too many humans on this planet for it to be sustainable in the long run and the looting of the masses by those banksters and their likes is even more unsustainable. The reference to de Tocqueville’s “L’ancien régime et la révolution”, which I am lucky to be able to read in the original, is very much to the point and should be read or re-read by all that pretend to govern us.
    The main problem is that the present form of democracy has been perverted to the highest degree: to think that the greatest democracy, which gives lessons to the world, can legally elect Ws and Obamas proves beyond doubt that this system will not mend itself. Our world is extremely complex. People who understand it, at least partially, are a minuscule minority. And our “leaders” are elected by the majority. How can this work? Not mentioning that money is now the driver behind each election.
    Would Churchill or de Gaulle be elected today? No way. We get Ws, Obamas, Sarkozy and the rest.

    1. Conor

      Um… (Not really on topic here, which I readily admit is over my head)… But anyway, to equate Obama with the likes of George (dubya) Bush speaks for itself.

      But what little I can discern, Ms. Smith is making perfect sense to me. As I see it, Capitalism – even as a by-product of its own existence – no longer serves the greater good, at least in America. It’s like the stock market is even more divorced from the general economy than it generally is otherwise. Like whatever happened to venture capital? It’s all about just speculation. It’s turned into a wacky shell game that has nothing to do with anything except itself. Corporations, if Ms. Smith is correct, are hording too much money and not putting out there to serve the general good.

      It’s like metastatic cancer.

      I have many problems with Mr. Obama. But hey, running a country like America is like herding a bunch angry cats on LSD.

      1. Cog

        Equating Obama with Bush? Easy. All of financial reform put on full display the behaviour we can expect from present, and future, executive branch occupants. Its a serial thing. That is “every dollar of GDP is sacred”…and may just help them get re-elected. Larry Summers has chloroform over Obama’s mouth with his insanely high demand hocus pocus and if you think that’s materially different than “deficits don’t matter”, think again.

        Watching fin reform unfold may have been about Democrat on Republican in the Conference setting, which thank you C-SPAN, reduced the number of places to hide. But you missed something big if you didn’t catch the latest presidential administration’s efforts, and all of its captive regulatory might, attempting to blunt almost anything representing a short-term cost at the expense of a long-term gain.

  29. zanon

    This is nonsense article.

    Business is pro-cyclical. If there is no demand, they will not invest. Weak labor market is keeping wages low, so firms make profit and keep it.

    The solution is for Obama to cut payroll tax and let household keep own money! But Obama only wants to make Goldman Sacks and Unions rich, their crony. Ordinary people can go hang.

    Saying that business should act in countercyclical way is pushing on string nonsense, just like loading bank up with reserve urging them to lend (actually that is even more stupid and backwards).

    1. JTFaraday

      I’m sorry, but that’s too passive to just let pass. Suppose demand for yesterday’s business NEVER “picks up” again?

      Meanwhile, the CEO has effectively flushed the corporate entity, while crying about the lack of demand in yesterday’s business and what the evil Obama government may try to do to them–which, as I think we all know, is a huge joke.

      Since we can’t fire these putzes, I guess we have to short them.

      1. zanon

        there is only one entity that can act counter-cyclical at sector level.

        it is raining, and only one person has umbrella. either he open it, or we blame the rain for making us wet.

    2. Chris M.

      I think her point was that there are plenty of profitable opportunities out there. But modern execs just look to the next quarter and do whatever they can to keep their sky-high margins while ignoring top line growth. Shareholders would be better off in the long run if more opportunities were pursued and businesses grew faster even though their margins might fall in the short run.

      Normally, you’d expect high margins and missed opportunities to attract competitors. But corporate power is so concentrated these days and so subject to group think that it’s not really happening. I remember a time when companies would be afraid to hold so much cash, for fear of being takeover targets. But I guess those days are over. Where are the Wall Street barons of the 80s when you need them?

  30. RSDallas

    Yves,

    I was with you throughout the article until I got tot he suggested solutions part. This is just terrible advice. It appears to me to be a Socialist skewed suggestion. Why not focus on providing Corporate America the opposite in the form of tax savings, etc..

    Corporate America is responding exactly as they should be seeing how they have almost zero visibility when it relates to stability and uncertainty. There is more uncertainty today than in another time I can recall within my adult life of 47 years.

    Why would you make a large or small capital investment in today’s times? Businesses have no idea of the true costs of the Obama regimes health care reform, proposed cap and steal scam, financial reform, and general levels of taxation. This is besides the point that most all of America thinks (and rightly so) that our financial system is in fact insolvent and could explode at any given time. The true Capitalist is waiting for the banks, pension funds and the likes to come back to reality (which most will eventually do) as to what the true value of the assets are that they hold. The true Capitalist is waiting until he can profitably display his Capitalist ways.

    I really enjoy your perspective on most issues, but give me break here Yves. The Capitalist are behaving exactly as a Capitalist should behave right now.

    1. JTFaraday

      “The true Capitalist is waiting until he can profitably display his Capitalist ways.”

      The True Capitalist “waits.”

      Wow. Now THAT is one novel formulation. I think the results are in:

      “the now-established trend of the corporate sector to save, as opposed to invest in growth, in advanced economies, and even most emerging economies, was tantamount to capitalists abandoning their traditional role….which is tantamount to disinvestment.”

      Which is where we started out.

      1. D. Warbucks

        You are clearly not familiar with the ancient Chinese “Way of the Capitalist:
        “Confuse your enemy by disinvesting, making them believe you are not a true Capitalist”

    2. sgt_doom

      RSDallas says:

      ” Why not focus on providing Corporate America the opposite in the form of tax savings, etc..”

      Hmmm…Ah..yup, yup. Let’s give major fed tax breaks to GE and ExxonMobil.

      OH NO, WAIT! They didn’t pay fed taxes in 2009.

      OK, so how’s about all the rest of Corporate Amerika?

      OH NO, WAIT! The majority of American-based corporations pay no fed taxes (over 70% from 1998 to 2005 according to various studies, including the GAO).

      So, if they don’t pay taxes, but every free market cracker keeps begging for more tax breaks, I guess you’d call them bizarrely crackers?

      1. CingRed

        Corporate tax is an interesting subject. Only one thing generates wealth and that is a productive entity. Corporations are shells filled with productive entities that produce wealth. Those productive entities are called humans.

        Humans are the only entity capable of producing wealth that can be taxed. Taxes on anything other that the wealth generating entity (humans) is just a diversion. All taxes must eventually be born by that which generates wealth. Companies do not generate wealth in and of themselves. It is the humans that occupy positions within them that generate wealth. To say otherwise is to propose that an organization chart by itself has the capacity to generate wealth.

        So go ahead and cry “tax the corporations” because they will very effectively pass that tax right on down to the human user of their products, so let’s get right down to what you are really saying and cry “tax me more”.

        Are you really foolish enough to think that somehow the corporate entity is the source of the productive wealth generation even on those rare occasions when they do cut a check to the IRS? If so I have some swamp land in Florida that you might be interested in.

        1. patterson

          Thanks cingred for bringing up my favorite reason not to tax corportations: they just pass the tax along.

          By this logic, it makes no sense to tax corporations at all, and if there is some behavior that you want to modify with taxes (like promoting investment in America), it won’t work because they’ll just pass the tax along. That makes perfect sense, right?

          Be sure though not to look at particulars when you make this argument.

          1. cowbot

            “By this argument, it makes no sense to tax corporations at all”

            Actually, it is from a combination of this argument (it is we who pay the taxes), combined with the fact that we individually have no say in how those are spent, that the futility of tax-and-spend economics is revealed.

            What the State does is appropriate resources from every single productive individual and spend it to employ thousands of hours of human labor for a product – an end-result – that no-one would willingly choose to purchase at that price.

            is cast into clear relief and the reader is illuminated.

      2. RSDallas

        It’s really irrelevant anyway, because nothing is going to improve until Corporate America and the rest of America either defaults or pays off all of the non productive debt that is currently choking our economy.

  31. Siggy

    Corporations tend to hold cash in the expectation that revenues may decline and they need a cushion to carry thru that decline into the next expansion.

    Tax retained earnings and there’ll soon be no retained earnings. With no retained earnings shareholder equity will be reduced. First there was the corporate income tax then there shall be a tax on retained earnings. By the by, how much of retained earnings exist as cash or cash equivalents?

    Did you ever try to liquidate capital assets? Try 20 cents on the depreciated dollar as a reasonable expectation. What might that mean with respect to shareholders and pension funds?

    I like quick ratios of 1.5. While a ratio of 1 might be acceptable, the company with a 1.5 has options, the one with a 1 has very few to no options and will too easily depart the economy.

    Earlier in this thread there is a very succint and profound comment to the point that it may be that we can nolonger afford our current standard of living. Relative to other economies that has been the case for a very long time.

    Spending less than you earn does not absolutely mean austerity, it means adhering to fiscal responsibility. Austerity, Austeria are neatly loaded perjoratives when the desired course of action is very substantialy less than what is implied in the word austerity. The use of loaded words in this discourse is too slick by half. Fiscal responsibility is not austerity with all its its draconian implications.

    What the government spends it must fund by either or all of: Taxes, Borrowing; or the debasement of the currency. What has been transpiring since 1946 is the continuous and pernicious debasement of the currency. Our ownership of near 20,000 tonnes of gold has dwindled to roughly 8,100 tonnes. We are, today, decidely poorer than we were circa 1965. There is no easy route to a stronger balance sheet and a stronger economy.

    Rather than worrying about Medicare/Medicaid and Social Security, might we better direct our attention to our military missadventures in Iraq and Afghanistan and a few other lessor places. Might our military expenditures be the place where we have grossly missallocated or wealth?

    We found no weapons of mass destruction in Iraq. What have we given the people of Iraq? The Kurds still want to succeed, the Sunni’s still hate the Shia and they are each still regularly blowing each other up, despite our continuing presence.

    We are in Afghanistan because we are chasing Al Qaida, the Taliban and, oh yes, Osama bin Laden. We are also fighting to bring democracy to a country that is at best a tribal aglomeration living in a fuedal time warp. But then there is oil in Iraq and there are significant mineral deposits in Afganistan. And oh yes we have to create a ring around Iran lest they get uppity and pop off an A-Bomb.

    Pardon me, but fixating on corporate/private savings is being preoccupied with the wrong clock.

    1. D. Warbucks

      “Might our military expenditures be the place where we have grossly missallocated or wealth? ”

      No. No. Definitely, No.

      The new economic model is called “primitive accumulation”:
      We see something we want, we take it.

  32. Brick

    Although I would generally agree with the premise presented here, I think perhaps there might be a over generalisation of austerity. Personally I see austerity as having different flavours. For instance what would be the net effect of disbanding a government department which has a role of creating red tape to prevent business expanding. Redirecting government spending can boost the economy if it is done correctly. I will however accept that some austerity ideas in Europe are of the other flavour, but feel uncomfortable when the two flavours are treated the same.
    The question “whose interest might these Austerian policies be” almost implies that there can be no currency crisis. Whilst perceptions that the US dollar cannot have a currency crisis may be true I doubt whether the same can be said for some of the European currencies, after all it is within living memory that the UK did have a currency crisis and I don’t see any more stability now than there was back when that happened. Money can be printed, default avoided and the bond vigilantes of yesteryear may not be around now, but long term it will damage potential investment.
    Since both Austerian and non Austerian camps missed the opportunity to reform properly, what is happening is almost inevitable, namely bad keynesian and austerity policies and I applaud the idea that big business incentives need to be addressed, but I don’t think the suggestions really solve the problem. Increasing base business tax and then giving tax relief for certain types of investment seems more balanced as it still leaves choice.

  33. Mike the Mad Biologist

    I find your original version, for the most part, much better than the edited version. It’s much more interesting to read, which might explain why newspaper readerships are in decline.

  34. anon

    “Corporate profits have risen as a share of GDP since the early 1980s, reaching unprecedented levels right before the global financial crisis took hold.”

    I would like to see some data on how these profits are distributed, e.g. are they concentrated in the big multinationals? If so, maybe these companies are just too big and powerful and can make money just because of their size and high barriers to entry for other companies. Maybe it’s cheaper for them to buy regulations/politicians/favors/customers/their competitors… rather than compete the old fashioned way.

    Once you’re the only toll road around (or somehow managed to lock people into your specific road), there’s really no incentive to make the road better – it’s all about extracting the maximum possible while doing the minimum possible.

      1. anon

        Yes, I’m into a level playing field. A basketball game wouldn’t be too fun to play, or watch, if the referee was bought off by one team.

  35. Foreign CPA

    Your tax on retained earnings already exists in the USA Internal Revenue Code at IRC Sec. 531 et seq. entitled Impositions of Accumulated Earnings Tax. It has been there for a very long time.

  36. LAS

    Being but a dingbat lay person I could be wrong, but this strikes me as a problem created by banks rather than your garden variety corporation.

    OK, perhaps the corporations raised more money than they needed for investment. I don’t see how this is necessarily a problem though.

    Isn’t it the case that simply by saving money, your garden variety corporation is making capital available to other entities for use via the financial services industry? Aren’t banks and venture capitalists supposed to lend this money to entreprenuers? Isn’t that the original concept of commercial banking and investment?

    So, this situation seems the result (once more) of an overly-influential, off-balance financial services industry that didn’t really diversify the investments or loans it made. Their claim to be expert in risk management is at least as outrageous as the rating agencies claim to rate bonds.

    1. Cog

      “Isn’t it the case that simply by saving money, your garden variety corporation is making capital available to other entities for use via the financial services industry?”

      Sorta, but the risk aversion to that saved corporate capital that is kept as “cash” is extreme. Its not like its going into SBA lending. It’s in shadow bank money markets, CP, a lot of “state and local governments” and other “eligable” places that can just as easily be defined by how much they DON’T stimulate economic activity.

    1. Yves Smith Post author

      Um, looks like you didn’t bother reading the piece. It clearly states that corps in most countries were saving in aggregate LONG before it occurred to anyone to put “bank” and “stress test” in the same sentence.

      1. Bruce

        Here we go with the “in aggregate” fallacy again. Yves, reported earnings are not equal to cash-flow, and even if cash-flow “in aggregate” showed corporate america (by which I assume you mean s&p 500, but I am not really sure) was hoarding cash (which I highly doubt), (a) you have to consider weighting by company in your ageggate, and (b) as many other posters have pointed out, it could be indicative of a slowing economy, yes even as far back as 10 years.

        You are advancing a hypothesis based on a fundamentally flawed first premise (retained earnings), and then data-fitting to “prove” the hypothesis.

        I just can’t believe this. I look forward to you providing some real data.

      2. MrMoney

        Perhaps I was not clear regarding my comments on the article. Yes, corporations have been building up savings prior to the crisis as the article indicates. What has not been acknowledged is the acceleration of corporate savings over the past two years. Exxon and Chevron are two examples that appeared in a Bloomberg article in March 2009.
        We need to follow the cash flow, not non-GAAP reported earnings.

        http://whatisthatwhistlingsound.blogspot.com/2009/03/strategies-part-1.html

  37. LeeAnne

    What are Barney Frank and Ron Paul up to? Maybe Deficit Hawks for Privatizing Social Security and Medicare?

    Long before Finance/FIRE caught on to the easy looting of this country on a scale never seen in the history of the world, growth of the US military since the end of WWII, a socialist economic system with reportedly about 1,000 military installations in 70 or so countries and growing, has thrived at the expense of US taxpayers, depriving Americans of the benefits of their increasing productivity.

    This has been made possible by the ever whirring right wing corporatist propaganda machine with ideological stories like the Cold War, the War ON Drugs, the Korean War, Vietnam, WAR ON TERROR, Iraq, Afghanistan, Iran …

    Well, according to this morning’s Huff Po, Rep. Barney Frank and Rep. Ron Paul are going to do something about this. Why We Must Reduce Military Spending here

    That Barney Frank would join with Ron Paul to reduce the military budget is reason for optimism, even cheering. But, pardon my cynicism, given the realities of our corporate owned government behavior up to now (see health care reform and finance reform), this alliance is more likely, if not almost certainly, designed for cover under the ‘reduce deficit spending’ rubric for their REAL AGENDA of PRIVATIZING Social Security and Medicare - and making them safe for excessive private profit.

    1. sgt_doom

      Exactly, given that the same Barney Frank took some Goldman Sachs-written legislation from his former staffer, now a Goldman Sachs’ lobbyist, and put it into the financial “reform” legislation exactly as is.

      Although, Obama’s “deficit committee” (a la Erskine Bowles, Alan Simpson and other neocons) is supposed to serve that purpose (stealing the paid-ahead social security tax fund).

  38. CingRed

    I do understand double entry accounting and the basis for retained earnings is net profit from the income statement. You make a profit, you increase retained earnings, you take a loss, you eat up retained earnings until such time as paid in capital is equal to the negative retained earnings and they you tell Turbo Timmy to go hold a gun to the head of congress and give you more money.

    But wait! We already tax profit (which is what increases retained earnings, so why not do it again? We tax when you buy something, we tax when you hold what you bought, we tax the profit you made on it, we tax the property that it sat on when you were adding value to it, so why not tax it one more time. I have a friend that closed his profitable business largely due to the seemingly infinite list of government regulations and forms. I’m sure most non-entrepreneurs don’t understand the drag this is on true capitalism.

    We have placed managers of mutual funds as the official “stock holders” for the majority of stocks issued. They don’t care about the long term viability of the company. They get a fee and they want to churn. Managers have taken over the board of directors in the same manner that banks have taken over their regulators and with similar results. (Suggested reading “The Battle for the Soul of Capitalism” by John Bogle) Companies have become too large for an individual stock holder to have any influence over and the corporate managers are concerned primarily with enriching themselves quickly and then moving on to the next victim company.

    We allow things like corporate pillage through LBO’s we allow CEO’s and top level managers to benefit greatly by selling off the stockholders company committing essentially the same fraud that was perpetrated by those who packaged up junk debt and sold it as a good investment.

    No, Yves, taxing retained earnings is not the answer and there are many reasons to hold cash and grow those holdings. Few Fortune 500 companies have made a profit every year for over 70 years. I happened to to work in the finance and accounting side of one that has. (Yes, that is REAL experience with this topic.) They have a nice chunk of cash on hand and it has allowed them to invest wisely at opportune times. Your proposed solutions would destroy that ability. You need to look elsewhere to fix the entities that claim to be operating as capitalistic principles but are not and that does not include all businesses that are out there.

  39. Tom

    The corporate sector’s high savings rate, and what if anything we should do about it, is an interesting topic, and I’m glad you raised it.

    But I want to respond to the rest of your article, which is based on a very befuddled sectoral analysis, and comes to the very befuddled conclusion that we need more government deficit, to compensate for increased household sector saving.

    The foreign sector is made up of far more than trade. For sectoral balance analysis to work, the foreign sector must be defined to include the entire current account balance PLUS the financial account balance (the balance of investments into the US by foreigners and out of the US by US residents).

    Also, the private domestic sector is normally divided into the household sector, the financial sector and the corporate sector. Either you are forgetting the financial sector, or you are including it within “the corporate sector”, which is not normal lingo and will confuse many readers.

    When a government increases its deficit, this is offset mainly by the foreign sector, as increased foreign buying of Treauries increases the financial balance, and the financial sector, as domestic banks increase the weight of Treasuries in their credit portfolios. The corporate sector plays a minor role.

    The normal, natural and healthy way for increased household savings to be offset would have been through decreased imports, which have long been elevated in our notoriously out-of-balance economy. By instead offsetting increased household savings with increased government deficit, the US government essentially wasted borrowed money on propping up the global price of oil, iron ore and other commodities.

    Moreover, the US government has increased its deficit since 2008 far in excess of the modest increase in household savings. This, in combination with low interest rates, has served to discourage household savings, perpetuating the unhealthy imbalances.

    What we are seeing now is a natural process of self-correction of those imbalances beginning to play out. Your call for yet more government deficit to further delay this balancing process is simply hysterical.

    1. steelhead23

      Tom’s post is truly interesting. Frankly, because I would prefer not to witness a global economic collapse, I like the idea of working toward a fiscal balance that helps humans. I am not nearly as well educated in economics as many here and on other blogs I read, but one thing is quite clear to me. Many Americans hate their government, don’t trust it, and believe it operates to nefarious intent. They hate taxes and spit entitlements. Others believe corporations and those that run them are thieves, liars, and cheats. The former tend to be monetarists or libertarians. The latter, Keynesians or socialists. From the bleachers, it appears that Obama has attempted a synthesis from the two camps – a stimulus package that was too small by half (according to Paul Krugman) yet refusing to intervene in the large banks which were clearly insolvent in Sept. 08 and propping them up to the tune of trillions of dollars.

      In essence, leadership has failed us. I don’t just mean the lassiez faire leadership that brought us this catastrophe, I mean the response to it. Tepid. I am far from certain which approach – a strictly monetarist course, with huge debt deflation and a bankruptcy mania to rival the 30s, or a new New Deal with debts our grandchildren would be paying – would be best for the nation’s long-term economic health, but Obama needs to learn that straddling a fence is a good way to get nowhere fast.

      1. patterson

        I am also on the fence about whether mass bankruptcy, unemployment, and destruction of living standards is preferable to paying some more in taxes at some future date.

    2. Tom

      On further thought I about this, and examining the flow funds reports, I realized that I also oversimplified and mischaracterized the domestic component to the offset of the growing US deficit.

      As the financial sector increased its purchases of Treasuries, it reduced credit to the corporate sector, which is another way of saying the corporate sector reduced borrowing, which is another way of saying the corporate sector increased saving. The elevated corporate savings that Yves and Rob are writing about turns out to be a result of elevated government borrowing.

      1. Yves Smith Post author

        Tom,

        Please explain how this trend exists in emerging economies ex Asia, or how you see companies investing in Germany (which ran government deficits) or why it existed in the US even when risk spreads (more important in corporate borrowing) were so low that you saw a record buyout binge in 2006 and 2007, or a record runup in household debt? Your argument implies that government borrowing led to elevated rates in the private sector, yet plenty of actors didn’t act in line with your implicit claim.

        And the financial sector certainly was NOT increasing its purchases of Treasuries pre crisis, which as the article points out, was when the trend towards corporate savings began and was called out as a disturbing development.

        This looks like a biased and selective reading of the article.

  40. Ronald

    Great to see you on the Opinion page of the NYT, was reading the paper this morning and was surprised to see our esteemed blogger making waves in print. Wonderful to see you getting wider recognition!

  41. Nelson Hsu

    Hi Yves, your observations are similar to Richard Koo’s who came up with the concept of the balance sheet recession. If we enter into a Japanese style deflation, what do you think of eliminating the minimum wage as a policy prescription? I figure the minimum wage hurts small businesses the most and eliminating might spur more entrepreneurial activity especially now since state budgets are a mess and unemployment benefits might run out. However, eliminating the min wage is probably politically unviable.

    1. Dong Wang

      The minimum wage is just killing small business. We need people who make only 1 cent an hour to really compete as small business owners in today’s competitive environment. And hey, if people will work for 1 cent an hour, who are we to stop them?

  42. KD

    Great piece, Yves. Retained earnings have been growing in Japan’s corporate sector, too. They hoarded money despite Japan’s longest economic expansion in 2002-2007. The result is the stagnant growth of worker’s wage and corporate tax. In Japan, Communist party is proposing the tax on corporate retained earnings exactly like yours. Why communist party? I don’t know.

  43. gordon

    Maybe I’m getting old, but I’m puzzled by Prof. Krugman’s blog post on Lincoln and McClelland and stimulus:

    http://krugman.blogs.nytimes.com/2010/07/06/lincoln-mcclellan-and-stimulus/

    Prof. K. also talks about corporate savings (maybe he’s been reading Yves Smith’s piece in the NYT) and suggests that the US Govt. should borrow and spend some of the corporations’ money:

    “We don’t literally have to borrow from the corporations; they’re parking their funds in the money market, and the feds would borrow from that market. But the end result would be to put some of that idle cash to work…”.

    Isn’t the US Govt. selling bonds any more? Isn’t any of the corporate boodle in the money market going into Treasuries? I don’t get it.

    (PS and before anybody asks, I don’t comment on Prof. K’s blog since he started requiring registration)

    1. gordon

      Prof. Krugman’s post (which I linked to above) has now attracted 132 comments and sure enough, several people have raised the same objection I did. I haven’t read all of the comments, but I have scanned through looking for a reply by Prof. K. and I haven’t seen one.

      And other commenters are saying “why not just tax the pile of money?”.

  44. briareus

    I was a bit troubled to see Yves and Co. advocating the forcible flushing of the “savings glut” into circulation.

    I am truly trying to keep an open mind, but it seems resorting to command economics to destroy savings in the face of massive demand destruction is akin to asking the system to forcibly reflate (ostensibly via pulling some perceived demand forward), and thus destroying any cushion many of these companies (and individuals like myself) are currently and prudently sitting on. And all for the sake of what I consider to be a mirage of demand out there.

    It was even more eyebrow-raising to see the comments here going so far as to proclaim that sitting on savings is an anti-social evil unto itself.

    I think what Yves might be missing is that social values and habits have changed, and probably not just for the duration of the crisis. Frugality is “in”, something Mish and the professors of Minyanville and others saw on the horizon over two years ago. Judging by the people I know, business owners I know, commercials I see and hear, it seems that the long awaited realignment in consumer habits is indeed starting to occur. It seems to me the people are realizing more and more that they can vote with their wallets and are finding that in doing so, even if borne from necessity, they are rediscovering the little joys from cooking and walking to more hobby and family time. I think many economists might be missing this, perhaps transfixed by the reverb in the echo chambers of their minds. Consider: What help would it be if the system, awash in money forced to find whatever malinvestment it can pour itself into just to avoid a penalty tax, finds little demand to pull forward? Just a thought, but one I humbly think worth asking.

    None of this is to say that I am advocating that this or that partisan policy error du jour. It just seems that many are losing their grip and taking refuge in the comfort of the Big Benevolent Brother, who will somehow cast off the shackles of its capture just in time to implement Keynes’ ‘centralized control of coordinated investment’.

    I think it is going to be a long hot summer, especially when some of the influential minds seem to fall for one-half of Keynes (and in my opinion, not the better half).

    1. attempter

      It was even more eyebrow-raising to see the comments here going so far as to proclaim that sitting on savings is an anti-social evil unto itself.

      I am truly trying to keep an open mind, but it seems resorting to command economics…….

      What’s truly eyebrow-raising is how even those who proclaim their “open mind” either are unaware or are lyingly pretending to be unaware that we already have a command economy. It’s called corporatism.

      The Bailout, the war, Pentagon budgets, and Big Ag subsidies are examples of a massive organized crime structure by which a corporate/government nexus called a kleptocracy loots the country and the earth and funnels all the loot to a handful of gangsters. That’s it.

      A command economy for the purpose of extracting and funneling private rents is the economic definition of fascism.

      Anybody who either supports the Bailout, the war, the weapons budgets, Big Ag subsidies, and corporate welfare in general, OR who remains silent about those while rushing to attack entitlements, the idea of stimulus, job creation programs, etc., is in a very precise sense a fascist.

      So if you really have an open mind you’ll take that to heart and start applying a term like “command economics” where it already exists.

      1. briareus

        I never said it didn’t apply. I protested those very problems you mentioned and I did so since the 90s when the most of the people my age were busy getting drunk.

        But the prescription offered above seems little different; the ordinary person is but flotsam and jetsam on the whims of yet another boss.

        Nice try at the fascist pigeonholing, but your partisanship is showing. I have no partisan affliction to defend, nor standard to wave with histrionic fervor.

        But by all means, do carry on with your hysterics. It is as amusing as it is educational to see how you react to points you disagree with. You make it clear that people like yourself who claim (as you did above) that saving money is antisocial and has no right to exist, are themselves planning my own future for me, starting with how I choose to spend the fruits of my labor; a choice that is and should be mine to make of my own free will. By your own logic, you intend for me not to have such freedom. Ironic, since you seem to rail against those would control your financial future. So who’s the fascist?

        1. attempter

          “Who’s the fascist?”

          1. I already told you. There’s nothing “hysterical” in my definition, though there seems to be in your response to it. My definition’s textbook. All one need do is see if a case fits it.

          2. Therefore, I’d bet it’s the person who, in the midst of the worst robbery in all of history and the accelerating establishment of corporate tyranny, would come onto a forum which is trying to find a way to fight back for the sake of humanity, democracy, and freedom, and launch right into an assault on a proposed reform on the grounds of ignorant right-wing talking points. (To wit, that Yves’ rather meager proposal constitutes seeking “command economics”.) No matter how concern-trollish and passive-aggressive the tone (“I try to keep an open mind…”).

          As anyone can see from your first comment, you’re lying when you now implicitly claim to have agreed with what I said about the real command economy. You definitely either do not agree with it or at any rate do not want people to think about it. You want to misdirect people away from it. Otherwise you wouldn’t have written what you did. You would have written the right thing to start with.

          1. briareus

            Keep trying. I’m not right wing. I’m not left wing. If someone proposes a good idea, I support it. The idea proposed in the op-ed is not an idea I can uncritically support.

            Kudos on wrapping yourself in the flag of human decency and democracy after I pointed out your implicit aim to determine my own financial future for me. It’s the only thing you could do, after all, since you can’t (and didn’t) say a word to deny it. Claiming it’s all in the name of a better world is almost as amusing as it’s vacuity. I see you put a lot of effort into your drive-by insulting; I’ve spent an hour reading your comments all over the place, and you say the same thing over and over to others while labeling them cowards, liars, and fascists.

            But please, keep trying. I’ll not respond anymore of course, but you go on ahead without me. I can tell you need this far more than I do.

  45. Matt Stiles

    We must stop and seriously ask ourselves, in whose interest might these Austerian policies be? None dare call it malpractice, malfeasance, or even outright madness
    ————————————
    The answer to your question is “non-asset owners.”

    Assets have become very concentrated in few hands due to the gradual, but compound, effects of inflation in the money and credit supply. Rising asset prices became predictable in this environment, allowing those with access to credit at the lowest interest rates (those which already had large amounts of collateral) to buy up these assets. The “Austerian” regime of debt deleveraging in both the public and private sectors bankrupts the asset-owning classes and allows those with minimal debt and positive net worths to buy their assets at market clearing prices (how ever low that may be).

    Over the decades, the focus has shifted toward leveraging rising asset prices and away from investing in productive capital equipment, human capital and R&D. Many US industrial firms are just glorified financial firms. When asset prices stopped rising in 2008, these firms no longer knew what to do. They are not run by entrepreneurs. They are run by business school grads and accounting quants.

    Those firms and their investors and creditors should go bankrupt. Their assets should be transferred to the true entrepreneurial geniuses of our day.

    Rob, you seem to want our finance minded group of corporate execs to do a 180 and turn into a bunch of Fords, Rockafellers, Gates’ and Jobs’. That is not going to happen. For a person so adamant about “real-world” accounting realities, I’m surprised you pass this off as a possibility anything more than utopian.

    We need liquidation of assets before we get a revolution in the entrepreneurial allocation of resources toward more desirable social goals and the general rising standard of living that capitalism claims to foster. This liquidation is preferably done in short, industry specific, bursts. But our central bankers wouldn’t let that happen – out of hubris that they could actually “prevent” the business cycle.

    Now we have to undergo this liquidation in nearly every industry simultaneously. A consequence of their collective insanity.

  46. Mogden

    Yves, congratulations on the op-ed. I did not agree with a single one of your prescriptions, but I always enjoy reading your work.

  47. Viator

    John Hussman on this question.

    “…Interestingly, some observers lament that corporations and some individuals are holding their assets in “cash” rather than spending and investing those balances, apparently believing that this money is being “held back” from the economy. What is preposterous about this is that the “cash” that companies and individuals are observed to be holding is primarily in the form of government securities and base money created over the past couple of years, which somebody has to hold at every point in time until those liabilities are retired. This is not money that is waiting to be spent. It is a stack of IOUs representing resources that have already been squandered, and now somebody has to hold these pieces of paper until they are retired.

    In short, instead of directing savings toward investments in real, productive assets that we would observe as physical output, fixed capital, and equipment (and claims on those assets in the form of corporate stocks and bonds), our economy has been forced to choke down a massive issuance of government liabilities in order to bail out bad debt. For every dollar of debt that should have defaulted, we now have two dollars of debt outstanding (the original debt, and a newly issued government security). What appears to be “sideline cash” is simply the evidence of past spending. Again, the crucial consideration is how the government spent the funds in the first place. Rapidly mounting evidence suggests that the answer is “not very well.”

    http://www.hussmanfunds.com/wmc/wmc100706.htm

    1. Yves Smith Post author

      Viator,

      Thanks for pointing this out. This is just embarrasingly wrong, in terms of Hussman’s understanding of monetary operations. The “our economy has been forced to choke down a massive issuance of government liabilities” is utterly incorrect. First, i gov’t bonds were being forced on investors, yields would be high instead of at record lows. Second, as we have stressed here repeatedly, governments that are currency issuers to not need to issue debt to fund operations. Third, savings that are NOT reinvested in productive enterprise (either domestically or abroad) ARE “held back”, there is NO other construction.

      And how pray tell does Hussman explain that companies all around the world were “holiding back” BEFORE the bubble burst? He has a nice little story he spouts that is ungrounded in fact.

      1. michael

        Yves, in my opinion you are avoiding the main issue here:
        Are we a debt-based financial system, i.e. every FRN is an IOU, or are we a money-based system in the good ol’ way, i.e. based on real savings.
        If you vote for the former, which I more and more tend to do, then Hussman has a very valid point.

  48. Desprado

    While I agree with the premise of the article, there is one important factor that can’t be ignored. A huge portion of savings are invested in equities. Middle class folks are counting on 401Ks so as to not to die clothed in rags. Until a new long-term investment system is instituted, corporations will continue to primp their stock price and meet dividend expectations.

  49. Liudmila

    Dear Yves,
    I am one of the devoted followers of NC website. Love it. But I was quite surprised to read your op-ed. In some sense it goes against the spirit of your website. Asset tax on not re-invested profits? What good can it make? Why would anyone bother investing at all if the profits would have to be reinvested? The correct way to restart the economy would be to announce a debt jubilee (just as Steve Keen suggests). But this is year out, still. In the meantime, anything that prevents economic freedom (such as asset tax, capital controls, etc) will help to deteriorate economic conditions.

    1. Yves Smith Post author

      Liudmila,

      The “economic freedom” argument is a canard when public companies have serious principal-agent problems.

      Per vlade above:

      If the company cannot invest (and I’m no arguing either way), one could make a point that it is almost their fiducary duty to return the cash to shareholders, as clearly there are no investment opportunities for the company that would generate the required IRR, but shareholders have more options than the company.

      Holding (a lot of) cash for a few years is very likely bad investment from the shareholders perspective – cash in company’s account is almost guaranteed to generate less than company’s WACC, not to mention targeted IRR.

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