Are corporate profits a sinkhole for purchasing power?

That seems to be Krugman’s argument here, and here, excerpt:

So corporations are taking a much bigger slice of total income — and are showing little inclination either to redistribute that slice back to investors or to invest it in new equipment, software, etc.. Instead, they’re accumulating piles of cash.

I am confused by this argument.  I would understand it (though not quite accept it) if corporations were stashing currency in the cupboard.  Instead, it seems that large corporations invest the money as quickly as possible.  It can be put in the bank and then lent out.  It can purchase commercial paper, which boosts investment.

Maybe you are less impressed if say Apple buys T-Bills, but still the funds are recirculated quickly to other investors.  This may not end in a dazzling burst of growth, but there is no unique problem associated with the first round of where the funds come from.  If there is a problem, it is because no one sees especially attractive investment opportunities in great quantity.  (To the extent there is a real desire to invest, the Coase theorem will get the money there.)  That’s a problem at varying levels of corporate profits and some call it The Great Stagnation.

The same response holds if Apple puts the money into banks which earn IOR at the Fed and the money “simply sits there.”  The corporations are not withholding this money from the loanable funds market but rather, to the extent there is a problem, the loanable funds market does not know how to invest it at a sufficiently high ROR.

If anything, large corporations are more likely to diversify out of the U.S. dollar, which could boost our exports a bit, a plus for a Keynesian or liquidity trap story.

When one looks at the components of aggregate demand, retail sales, after a large and obvious hit, seem to be recovering.  They are up 4.7% from Dec. 2011 to Dec. 2012 (pdf).  If that is what a sinkhole looks like, as I said I am puzzled:

Real Retail Sls Totl

Here is the story of business investment minus corporate profits and that series doesn’t impress me (Krugman seems to think it is doing OK).  The trickier variable of net investment you will find here and that looks worse.

By the way, Fritz Machlup considered related arguments in his 1940 book.


"Maybe you are less impressed if say Apple buys T-Bills, but still the funds are recirculated quickly to other investors."

This is the kind of thinking I expect of freshmen students,not professors at prestigious universities.
Effort isn't free, and rents collected raise the cost of transactions . Yes the /money/ gets reused but money is just a medium of exchange. its far less important matter if the money gets reused or not.

You have clearly confused yourself by thinking in terms of money. Think in terms of barter first, then split the barter transactions in half, into two money transactions.

In terms of barter, sitting on cash doesn't withhold any real resources from the market at all. That just makes the puzzle worse.

You could be clearer about what transaction cost you are invoking here. The cost of surveying price information? The cost of price adjustment? The cost of optimal decision-making?

This matters a lot in how the proposed accelerator model works.

^should be a reply to DocMerlin, not TC

As a freshman I was taught about things like excess capacity, uncertain future taxes and regulations restricting future investment, Cournot competition ( in this case firms are at an equilibrium where expansion lowers after tax profits, especially given uncertain or negative government policies (do firms really feel that they understand the full impact of health care changes?), South Korea with very low corporate taxes should see increased investment.

You are absolutely correct. Artificially restricting rents can be worse than the rents themselves. I never said it was not. What I was horrified at was his reasoning.

Dr. Cowen is a professor at George Mason U. He is not a professor at a prestigious university,


For all who read that, look the word up and learn its source.

"This is the kind of thinking I expect of freshman students,not professors at prestigious universities."

This must be your first time visiting this blog...

Cochrane's graphic portrays the 'sinkhole' or sluggish recovery more clearly: But add a trend line to your retail sales chart and it's similar. The counterfactual is at the heart of our macro debates, sadly it's often buried.

The key point is still what kind of theoretical mechanism is possibly operating here and that remains a mystery.

Surely you have some thoughts on the actual mechanism. (Yes, there are hints in the post, but remember we are not as plugged in to the topic.) Or maybe give us a few highlights from Fritz? You have some non standard views about the economy, for example, not many think we're back to the natural rate of unemployment, or there's a TGS. If you relaxed those assumptions would you be agreeing with Krugman or is there something deeper to the disagreement? Believe me I have gotten a heavy dose of macro 'mystery' over the past five years...some clarity would be awesome.

N.B. - Austrian economist Fritz Machlup, not to be confused with Fritz the chess program, was anti-patent. It's interesting to see the two schools of thought in the Austrian camp pro-and-con about patents. Reading the book "Against IP" by Austrian N. Stephan Kinsella. What has this to do with this post? Everything. The Austrians who are anti-patent (F.A. Hayek was one) believe inventions and investments 'drop out of the sky' exogenously, whether or not anybody promotes them. They are thus naturally prone to think things are now as they should be, 'same as it ever was'. That's wrong IMO.

Thanks, Ray. When I don't get the humor here, I assume it's Straussian. When I don't get the economics, I should probably assume it's Austrian. Maybe those two are related? More seriously, it's impossible for me to believe things are 'now as they should be'...the un/under-employment is simply not acceptable.

What, add a trend line through the bubbliest of bubble years and extend indefinitely into the future? Come on.

What ignore the DEEPEST recession since the Great Depression? You come on.

I don't really get what your point is. I'm not ignoring that there was a recession, it's just that the recession is over and retail sales have recovered to a level that is totally normal, if you don't assume that a bubble continuing forever is what is normal.

Retail sales have not recovered to a level that is "totally normal" (especially if you recall some of those declines in the recession were durable expenditures, that we'd normally expect to be partially made up when all is back to normal). Strip out the housing bubble from the trend and my point still stands, in part because the hole was so big. And as exhibit B, the unemployment rate is not back to "normal" either.

If you want to horde cash safely in banks or buy T-bills why do we need a corporation?

Might as well have the shareholders do that without Apple's help? What's the advantage?

Because of dividend taxes?

As Warren Buffet says, it never makes sense for an American C-corp to pay dividends.

Remove ourselves a moment from the Keynesian world view, why is it hoarding? Apple, for example did extraordinarily well for a short time when they had no real competition in a space they created, now they face competition and shrinking margins. The nature of the business is that you will have deep troughs that need to be survived; the high tech industry is littered with great companies with good products who ran out of cash.
Why is it now rational and conventional wisdom to make yourself poorer?

What's the nearest analogous example we have? A tech company that amassed hordes of cash, used it to survive a trough and then revitalized?

Assuming you're not joking, the example would be Apple. Except they very nearly didn't hoard enough cash the first time around, and very nearly went out of business in the 1990s.

Are you entirely sure they hoarded cash in the 90s? They went hat in hand to Microsoft if I remember correctly, so I doubt your assumption is true.

Besides which, borrowing costs are cheap cheap cheap and with ZIRP it doesn't look like that's going to change any time soon.

Wouldn't that be a bad example?

Apple made it in spite of not hoarding cash in the 90's. Some others probably hoarded and whimpered away.

Point being, hoarding cash rather than taking a risk and investing it seems a pretty weak strategy, uncorrelated to success.

Yes, you don't need an analog. Apple's been down that road in the past. That being said, there isn't much use for Apple to hoard as much cash as they are currently have on hand. To put it in perspective, Apple has enough cash on hand to buy the entire domestic car industry (Chrysler, Ford & GM) out right and still have some billions left over.

Does it matter? Microsoft was hoarding vast amounts of cash at one time and the economy didn't collapse.
Krugman sees a pile of cash and wants to get his hands on it to save the world. First, it isn't his, he hasn't shown the ability to make that kind of money himself. Second, what he sees as negative is a positive from the standpoint of those who happen to have generated the cash.
Krugman has a column in a newspaper that is slowly going broke. Apple has been very successful in what they have been doing. On what basis should Krugman be taken seriously at all?
Apple has skin in the game. Krugman and the policy makers who want access to that money don't.

"On what basis should Krugman be taken seriously at all?"

You are of course correct; I believe he got that Nobel in a Cracker Jack box

"Krugman sees a pile of cash and wants to get his hands on it to save the world. First, it isn’t his, he hasn’t shown the ability to make that kind of money himself."

To quote Colbert "Are you high, right now?" Krugman argues we might have a better overall economy if Apple paid those profits out to investors (you know, the ones who, in a capitalist economy employing the corporate form, created this value- they are "jaaaab creators" after all) or used those profits to develop more goods and services they could sell profitably, and all of a sudden he's Karl Marx? Maybe you should consider going back and getting that GED.

As to the risible "reasoning" displayed by the OP, maybe some economics distinctions are handed out Cracker jack boxes, after all.

"Krugman argues we might have a better overall economy if..."

I think the point is that Apple's responsibility is not to the overall economy but to its shareholders. If somehow they are not fulfilling this responsibility, if they can use "those profits to develop more goods and services they could sell profitably", maybe you and Paul and the other armchair geniuses should start buying up Apple stock with a goal of supplanting current management and improving the company's results. The shareholders will love you.

The suing has already started:

"Apple came under siege today by an influential institutional investor seeking to unlock its massive $137 billion cash war chest's dividend potential, in growing signs of such unrest and shareholder angst with the company's poor stock market performance of late.

Billionaire hedge fund manager David Einhorn of Greenlight Capital is agitating for investor action and has filed a lawsuit in plans to oppose a proposal concerning its cash pile, scheduled to come up for a shareholder vote on Feb. 27."

"It's very odd that Apple is just sitting on all this cash when it's clear that its growth has slowed down," says Richard Sloan, an accounting professor at the University of California, Berkeley. "Value investors are thinking more about distributing free cash flow."


I didn't even think of lawsuits as a mechanism for disciplining companies and enforcing shareholder rights. It's like I forgot what country I lived in for a minute.

I don't get this. Maybe these guys bought Apple at a bubbly $700 a share last September, and all the bad management decisions have come since then. Anyone who bought Apple before 2012 can cash out and walk away with a tidy profit if they don't like management's decisions. Or, like I said, they can put their money where their mouth is and buy the company.

I'm not arguing, and I don't understand the OP to be claiming Krugman is arguing, that Apple has any duty to anyone not a shareholder (who of course have the option of selling off at the current price, depressed by the news that the most profitable corporation's profits grew less rapidly than was desired), but merely that their decisions had consequences for the economy as a whole.
Clearly, there is no way in which an economy in which consumers had additional disposable income coud be of benefit to Apple shareholders, and of course the "efficient market" has already insured that all possible human desires are sufficiently gratified by currently available goods and services, so no point in R &D either- what else can they do but sit on the cash?
It's not like the can invest in something as profitable as Apple, after all.

We'd have a better economy if someone could compete with Apple.

Krugman's Nobel was for a field quite different than Apple cash positions. Appeals to authority are meaningless adornments, a means of not thinking. Sorry.

Pointing out that Krugman has a Nobel is not "an appeal to authority", it was a sarcastic rejoinder to your "why should we listen to this newspaper columnist?"- i was point out that's not his day job. An appeal to authority would be if I said he's right because he is distinguished economist.

You do get that no one is saying Apple is wrong to do what it's doing (from the point of view of Apple management at least), merely that when they and others do this, it has economic effects? Of course, this is exactly the field of his Nobel BTW which you are right was not about corporate cash positions.

I take it you have no substantive response to my pointing out that your reading of the situation is totally screwy?
Do you "stop thinking" when you are able to convince yourself someone has "appealed to authority"?

A tech company that amassed hordes of cash, used it to survive a trough and then revitalized?

Microsoft is doing this right now. Their stock hasn't moved for 10 years. Of course, their situation is not as dire as Apple's was back in the mid-nineties, but they have not had a hit new platform since the X-Box, and in the meantime have poured untold billions into distractions like Bing.

Bill Gates felt that that they should always have enough money in the bank to go at least a year without revenue.

I'm not sure about the "revitalization" phase of Microsoft though. I suspect it's a slow long downhill stretch for them. Sure, they aren't dying any time soon but I'm not seeing any sparks of brilliance either.

From a market/economic efficiency standpoint, why should we be better off if a particular corporation who lost ground competitively as technology changed had a cash hoard to try to fight its way back to competitiveness?
Wouldn't we be better off if the shareholders reaped the cash that Apple generated in its period of dominance, and then turned around and reinvested it in newer companies better positioned to create new value from the next wave?
If Apple truly had the best prospects going forward and needed capital, they could come back and raise it on the markets, making the case to investors for why they have an attractive opportunity.
The only people who benefit from the cash hoard are the executives of Apple, who preserve their jobs by making sure the company they run has a large balance sheet. This benefit comes at the expense of value for the owners of the company - shareholders - and economic efficiency in general.

I have a dumb question.

"I would understand it (though not quite accept it) if corporations were stashing currency in the cupboard."

If money is stashed in cupboards, and thus removed from circulation, does it not increase purchasing power of all currency actually in circulation? Sort of a reverse debasement, but on the relatively minuscule level of one corporations' profits?

Absolutely. An increase in the demand for money lowers the price level. However, those who believe in a liquidity trap would argue that the lower price level doesn't do any good. But then, does anybody remember the Pigou Effect?

So this is why TC 'understands but doesn't quite accept' this line of reasoning?

Fascinating, isn't it? It's almost impossible to waste money, in the macro sense.

That's correct. You can only waste real resources.

At the micro level you can, of course, waste your own money (by burning it, say). By doing so you transfer some of your claim on the economy's real resources back to all the other moneyholders. This transfer could result in inefficiencies which would be actually wasteful, if, for example, the money was burnt forcibly rather than voluntarily.

That's of course not true.

We're in an international economy now, for American domestic purposes, money is wasted every day by disappearing untaxed into non-American coffers.

That's only one of the clearer examples of this, but money is wasted all the time by going into the bidding up of prices of financial assets as well.

Money used to simply bid down money market yields or other financial assets may as well be stuck under a mattress.

If it's not used to push demand of real resources, it's for all intents and purposes under a mattress.

So all the extra rich-man-in-the-US money that goes off to swiss banks or cayman accounts that just purchase financial foreign assets aren't really going to benefit American economic stats.

Regarding the "reverse debasement", think about whether what we really need is more domestic purchase power (less inflation) ? That's perhaps the last thing we need right now with such high unemployment and inequality -- to give those who actually have money even more relative purchase power...

You need to graph "potential real retail sales". To do this take the trough from the tech crash and peak from the housing bubble. Draw a line through both points and extrapolate.

Is that as crazy as it sounds?

No. What would retail sales be now if there had not been a recession? Close to what we see in the data now? Probably not. But you know what we can argue the count factual forever, cause it didn't happen. #macrorocks

"What would retail sales be now if there had not been a recession?"

"But you ARE Blanche, you ARE in that chair!"

Nice. But see we don't get to run macro experiments, so this is what we are left with for cause and effect. It's better than nothing, but not clear cut.

Technically speaking, noone else gets alternate realities as witnesses either.

my mistake I thought you worked in an experimental science...if so you create alternate realities. ya' think all those lab rats would just 'get' cancer?

No, just making an esoteric point that you can't take the same cancer rat and then give him the "Not Cancer" condition to see how he'd respond to that.

Actually, with rats you use a mutated strain prone to cancer but it will be a few unique genes. Or you pack them full of some carcinogen. Or both. Then you extrapolate to the general pop based on something you used because it was nothing like the general pop. So, nobody has it easy.

What would retail sales be if there had not been a boom.

still weak. but yes, the proper trend, definition of 'normal' or comparison group is debatable.

Yes, but I think that's his point.

Nope. If everyone would just take out one more home equity loan, we coulda seen this thing through. Anti-social bastards!

"Is that as crazy as it sounds?"

Your leg is being pulled.

That's what I thought, just wanted a semi-polite way to ask.

Maybe a graph with three axis' over time. First is Krugman's influence with policy makers, second his speeches/columns rated on either 'we will be rich if we purposely make ourselves poorer' or 'they have too much money, it should be taken from them and put to better use'. Third would be some measure that indicates any of the three reactions, 'these guys are nuts, let's sit on our hands', or 'these guys are nuts, but are shovelling money out the door, how can we get a piece?' (Buy worthless mbs paper to sell to Fed), or 'the pasture looks much better over there'.

Don't worry (this time) so much about the counterfactual, the funds get put back into capital markets under all of these counterfactuals.

They don't. Money markets are not capital markets. A corporation isn't supposed to net save, that's all.

I think money might circulate like those charts of Atlantic Ocean currents. Tweaking the Gulf Stream has an effect, but it takes time and may not matter in half the ocean. I kind of sense that governments and big corporations are close to the money currents, but workers with their purchasing decisions are further away.

Everyone knows the profitable opportunities available - their own businesses! No shortage of profits there. IP laws prevent others from investing in them and competing against them directly, and their own lack of desire to cut their own margins prevent them from expanding.

The trouble I have with aggregate profit tables is that they aggregate: they aggregate profits from foreign operations and from domestic operations; they aggregate domestic and foreign subsidiaries. It would be a cleaner picture if you just captured US profits and profits from domestic operation: much of the profits of multinationals are held in foreign subs, who will take those profits to invest in foreign operations, before ever returning the profits to the US for repatriation and taxation.

Are there any series which includes solely domestic operations?

Indeed, this argument is nonsensical without accounting for the tens of billions in tax-evading permanently-overseas profits.

And if you think globally and see cash piling up, then it isn't an American story. It's herding, globally. Mass psychology at work, it moves in cycles. Along with debt, and despite the talk of animal spirits, neo-Keynesians pretty much ignore it, or treat it as a variable, instead of a slowly changing constant. Just like you couldn't convince people not to buy tech stocks in 1999, you can't convince people not to hold "safe" assets today.

8, Hmmm. If you argue that "mass psychology" may be a culprit, and it may well be, I don't see that as an argument against Neo-Keynesianism. Akerloff and Shiller would argue this is precisely the reason you should have a government countercyclical policy of stimulus during periods of "mass psychology". But, I also agree with you that when we use domestic aggregates that include foreign operations as a metric we shouldn't ignore the international economy, particularly since US firms have significant foreign operations and foreign earnings, both of which are dependent on foreign economies.

Foreign subsidiaries of US parent corporations don't need to dividend their earnings back to the US parent (and subject them to US tax) in order for those earnings to be re-invested in the US economy. A lot of those earnings end up back in the United States as investments in US Treasuries, commercial paper or normal US bank deposits. Much of those earnings do get re-invested one way or the other---just not in the parent company's business. For example:

And, just think, absent that US tax hit, there is even more to re-invest!

Vivian, That's true, and you can have the foreign sub underwrite expansion, or R&D in the US.

In fact, one of the strategies MNC's with heavy R&D expenses do is transfer IP assets abroad, have the foreign sub license back technology to the domestic, R&D improvements and patents that result from that relicense are then the assets of the foreign sub, which then later raises license fees to the US sub.... But, even though the US domestic operation generates revenue, the license income goes to the foreign sub over time.

Now, reduced tax repatriation doesn't mean there would be more investment in the US, since you can do this approach, along with loans, to support US operations. And, if you want to be empirical about this, when the US gave a repatriation holiday in the past, the money came back, but there was no significant change in investment....but, executive pay increased!

I think the point we both agree is that "profits" in the aggregate and how they are used depends not just on conditions in the US, but also conditions abroad where there are, or are not, investment opportunities as well.

"In fact, one of the strategies MNC’s with heavy R&D expenses do is transfer IP assets abroad, have the foreign sub license back technology to the domestic, R&D improvements and patents that result from that relicense are then the assets of the foreign sub, which then later raises license fees to the US sub…. But, even though the US domestic operation generates revenue, the license income goes to the foreign sub over time."

I doubt it. The outbound transfer of an existing intangible would be subject to US tax on the gain from the sale of the intangible and that scenario would most likely trigger a deemed dividend under section 956 of the Internal Revenue Code as "investment in US property" (a term of art). The latter includes the development or acquisition of intangible property for use in the United States. See also, Treas. Reg. 1.956-2(a).

It would be more likely that a foreign subsidiary would use its earnings to engage a US group company to perform R&D for it under a cost sharing arrangement. Under such an arrangement, the rights to use the intangible in the United States would remain in the US and all non-US rights would be owned by the foreign subsidiary.

From a US perspective, though, having foreign earnings finance R&D performed in the US is not altogether a bad use of those funds----it finances some very good jobs in the US.

Vivian, No, the first part of your statement depends on what the transfer price of the asset is, and how creative the accountants are in doing the valuation of the IP asset. Subsequent "improvement patents" funded by the foreign sub have to be valued, and are valued on the high end so as to accumulate value in the foreign sub. The second part of your statment, regarding the cost sharing agreement, I agree with and is standard practice.

You might want to read the Senate Permanent Investigation Subcommittee reports on this subject:

If a patent (copyright or other intangible) is purchased by a foreign affiliate from a US company, an appropriate transfer price needs to be determined (an arm's length price). That's the job of an economist---not an accountant. Being "creative" sounds like another word for fraud; but valuation of intangibles is far from an objective science and therein lies a big problem. Gain is simply the difference between the cost basis of the intangible and the (appropriate) transfer price. I suppose if you are able to cheat on the price, you might be able to transfer it for less than the actual value and tax book value; but the latter would be rare. Most properly priced transactions result in gain. And, it would be a double tax whammy---gain on the sale of the asset *and* a deemed dividend for the (deemed) repatriation of foreign profits. That's about the most stupid thing one could do. It is possible that some transactions involve the outbound transfer of existing intangibles the parties believe may increase in value; however, again, the transfer pricing issue is dicey.

As I noted, the more common and sensible transaction is to finance R&D to position ownership of the intangible outside the US from the get go---ownership follows the party who bears the cost (and risk) of development.

Vivian, Transer pricing is indeed dicey, as you said. And, don't assume that those with interests in minimizing their taxes aren't aware of that, or don't operate in their own interests.

What I have seen is transfers of assets, with significant valuation issues, the foreign sub financing domestic R&D, and valuation issues concerning the license fees to the US firm by the foreign sub, which in effect, recaptures the value of the RandD based on the money paid by the foreign sub to have the US firm engage in the R&D. Over time, the foreign sub becomes the holder of the patents, charges the US entity a high royalty rate, and the profits accumulate abroad in the Irish or Luxembourg sub.

Earlier, you also made a statement that I do disagree with as well--"From a US perspective, though, having foreign earnings finance R&D performed in the US is not altogether a bad use of those funds—-it finances some very good jobs in the US." While you may be looking at this from the perspective of the US multinational (MNC) that pays an effective tax rate of 10% or less, consider this statement from the perspective of the domestic US firm that competes with the MNC and pays a higher effective tax rate. They, often small businesses, are competing at a disadvantage, and they may not be investing in R&D because they are paying a higher effective tax rate.

I remember one transaction I worked on where the target was a domestic medical device manufacturer, and the acquiring firm considered in its valuation how it would reorganize the company along the lines mentioned above to minimize US taxes. This is simple rent seeking. Why should a US domestic firm have to create foreign subs when it is trying to get off the ground in the US. Why should it be regarded as an efficiency to lower taxes by engaging in these activities?

We need to lower US corporate taxes and part of the way is to cut off some of these abuses so that smaller businesses and larger businesses have lower rates and are competing on the same basis. One way to pay for it is to tighten up the Code and enforce. On the enforcement side, we are already seeing the EU begin to question some practices, and I predict before long US MNCs will be asking for reform because they will become a bigger target.

"Over time, the foreign sub becomes the holder of the patents, charges the US entity a high royalty rate, and the profits accumulate abroad in the Irish or Luxembourg sub."

Bill, I hate to say it, but you don't seem well versed in the tax issues involved. The situation you describe in the above-quoted sentence almost certainly does not enjoy deferral from US tax because it is "Subpart F" income under section 954 of the Internal Revenue Code. There is an exception for "active royalties"; however, that exception basically requires that the substantial participation in creating the intangible by folks on the ground (in this case, Luxembourg or Ireland) and not merely the purchase of the intangible as you have posited it. Charging other non-US subsidiaries royalties for *non-US rights* generally avoids the Subpart F problem because these foreign subsidiaries are ignored as separate entities under "check-the-box" entity classification rules such that the royalty is not, for US tax purposes, considered paid between separate entities and is therefore disregarded.

Vivian, You are right. I am not a tax lawyer. I occaisionally, though, as an antitrust lawyer, give presentations on international distribution and licensing, and get to hear the presentations from international tax accountants on doing perfectly legal things that favor MNCs. I am heartened to hear there are no problems with our laws and how we treat MNCs vis domestic corps who compete with them.

From Bloomberg:

"Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.

Google’s income shifting -- involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” -- helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.

The Dublin subsidiary, which employs almost 2,000 people and sells advertising across Europe, the Middle East and Africa, has more than tripled its workforce since 2006 and is credited with almost 90 percent of Google’s overseas sales, which totaled $12.5 billion in 2008.

Oct. 21 (Bloomberg) -- Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda. Google’s income shifting helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization. Bloomberg's Melissa Long reports.
“It’s remarkable that Google’s effective rate is that low,” said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.”

The U.S. corporate income-tax rate is 35 percent. In the U.K., Google’s second-biggest market by revenue, it’s 28 percent."
Google, the owner of the world’s most popular search engine, uses a strategy that has gained favor among such companies as Facebook Inc. and Microsoft Corp. The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax. (See an interactive graphic on Google’s tax strategy here.)

The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros.
Google, the owner of the world’s most popular search engine, uses a strategy that has gained favor among such companies as Facebook Inc. and Microsoft Corp. The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax. (See an interactive graphic on Google’s tax strategy here.)

The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros.


The Bloomberg article is consistent with what I've written. For example,

"Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its* foreign profits* through Ireland and the Netherlands to Bermuda." (my emphasis added).

I have no inside information about Google; however, if their tax planning is typical, the royalties charged by their Irish subsidiary are charged for use of intangibles outside the US. Google (US) itself is not likely paying its Irish sub royalties. For example, other European subsidiaries in higher tax jurisdictions are making tax deductible royalty payments against those higher rates to low-tax Ireland.

These techniques do have the effect of 1) deferring the US tax that would otherwise be due if Google US were to license directly to those foreign subsidiaries; and 2) substantially reduces Google's foreign tax rate (and therefore its overall tax rate). But, as to the second point, it is not the US ox that is being gored. Google is reducing substantially the tax it would otherwise owe to non-US jurisdictions. That creates a dilemma for companies like Google---in order to get the money back to the US by dividend or other means that enable the US parent to use those funds directly, the US parent has to pay US tax equal to 35 percent less the foreign tax underlying those profits. This credit system effectively traps those earnings outside the US. This is one of the reasons companies like Google are limited in their ability to use those funds to pay shareholder dividends (or reinvest the funds in equipment, etc) in the US.

I believe that one of the reasons for that cash build up is that companies are uncertain as to the future of US international tax policy: Will the US move towards a territorial system or reduce US corporate tax rates or initiate a temporary policy to encourage repatriation (which would make bringing those funds back less expensive tax-wise), etc than it is now? This policy uncertainty is not a small problem. Companies seem to be waiting not only for more clarity but a better deal. The tax cost might be more palatable in a better economic environment; however, adding the tax cost onto a weak economy does change the CFO's calculus.


1. Are you sure Google (US) wouldn't be paying licensing fees to Google (Ireland) for IP that it contracted with Google (US) to perform? In fact, I would be surprised if they didn't, as this would assist in increasing earnings in the foreign sub.

2. The US ox is being gored, too. Deferral is not for a short time, and, based on contracting by the sub, accumulates untaxed by the US which does not have a territorial tax system, but rather a worldwide system.

3. A territorial system would likely make things worse, and encourage even more movement overseas according to the Center on Budget Priorities:

1. "Are you sure..." I'm sure that it would not be effective for reasons previously stated. Google Inc's royalty payments for use of intellectual property in the US to one of its foreign subs would be Subpart F income, that is, income currently taxed to Google Inc. There would be no deferral, so there would be little reason to follow that strategy, other than increasing inefficiencies and costs.

2. "The US ox is being gored, too. Deferral is not for a short time..." That is correct, to some extent. To the extent that Google or another US multinational can stock earnings abroad permanently they won't pay US tax. To the extent the money is brought back, actually or constructively, the US fisc benefits from the tax planning (lower foreign tax credits mean higher US residual tax). Note that for financial accounting purposes, no current tax charge has to be made for a deferred tax liability if the company asserts that the profits will be reinvested permanently outside the US. At a certain point, the excessive storage of foreign subsidiary earnings in the form of cash or cash equivalents can run afoul of another rule pertaining to "Passive Foreign Investment Companies" or PFIC's. I'll spare you the details but those rules do put a limit on the practice.

The practice, while it works, also has beneficial effects on share price, share options, etc. As I noted above, companies like Google, Apple, etc, can be victims of their own tax planning success. The better they are at reducing the non-US tax burden on foreign earnings, the higher the residual tax is when and if those earnings are actually repatriated as dividends. This tends to lock in those earnings abroad and prevent a more efficient allocation of that capital, if remittance to the US would be more efficient.

3. "A territorial system would likely make things worse..." That's highly speculative and, in my experience, not likely. The United States is essentially the only major OECD country *not* to have a territorial system. The CBPP is not non-partisan---of all the tax policy centers, they are the most partisan and certainly left wing. And, there are various forms of "territoriality". Countries like the Netherlands utilize an exemption method of double taxation relief, meaning that when profits are repatriated they are exempt from tax in the hands of the corporate recipient rather than taxed at domestic rates with a credit for underlying foreign tax. Somehow, these countries manage to have competitive economies without being the outlier, as the US is. Safeguards are usually built in to ensure that income earned abroad is not overly "passive" and/or that the exemption is only granted if the foreign earnings have been subject to a minimum rate of tax. The territorial system would largely remove tax considerations from repatriation decisions and would result, I think, in a much more economically effective allocation of capital. It would also save millions of hours of compliance and tax planning costs which are currently a huge waste of capital and especially human capital. And, I guess one could legitimately ask the question whether a US multinational *should* invest abroad if doing so is a more efficient use of their capital....


1. You might want to go to Prof. Steven Shay's of Harvard Law Schools testimony on how Microsoft shifted income using IP:

From his testimony:

"Microsoft is a remarkable and a remarkably successful company. It is one company,
however, and other companies will use other techniques to shift income. Microsoft’s income
shifting strategies, including transfers of valuable intellectual property rights, are not unusual as
evidenced in the 2010 case studies developed by the staff of the Joint Committee on Taxation.21
The Microsoft companies in Ireland with respect to which information was provided (including
companies organized in Ireland but tax resident in Bermuda) included a cost sharing participant
under a cost sharing agreement with Microsoft for rights to sell products in Europe the Middle
East and Africa (“EMEA”) and companies that sell and ship copies of the Microsoft products in
the EMEA. The same is true for the Singapore except they sell to the Asian region. The Puerto
Rican company does the same for sales to the United States and other countries in North and
South America.
In FY 2011, Microsoft had global revenues of $69.9 billion and earnings before tax of
$28 billion.22 Microsoft’s global book tax rate was 17.5%. Microsoft had approximately 90,000
Microsoft employees worldwide in 2011. Based on consolidating financials (without
eliminations within those groups), in FY 2011 the Irish, Singapore and Puerto Rican companies
earned approximately $15.4 billion in earnings before tax (EBT), or approximately 55% of
global EBT. The average effective book foreign tax rate for the Irish, Singapore and Puerto
Rican companies was approximately 4%....
This data illustrates in broad but concrete terms what has been shown in aggregate data,
namely, that U.S. multinational companies aggressively locate earnings in low-tax locations.
Indeed, to give one measure of the scale involved, the companies in these low-tax jurisdictions
employed only 1,914 of Microsoft’s 90,000 employees, yet they earned $15.4 billion in earnings
before tax or over $8 million per employee (compared to an approximate average of $311,900 for
all Microsoft employees).
We do not have sufficiently granular information to form a view whether these results are
consistent with existing transfer pricing regulations. Whether they are or are not, these results
are not consistent with a common sense understanding of where the locus of Microsoft’s
economic activity, carried out by its 90,000 employees, is occurring. The tax motivation of the
income location is evident."

You might also note that the subcommittee found:

"Check-the-Box and the CFC Look-Through Rule Undermine Subpart F.

In FY2011, Microsoft Corporation excluded an additional $2 billion in U.S. taxes on passive income at its offshore subsidiaries, relying on the “check-the-box” regulations and the controlled foreign corporation (CFC) “look-through” rule, which have undermined the intent of the tax code’s Subpart F to prevent the shifting of passive CFC profits to tax havens to avoid U.S. tax."

2 "To the extent that Google or another US multinational can stock earnings abroad permanently they won’t pay US tax." Agreed. "To the extent the money is brought back, actually or constructively,...." I thought you said that it would be taxed to the parent. Oh, I see, it can, but it isn't taxed even if it is used, as you say, constructively in the US. Let's recognized that small businesses in the US who are competing with MNCs do so at a disadvantage.

3. The ad hominem of the Council on Budget Priorities doesn't advance the argument. You can read, if you want, the letter from Sen. Levin and Coburn (hardly a left wing radical) making the same claims at: This describes what I have described earlier; you can it by going to the Subcommittee website and go to the tab called Related Files:

"1. ...under a cost sharing agreement with Microsoft for rights to sell products in Europe the Middle East and Africa (“EMEA”) ..."

Again, that's consistent with what I've been telling you all along and contrary to what you've been asserting. You've been asserting that the game is for US parents to "transfer" their IP out of the US and then the US parent has to pay a royalty to the party to which that IP was "transferred". Shay gets it; you don't. US parents are entering into cost sharing agreements to *develop* IP under which the foreign sub gets the non-US rights and the US company gets the US rights. No US to foreign royalties are involved.

re: check the box. Ummm, I think I covered that at 2:30 pm on Feb 10 in my comment above: "Charging other non-US subsidiaries royalties for *non-US rights* generally avoids the Subpart F problem because these foreign subsidiaries are ignored as separate entities under “check-the-box” entity classification rules such that the royalty is not, for US tax purposes, considered paid between separate entities and is therefore disregarded."

2. “To the extent that Google or another US multinational can stock earnings abroad permanently they won’t pay US tax.” Agreed. “To the extent the money is brought back, actually or constructively,….” I thought you said that it would be taxed to the parent."

You should really learn to read (and comprehend). Here's what I wrote: "To the extent the money is brought back, actually or constructively, the US fisc benefits from the tax planning (lower foreign tax credits mean higher US residual tax)."

Note that I said the *US fisc* benefits, not the parent. The parent *is* taxed on actual or constructive distributions and that is why the US fisc benefits from the foreign tax planning. If the parent is taxed on a dividend of $100 (with gross up) that had a underlying tax rate of 2 percent, the US fisc gets $33.

3. ad hominen. Well, I guess that just goes to prove that corporations are indeed people. But, seriously, are you telling me the CBPP isn't partisan?.

A question and a "what-it."

Question: How much of this cash are profits from abroad that companies may be scared to repatriate for tax reasons?

What-if: What would happen if, instead of investment, dividends, or whatever, this cash was given out to employees, either as bonuses or (much less likely) as more permanent bumps in wages?

I'm not endorsing the "what if" so much as conducting a thought experiment that amounts to "what if some of the capital income was transformed into labor income?" aka something akin to counteracting the "bias" in capital biased technological change. How would that change investment and consumption aggregates?

"What would happen if, instead of investment, dividends, or whatever, this cash was given out to employees"..."How would that change investment and consumption aggregates?"

Well obviously it would devalue the price of stock in question. In Apples case, I would immediately sell the few shares I own if I thought they were about to take their cash on hand (some very, very small part of which is mine) and hand it out as bonuses. I didn't buy the stock as a charitable endeavor and I won't hold onto stock in a company run by people who aren't acting in my best interest.

What's the holding period of most of these corporate funds? If it's very short then it's not going to support many loans that would increase the flow within the real goods markets.

Corporations are redistributing their profits to shareholders through the share price.

You would think Krugman has no clue who Warren Buffet is.

Buffet is sui generis and there really is not comparable person running a big conglomerate today. He buys stuff on the cheap while other CEOs do not and realized that the insurance industry was going to be a key pillar to Berkshire. If you look at all the companies out there making acquisitions, how many can you point to that have been successful in as long a period of time as Buffet. I really cannot think of anyone else that has done this. At least Apple has not made any stupid acquisitions!

Not my point, though I don't agree with much of what you wrote anyway- Buffet isn't unique by a long shot. The point was that cash piling up on the balance sheet is reflected in the market price of the stock. So Krugman was just flat out wrong in stating that companies aren't redistributing it to the shareholders- if they don't pay dividends, the shareholders can still collect by selling the appreciated stock. And if the companies are making poor acquisitions, then Krugman is still wrong.

Correct. A company with no assets and no debt and 20 bn in TBILLs has a market cpa of...20 bn. If the cash become s significant portion of the market cap and shareholders think it's wasteful to hold the cash they can sell the equity. If it's widespread that corporations are holding more TBILLs than usual (is it?) , perhaps it's because of lack of investment opportunities or investment uncertainty. If corporate profits are a greater percentage of national income than previously (note this is different than a higher average pct of TBILLS being held! watch the pea under the shell!) perhaps there is a relative value of capital vs labor story there. My guess is taxing capital more heavily is not the long term solution to that problem.

Selling appreciated stock isn't a distribution to shareholders. It's a transaction that doesn't involve the company.

@Brian, If a company doesn't pay dividends, how, you may ask, might an investor ever realize a return on investment? Well, he owns a piece of the company, so he owns a piece of every dollar the company is sitting on.

Other investors know this, and are happy to pay for the cash a company holds as part of the price of a stock.

If that cash is used to pay dividends, stockholders receive it directly, and ex-dividend, the price of the stock is lower, by precisely the amount of the dividend, than it would otherwise be.

So, for the company that doesn't pay dividends, the stock price go up versus those that do pay dividends. Investors can sell a portion of their appreciated stock to generate income, mimicking the effect of dividends (tho it may be a little more cumbersome). When dividends are taxed more highly than capital gains, this is a more tax-efficient way of 'distributing' profits to shareholders than paying dividends.

I'm confused by TC's view that Apple putting money in the bank or buying T-bills is OK.

If *that* is OK, then why is the paradox of thrift a problem? Most people who try to save off each other still put the money in the bank, right? FDIC insurance means it's fairly safe.

How is Apple different?

Possible answers:

- Apple is one company, so there's no composition fallacy.

- Apple is not trying the increase its savings (or rate of savings). It's happening due to real/structural stuff.

- Apple is not a big consumer. They buy only capital goods, unlike people who cut vacations. (I don't really see why this would be a problem, I'm just putting it out there)

With this argument, I'm wondering what TC would consider to be hoardnig? Would the CEO have to sleep on a big pile of gold at corproate headquarters for it to count?

That's pretty much what he wrote in his third sentence, and it's hard to see how he's wrong. Buying financial assets leads to other people's using your money.

Buying financial assets leads other companies to sit on more cash. If that means using/moving money, I am fine. But unless someone use money to produce things, we are still trapped in the paradox of thrift. What Tyles and you are demonstrating is that money cannot simply disappear, but none is saying this. So what's your point? Money is like water, but where water is located makes a difference. If water is trapped at the Poles, we live in an ice age. If water is in the clouds, temperatures and the sea level raise. And thanks to positive feedbacks, both outcomes are self-reinforcing. To say that economic rents are not a problem runs against the whole empirical evidence about the evolution of society. It's like putting economics back to the 18th century: pre-physiocrats economics.

The problem with this story is it isn't happening, at least not in a systematic way.

The fraction of corporate profits that are being held in liquid assets (including cash) is actually below average right now, if you look back a few decades. For example, in 1970 almost 20% of corporate profits were held in various liquid assets, vs. about 10% today. (Source: Fed's Z1 Flow of Funds. Table L.102 line 41 Liquid Assets / F.102 line 1 corporate profits)

Liquid assets as a percentage of Total Assets, Corporate Profits, and Short Term Liabilities each tell the same story. In 1945, the "hoarding rate" was almost 50%, probably because of government intervention during the war. Since then the trend has been a slow steady decline, reaching 20% by 1970, and bottoming somewhere between 5% and 10% in the 2005-2010 period. In the last few years it has grown to around 10%.

But, what is reasonable? What percentage of their income SHOULD corporations hold in cash for emergencies? I think 10% is a perfectly reasonable level of savings.

+1, for an insightful post

Leverage: the ultimate low-hanging fruit.

thanks for post. any idea of the percentage of the GNP "stuck" in cash? is it significant?

I haven't done this myself, but I have seen other work indicating that liquid assets as a percentage of GDP paints a different picture. The trend there, as I recall, isn't as clear in the long run.

However, I don't like using GDP / GNP for several reasons:
1. GNP includes government spending and other items that are unrelated to what we're really trying to measure - how much corporations are investing in the economy. For example, if government spending rises as a share of GNP, it could mask an increase in corporate hoarding (or investment).
2. GNP includes privately owned corporations, but our data on liquids assets excludes them. Like government spending, this could mask changes in corporate hoarding (or investment).

What is the definition of "liquid"? Is a two year certificate of deposit liquid? Is a ten year treasury bill liquid?

I'm ashamed to admit, I don't know. But, I'm using the Fed's definition - so you could look it up there, I guess. (Now that I think about it, I have no idea how to do that. Does the Fed produce a definitions & assumptions document for the Z.1 report?)

For Apple? The cost of developing and stuffing the channels with a new platform and having it fail. Then they have enough to start again. I don't think 10% is enough.

Carl C, I think corporations don't actually have cash. They use banks.

I believe PK is saying that given that banks do what they tend to do -- that is, hoard cash when interest is paid on reserves, and probably even if interest is not paid on reserves -- he wants to shift attention to corporations - the banks customers - and that the corprations are not taking risks and making real investments to the quantity he'd prefer.

Pity the poor genius Paul Krugman. Perhaps he should start his own company, hire a bunch of people, make some profits, and then reinvest them in the obvious ways he recommends. You know, lead by example here.

I know his plate is already full, patiently telling governments and consumers what they should be doing. Maybe we can clone him.

a master chef doesn't need to know how to farm to be able to recognize quality vegetables.

Tyler, your argument puzzles me. As I read it, all Krugman is saying is that the business sector is getting a large share of national income and currently has a low propensity to spend out of that income. That puts a lot of pressure on market adjustment mechanisms to induce other sectors (households, foreign or government) to make those purchases instead. Prices don't adjust seamlessly to induce these purchases, so there's depression. This is just basic Keynes. What are you arguing with, exactly? It almost sounds like you're making some kind of crude Say's Law argument from the tautology that income=output.

"As I read it, all Krugman is saying is that the business sector is getting a large share of national income and currently has a low propensity to spend out of that income."

Yes, and the point is that is incorrect. Corporations take their income and use it to buy financial assets; they don't literally sit on a pile of cash. If you want to make the argument about propensity to spend, you need to point to the guy who is actually sitting on a pile of cash.

"Corporations take their income and use it to buy financial assets..."

Doesn't always end well when chasing yields and may be setting us up for new problems:

It's fair to ask what the rising profit share means and odd to just blow it off as some innocuous composition shift.

No. Demand for assets is not demand for commodities. Demand for assets can *translate* into demand for commodities by encouraging firms and individuals to borrow (or save less) and spend. But the translation is not frictionless, particularly when interest rates are already zero for many assets and investment opportunities are (at least perceived to be) lacking.

are there actually fewer investment opportunities that are measurably worthwhile, or is does this also reflect a significant shift in corporate investment criteria?

Anyone willing to collaborate on a break-in?

Thanks all for your enthusiasm. We will meet at next Monday to finalize plans. Wear your TGS shirt so we will know who you are.

Could someone recruit John List? The plan is to run a randomized control macro experiment (to keep Claudia happy); we will save half the money in one part of the economy and spend the other half in another part of the economy. We can discuss the details when we meet. If someone know Tom Cruise, that will also help.

If people are claiming that a corporation buying T-bills has the same effect on the real economy as a corporation paying the money out as dividends or buying back stock, or, heaven forbid, spending it on investment goods or labor, I think that those people have some burden of proof. If people are not claiming that, I don't see why corporations saving more money can't have a significant effect on the real economy, including a reduction in aggregate demand.


Krugman agrees: Mystery solved it seems.

He's attacking the strawman in his usual way. What TC appears to be talking about is cause or effect to disentangle whether the problem is a cash crunch versus AD versus TGS etc. This type of question is dead to Krugman so he just asserts that TC is saying there is difference in investments. I don't think so. I see him saying that corporations aren't causing a cash crunch by stuffing their mattresses if they are making money available to capital and credit markets. Always assume TC is dissecting at a greater granularity.

Andrew' these are blogs. The arguments are boiled down and served up with an extra helping of intellectual learn anything in this medium you have to sample from a wide range of sources and combine the bits in ways that make sense to you. There's much to be learned from Krugman's blog and there's much to be learned here, but someone who reads in only one place will almost certainly learn less. I like to start here because this is not the stuff of my macro daily diet and forces me to think about the assumptions I normally make. I usually feel pretty stupid here but I figure that's a good thing too. On your last remark, I have stopped assuming anything about the what or how behind TC's analysis...doesn't matter as long as he stirs up a conversation on an important topic and I learn something along the's worth reading.

Claudia, I applaud your efforts to continually challenge your worldview, and I try to do this too. Do you think Krugman shares this approach?

I'm not bothered by not knowing where TC is coming from all the time. His point, often, is to raise issues and spark discussion. Krugman, almost without exception, tells you HOW IT IS. I still read him, but his whole shtick the past couple years seems to be to beat people over the head to spend more money and borrow enough to make it happen ('hair of the dog'). He's pushing leverage, pure and simple, and he's getting increasingly hysterical. In the link you provided, he closes with: "[Say's law] continues to play a central role in distorting economic discussion and crippling our policy response to depression." It's a depression now? I try, but it's a struggle to take the guy seriously- hes more political hack than economist at this point. He basically admits this is what he's doing, and he has his reasons (the other side lies non-stop, so...) but I disagree with him. There are liars and hacks across the spectrum, but there are also people generally trying to understand.

It seems to me Tyler's MO is much closer to an open-minded worldview.

Brian, I don't know much about other people and what they are trying to do. And I fail more than I succeed at having an open mind myself. (Oh and open minded people are wrong a lot too.) Clearly Krugman and TC differ some in their rhetorical styles and underlying assumptions about how the economy works. However, they look like two peas in pod compared to a lot of other people engaged in the economy, like my farmer brother (now he'd be a colorful blogger). I generally have the view that simple and stable answers are quite scare, so I like to hear all sides. But that means I listen to and ponder and repeat a lot of garbage, and some people grump at me for even bringing it up. I am sympathetic to their concerns, but I am a big fan of free disposal (take the best and leave the rest).

From your cite, I thought this was classic Krugman:

"When John Maynard Keynes wrote The General Theory, three generations ago, he structured his argument as a refutation of what he called “classical economics”, and in particular of Say’s Law, the proposition that income must be spent and hence that there can never be an overall deficiency of demand. Ever since, historians of thought have argued about whether this was a fair characterization of what the classical economists, or at any rate his own intellectual opponents, really believed.

Not being an intellectual historian myself, I won’t venture an opinion on that subject. What I will say, however, is that Say’s Law (Say’s false law? Say’s fallacy?) is something that opponents of Keynesian economics consistently invoke to this day, falling into exactly the same fallacies Keynes identified back in 1936."

In other words, I can't bother to understand what Say really meant, but I know those who invoke him are wrong. What a weasel.

work on your reading comprehension. krugman didn't say he didn't know what *Say" meant. Say made comments about *others*. krugman said he wasn't certain if *Say's* characterization of what *others* were saying was accurate. But he understood what Say was *claiming* they said. And then he cited people who are making claims exactly inline with what Say said people were saying.

No, the burden of proof is the other way around. Why should management at these companies be throwing money on what they see as negative NPV projects? You're also assuming (and specifically, this is why you have the burden of proof) that the money that gets spent will go to people who will find more positive NPV use out of that money, instead of say, sticking it in T-bills.

American corporations are stashing their profits overseas, waiting for another tax amnesty, as in 2004, to bring them back to the U.S. For example, you may think of Microsoft as an American software company, but to the IRS, Microsoft is an Irish, Singaporean, and Puerto Rican industrial goliath, because that's where it presses its software DVDs, with an R&D outpost in Redmond.

Mutinationals not repatriating foreign earnings is a different issue, though, is it not? If we're criticizing Apple for buying T-Bills instead of investing in new R&D facilities (for instance), obviously those are profits taken domestically, otherwise you couldn't buy T-Bills with them.

Right. I'd be more concerned about Apple not repatriating profits earned by its workers in Cupertino. From Apple Insider on 2/8/13:

"With Apple actively exploring potential uses for its $137 billion in cash and investments, bringing all of that money back to the U.S. would be a costly move. About 70 percent of Apple's cash balance is held overseas, and repatriating that money would have it taxed at America's 35 percent corporate rate. As noted by analyst Amit Daryanani of RBC Capital Markets, that means bringing the money stateside would cost Apple $33 billion."

"obviously those are profits taken domestically, otherwise you couldn’t buy T-Bills with them."

No. There is not reason why an offshore investment account could not hold US treasuries.

It's possible that average corporate cash holdings may be correlated with corporate interest rate expectations as well. IE if you think your cost of debt may rise dramatically in a few yrs, you may hold cash as a hedge.

More generally, cash allows you to keep your powder dry and move quickly as opportunities arise. That's Buffett's view anyway.

From a finance theory perspective, this is a typical debate about the distinction between the financing decision and the investment decision. In a frictionless world, any project with a positive net present value (NPV) should be undertaken. If you have surplus funds, these will be on lent to others who have positive NPV opportunities and vice versa, you will borrow as required.

So, logic suggests Apple sitting on cash is only a problem if frictions within the economy prevent the flow of finance. Note that if insufficient NPV opportunities exist within the economy, Apple's actions are irrelevant - they cannot will NPV positive projects into existence that would not already exist. As it happens I think financing frictions ARE a problem in the US, in as much as there remains an unwillingness to lend to sub investment grade corporations or individuals with impaired credit scores. However, this is a natural "risk aversion" mentality within the finance industry so soon after a banking crisis, magnified by regulation aimed at restricting risk taking (I'm not passing judgement on the desirability of this, just stating a fact). The appropriate policy response would be to target microeconomic reforms within the finance sector - monetary intervention can do little more.

So I think there is some merit to both sides of this, though compelling Apple to act on its financing decisions beyond the influence of changing its reference rate of return won't really work.

Question: Do economists have an economy-wide measure similar to a firm's "Return on Equity" or "Return on Total Capital"? And if so is it lower now than in the past?

I don't know the answer is. As an investor does seem to me that there are many companies (more now than in the past) with excess cash that don't have a good use for it and I do wish they'd simply pay more in dividends and give the cash back to me.

ROE is really a measure of productivity, so GDP per capita is probably your economic equivalent. Tax law in the US I think is the main constraint to higher dividend payout ratios. In Australia we have dividend imputation, which means you get credit for the corporate tax already paid on the dividend received. This leads to higher payout ratios generally and therefore a viable alternative to fixed interest style investments if you intend to buy & hold whilst still receiving income along the way.

homeandhosed, thanks for the reply.

Here's a long term trend of real GDP/capita trend for US I found from Doug Short if interested.

I do wonder if the "Equity" portion of the equation portion of the GDP/capita equation is increasing faster than the GDP/return portion though. (More investment in each individual and not getting much extra return out of it)

It's astounding that you keep taking Krugman seriously. It must be incredibly tiresome.

I don' t know whether to be impressed with your relentlessness, sympathetic to your job description, or saddened by your gullibility.

Hope springs eternal.

So, is the bottom line that Krugman says "piles of cash" and wants us to hear "heterogeneity of capital"? And does he give others that type of rhetorical latitude? Or is he constantly critical?

Professor Cowen,

Krugman has done a poor job of exploring Stiglitz's claim that inequality was holding back the recovery. You are correct that corproate profits as displayed above fail to make a strong case for declining purchasing power. However, undistributed corporate profits have actually surged since 2009 and were on the rise following the dot-com bubble. It appears that wealthy households may be using corporations as a savings-vehicle, which would reduce purchasing power. The disaggregated charts of gross private savings are here (

good link. thank you

What is not impressive is that chart of Real Retail Sales. We are FIVE years down the road and retail sales are now just back to where we were. That amount of spending obviously will not support anything close to full employment also taking into account natural population growth.

Destruction of physical wealth is indeed possible under particular circumstances. To think it is impossible in a market economy, it's naif. That's the whole point. Modelling economic systems on the analogy with mechanics/physics may be helpful to understand some equilibrating mechanism, but it cannot be used to determine the behavior of the system as a whole. Closed mechanical system cannot collapse, but real biological systems do collapse. The burden of the proof is on those, like Cowlen, which deny the 'lifeness' of economic life. But they think they have won the argument back in the '70s. They are a fringe who think truth has been revealed: understanding (economic) life is like dealing with the mechanical properties of fluids. Economics made hydraulics.

I have a definitional question - one of Krugman's post shows that after tax corporate profit is equal to nonresidential fixed investment. My question is: is after tax corporate profit defined by the statistic keeper to be net of that investment? Accounting wise, it would not be, it would be net of annual depreciation in prior investment, not the total new investment). IF so, then he might have a point, but if not, then his claim is false in a fundamental way -- taken as a whole (as he is taking it for all other purposes), the business sector is reinvesting all of its after tax profit in capital goods.

I also note that when you go to the BEA Tables, they do not have any detail for the corporate profits category after 09. They just have a bottom line number but no showing of how it was derived.

I think more research would definitely be needed to understand this better. For example, when calculating corporate profits, the BEA adds back bad debt expense because that is a financial flow. Now, that is a real loss to a provider of capital. It's the opposite of capital taking from labor. SInce bad debt expense soared in 08 and 09, rising from less than 1% of GDP to between 2 and 3 %, that is a huge component of BEA-determined profits in 08 and 09 - it literally accounts for 25% - 35% of the after tax number. I can't say for 10 or later because the BEA tables don't provide any detail.

I left this comment on Krugman's blog and post it here fwiw

" I don't think there is all that much hoarding going on. If you look at this BEA powerpoint,

& go to slide 15 "Investment Depends on Cash Flow" and note the amount of cash available for corporate investment - 1.428T.

Then go to the GDP accounts for 2009 and look at PNRI - 1.35T, a virtually identical number. So nothing is being hoarded."

The Keynesian argument is not that Apple is withdrawing resources from the economy, but that if it and other firms had an epiphany of animal spirits real I and real i would rise. What is preventing this epiphanhy? Fear of Cowenian stagnation? Of Romneyian regulation? Of Tea Partian austerity? Of Bernankian non-NGDP targeting? Of suboptimal response to Cochrainian inflation? Of governmental non-investment in infrastructure? Who knows?

First Krugman didn't show the complete series back to 1947 and the periods where CP were higher and lower but what he didn't show was that after the beginning of financial reform and tax reform in the 1980s CP began to increase as a share of GDP. Today's share is simply a continuation of a trend begun long ago. And second when we look at total corporate assets and financial assets as a share of total assets we find that the ratio of financial assets (CFA) to total assets of corporate non-financial firms stands today at over 50%. This trend has continued since the tax reform act of 1984~ when CFA stood at just under 30% of total assets. Corporate Real Estate (CRE) was the dominant asset class from the 1950's until the 1980's when CRE and CFA held equal shares of apx. 37%. Corporations have had an increasing preference to hold an increasing share of corporate assets as financial assets. Profits rather than immediately re-invested have many alternative vehicles (including offshore investments) which reduce the urgency for return by investing in the corporate entity itself. Financial reform begun in earnest in the 1980's obviously reduced the opportunity cost of holding such assets. Also, the offloading of CRE to independent entitities and the securitization of such assets also had a role to play. Also M&A activity shows that it is cheaper to buy than to build. New firms in the information economy need little in the way of physical assets so one may well ask where lies the Wealth of Corporations? While financial assets dominate corporate balance sheets today wealth is largely held in intangibles (like 'trust', patents, etc) and human capital which may have always been the case but always poorly measured. These intangibles if increasing in value over time explain the growth in CP and the growth in CFA. If we look at the excess share of CFA of TA we could look at that as deferred investment and we should expect at some time higher rates of corporate growth.

What is holding back the economy the most is a) overregulation, b) fear of future higher taxes (due to high gov't debt), and c) banks not lending money.

The key graph I don't see is that of loan applications rejected. Instead I read anecdotes about how "credit is tight" and small companies can't get loans.

If banks choose to get IOER from the FED instead of loaning out the (corporate deposited) cash, it is more clearly not a problem of production corporations hoarding cash so much as financial corps hoarding cash and failing to do their job. And the Fed should be charging banks for storing their IOER, rather than paying positive rates -- to get the banks to do higher ROR activities.

I wanted to thank you for this great read!! I definitely loved every bit of it.
I have you saved as a favorite to check out new
things you post…

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