Why are corporations saving so much?

There has been much recent discussion of the topic and I apologize (to RA, among others) for being late to the party.  Here is one piece by Yves Smith in the NYT and here is an Economist symposium on the topic, with many first-rate contributors.  Overall I am puzzled at the nature of the worry here.  Corporations with cash surpluses are not destroying real resources, nor are they stuffing cash in their mattresses.  They are investing in financial assets.

Take a financially conservative corporation, which holds its surplus in the form of T-Bills.  If it bought the T-Bills fresh at auction, that's lending money out to the government and the capital is still deployed.  Isn't that called…in some circles…stimulus?  (I've even heard the multiplier might be 1.4!  Or does only the borrower get credit and not the lender?)  It's trickier if the corporation buys the T-Bill on the secondary market, but still a) someone else has the money now, and b) this resale opportunity encourages other investors to buy freshly created T-Bills, thus putting capital in the hands of the government.  In terms of final effect, there should be a near-equivalence between buying old and new T-Bills.

Of course you might think the government is not spending this money well, but that's the problem of the government, not the corporate surpluses, which indeed are being invested.  I ran a surplus this last year and paid off some of my mortgage; does anyone think I destroyed net real resource investment?  (In fact I redistributed profits away from the financial sector, I suspect, which is good for the real economy at this point.)

If velocity is too slow for a social optimum, is it the corporations — who strive to rapidly invest excess cash in the till — who are at fault?  Even if corporations are not helping matters, are they doing anything worse than passing off a hot potato?

You might make an external cost argument.  Perhaps each corporation does well by holding T-Bills, but the system as a whole suffers under the encroachment of state power and public sector expansion.  That's not an argument which many proponents….do I even need to finish this sentence?  

It is perfectly fine to claim that we have a sectoral misallocation and that high corporate cash reserves are a symptom of this problem, for instance maybe there is too much lending to the safer, commercial paper-issuing big corporations and not enough lending for higher-yielding, riskier start-ups (no one knows which risks to take), or whichever story you wish to tell.  I hold a version of that view myself, but it's very different from believing that high cash reserves are stifling investment per se.

By the way, these high cash reserves are one reason why I don't think Alex's nominal wage stickiness story explains current unemployment.

Why is it so frequent that economists take Keynes's analysis of sitting on currency and apply it to savings and investment?

File under "Yet another discussion of the Junker problem."


Um, what *is* the Junker problem? None of the links I clicked on provided a summary statement of what the problem is (and how it got its name).

It's my understanding that cash surpluses equate to low sales. Maybe this is a question better answered by an accountant than an economist.

And, of course, the people who want debate and doubt to remain as long as possible are those who profit from current arrangements. It's not like that is neutral, either.

Something I agree with:

"If households and corporations are trying to save more of their income and spend less, then it is up to the other two sectors of the economy — the government and the import-export sector — to spend more and save less to keep the economy humming. In other words, there needs to be a large trade surplus, a large government deficit or some combination of the two. This isn’t a matter of economic theory; it’s based in simple accounting."

Simple accounting is right.

It is accounting. But the accounting doesn't make it real. The crisis began with accounting flaws.

John Hussman addresses the problem with "national accounting" in his amazing weekly commentary.


The high cash reserves indicate low *physical* investment. Corporations are sitting on cash *instead of* opening new factories, franchises, or even upgrading or modernizing their existing facilities. Whether the cash is invested in a financial sense is beside the point -- unless that investment goes to someone who is building something productive, and right now, it is not.

The alternative to corporations building something (i.e. new or improved means of production) is for the government to build something (i.e. infrastructure) -- exactly the area in which neo-Keynesians argue that too little is being done right now.

this resale opportunity encourages other investors to buy freshly created T-Bills, thus putting capital in the hands of the government

They can't buy freshly-created T-Bills unless there *are* freshly created T-Bills. The amount of new capital the government chooses to accept by issuing new T-Bills is determined by political, not market, forces, and thus the supply of T-Bills isn't necessarily responsive to the demand.

Andrew, as you can see macroeconomists still have hard times dealing with accounting, both traditional accounting of enterprises and national accounting. It was true in the 1930s and still is true today.

David, yes you're the good guy and I'm the bad guy. Please grow up.

Why is it so frequent that economists take Keynes's analysis of sitting on currency and apply it to savings and investment?

Because Keynes didn't understand savings and investment, and passed that lack of understanding on to his followers.

Professor Cowen --

I interpret it as a mix shift.

Before the crisis, corporations held some amount of their available funds in cash (and equivalents); and invested the rest in capital equipment (or whatever).

Since the crisis, they've pushed up their demand for cash; and correpondingly lowered their spending on real investments. The Fed expanded the money supply to meet their demand for more cash. And the capital-goods sector has shrunk drastically, reflecting their depressed demand for its products.

Ted, there have always been heat waves.

I'm not blaming republicans for uncertainty. I'm saying they are blocking just about everything, which increases certainty.

Businesses are sitting on cash because there is inadequate demand and excess capacity. Nice simple explanation that covers the situation.

If you want to invoke regulatory uncertainty you're going to be a whole lot more specific and analytical. Waving your arms and saying there is a lot of uncertainty isn't enough.

I am always curiuos about this:

Why is it so frequent that economists take Keynes's analysis of sitting on currency and apply it to savings and investment?

If there were no Government securities available because the debt was paid back or the Fed had bought it all up, are those in favor of more stimulus saying that people would hold cash instead?

Foosion, I agree that the cause is caused by a lack of demand. That was my first point. My second point deals with the somewhat related issue of increased concern about regulation. My evidence is based on discussions with businesspeople. It's not just a matter of waving my arms. What's your basis for your assertions?

Not sure what Junkers says but I say that when I worked for a very fast-growing tech company in the 1980s and 1990s we tended to hoard a certain amount of cash in anticipation of future development costs and spend any "excess" on acquisitions and marketing. Eventually the company started running out of room in its development space, and the economy faltered, and so while they were still pulling in tons of revenue on reorders but had no growth opportunities and not a lot of new customers.

They had a couple of relatively big-ticket R&D projects by industry standards but by internal cash-intake standards it was pretty inconsiderable. So for a couple of years they "spent" their excess on short-term cash equivalents and, when analysts kicked up a fuss, on stock buybacks.

There might have been a low-level beancounter somewhere in the company who thought having so much idle cash was a good idea because he liked drawing lots of zeros before he got to the decimal points on the balance sheets. And Tyler's no-doubt right that having all that cash in short-term parking was somehow "stimulative" to the rest of the economy. (Eyeball roll.)

It just wasn't worth crap compared to how the company would have spent the money if it had seen, you know, potential customers and investment opportunities instead.

So yeah, Tyler, I think you're right. Who needs capital investment opportunities instead of financial ones! Who needs customers? Companies sitting on wads of cash really must be the best possible use in this eternally best of all possible hypothetical worlds.


To join in on some of the commentators here, this does seem off to me. Particularly, I don't understand the treatment of T-bills as a miraculous transfer of money from private hands to public works.

If T-bill auctions were perfectly rationed to meet demand, and if the public investment of that money was determined by market (and not political) forces, then this would make sense. But if they aren't, you'd probably get a situation like we currently have: T-bills with low and falling rates and deficit hawks in the Senate looking to turn the pipe off for public spending.

First, corporations lending to Treasury is not, as you assert, a form of stimulus. Under our system, government can't spend money (for long) that it doesn't have, so when there is a deficit, government borrowing is a necessary part of stimulus spending, but the borrowing part isn't the stimulus. You are aware of that. Why are you making an argument based on a silly assertion?

And another thing. Bad enough that you put on a cute little display of how well you can twist an argument, but it's not entirely clear why you thought twisting the argument was necessary. Is it just a parlor trick for other economists? I'm not aware of any serious people who have accused corporations of bad citizenship for sitting on cash. You seem to be defending behavior that nobody has criticized.

The point to observations about corporate cash piles is generally, as far as I can tell, that high cash levels mean corporate managers can't find good private uses for money right now. That is an observation about the economy, not about whether corporate behavior is right or wrong.

Despite what we may hear from the minority in Congress (among others), our government isn't collectively sitting around wondering how to get its bureaucratic mitts on ever more money. Government needs to borrow money now in order to fill a gap in private demand. The point to observing that firms aren't spending is to observe that private demand is weak. You are pretending to answer a criticism that nobody is mounting.

When I see shenanigans like this, my tendency is to grow suspicious. Why are you pretending to address a non-existent argument? Are you trying to distracting us from the real argument, as propagandists often do? Is this really just an an economist preening himself annoyingly in public, or is there a pong of politics in this thing?

I'm not aware of any serious people who have accused corporations of bad citizenship for sitting on cash. You seem to be defending behavior that nobody has criticized.

Yves Smith isn't a serious person?

The reason for all this saving in the United States is that public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on.

Rather than incur such expenses, companies increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in purely financial speculation.

Hayek pointed out that in a deflation we have the hoarding of cash rather than investing it for future economic growth. At the time of his writing banks couldn't be trusted and it was diffcult to actually buy Treasuries so money was 'in the mattress'. Its not too much different now.

There is $3T in zero yielding money market funds and another $1T being hoarded and not invested by corporations as you point out. This hoarding of cash is deflationary so it is important.

As Tyler points out, what's being called "cash" isn't money, it's short term Treasuries. If the government runs a big deficit and sells a lot of T-bills, somebody has to hold them, as they don't magically disappear. Whoever that someone is, in this view they'll be holding lots of "cash". Another way to think of this is that big deficits mean the government is dissaving. That dissaving has to be matched by saving somewhere: it's an accounting identity.

The other thing that people keep missing is that money and credit are not the same thing. Money is both the unit of account and the medium of exchange. Credit is neither.

And by the way, Keynes "sitting on currency" liquidity trap is wrong, too. I'm currently attempting to educate Mark Thoma on that.

If dollars are created in order to stimulate, everybody pays higher prices because of inflation. Demand has merely been moved, a little from everybody in random amounts, depending on what they by and where the stimulus is spent, becomes a lot for whoever is handed the stimulus first.

There's no magic. Nothing is created. Those very small amounts are very difficult to measure. The constant small changes happening in markets hide the tiny losses the stimulus creates via price changes.

If you were the person handed those stimulus dollars and you decide to burn them instead, no one is affected. The creation and the dollars balance each other out.

But there are real effects of stimulus. There is the loss of the labor of those who would have had to work to produce the free stuff they're getting because of stimulus. There's a real decline in the total amount of capital when capital is invested in unproductive things that people are not willing to pay for and that do not result in the capital being paid back and even increased

If you don't spend the dollar bills you have, they don't compete with other dollars and prices are slightly lower for everyone

I think a policy that could help is a moratorium on bubble mortgage interest. Have the entire interest payment applied to principal for a year, and make it tax deductible. Bank cashflows in the short and medium term don’t change, except they don’t show a profit and can’t justify giant bonuses. Their balance sheets improve, homeowner balance sheets improve, and people are less likely to walk away (from paying 50% higher than market rates on inflated debts). Cashflows are unaffected to banks and incentive for borrowers to pay is increased. It’s mostly a trade of short term profits for long-term security/stability.

The decrease in tax revenues will be offset by value restored to toxic assets the government holds, since many of them were designed with the assumption of prepayment.

Potentially, banks could lose out if real-estate suddenly shot back above bubble levels.

The big problem is that the plan would give false hope to a lot of those bad mortgages and cause them to continue making payments when the rational thing to do is walk away.

The bank only loses at sale, the amount above principal the house sells for up to the amount of originally scheduled interest during the moratorium, or at the end of the mortgage (the mortgage would either be payed off early, if the payment is unchanged, or payment could be reduced at some point, probably by borrowers refinancing sooner than they'd otherwise be able to). Of course, this is far in the future and the loss would need to be discounted, making it very small. I'd use expected GDP growth as the discount rate or maybe just inflation.

The banks' financial situations improve additionally in the short-term, since they'll be paying less in taxes.

A fiscal stimulus component could be added. Allowing the borrower to make less than the full payment would provide cash for spending in the non-financial sector. But it shifts risk back onto banks.

Looks like we backed ourselves in a corner by being unwilling to do stimulus out of fear of Tea Party retribution.

What are you talking about, Bill? Are you really saying that we haven't had fiscal stimulus the last 2 years?

What is so surprising about this? We have just come through a difficult period, and we have an anti-business regime that insisted on making major increases in government power. We have large tax increases already scheduled for next year and warnings of more increases to come.

Oh, I mispoke, those tax increases are likely to usher in a period of breathtaking growth. Forget what I said.

Yancy, Has it been two years? January 20, 2009 to July 2010. I assume the budget wasn't passed immediately but I won't bother checking. My oh my how you count.

Simple accounting can tell the reason why. Less expenses means higher income. It's applicable for everybody too. We have to follow them. They know exactly what they're doing.

Comments for this post are closed