Krugman’s response on cash hoarding

Krugman, in a response, accuses me of not understanding Keynes’s critique of Say’s Law:

Cowen can’t see why corporate hoarding is a problem. Like Riedl and Cochrane, he concedes that there might be some problem if corporations literally piled up stacks of green paper; but he argues that it’s completely different if they put the money in a bank, which will lend it out, or use it to buy securities, which can be used to finance someone else’s spending.

Let’s look at what I actually wrote:

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.

My arguments is that it can be a problem, and that recycling is not automatic, but in that case other factors must be in play and we should reinterpret the matter in terms of those other factors.  Krugman may or may not agree but he doesn’t get to that point.  Rather his critique is that I think recycling into AD is automatic.  That is a “read fail,” and quite simply he would prefer to counter the argument (Keynes vs. Say) which fits into his prior template rather than deal with what was written.

Dorman thinks there are few good investment opportunities because consumer spending is weak.  In a somewhat condescending fashion, he suggests that somehow I cannot, when thinking about macroeconomics, keep investment and retail spending in my mind at the same time.  He doesn’t mention that my original post considered retail spending explicitly — and with a picture — and argued that although there was a big hit to spending, the pattern of the hit and subsequent recovery for retail doesn’t appear to match the pattern of our investment problems.  Again, he may disagree on the point, but he can’t even bring himself to mention that I cover it, instead preferring to claim I ignore it.


Am I understanding your argument correctly (not being sarcastic here)? To paraphrase:

- You're saying that cash hoarding by corporations like Apple isn't a significan't problem because this money is held in bank accounts that is made available to other investments. ("It can be put in the bank and then lent out. It can purchase commercial paper, which boosts investment")

- The real problem then, is that there isn't enough high-return investments for this capital to fill, or that a flaw in "fund recycling" may be preventing this capital from flowing to investments even if they are there. ("can be a problem, and that recycling is not automatic")

How exactly does this mean that corporate cash hoarding isn't a problem? If you are correct, then cash hoarding just piles more money into "the loanable funds market does not know how to invest it at a sufficiently high ROR". Considering that sufficient demand ultimately drives return on investments, doesn't your argument just mean that cash hoarding will cause even worse effects than if "fund recycling" actually were to be automatic?

Would appreciate clarification - not sure how this logic is playing out.

+1 I read the quotes as well, and don't understand Tyler's argument: on the one hand saying that if Apple buys T-Bills with its profits, it's ok because the money is recirculated, which is the criticism that Krugman responded to with his critique of Says law.

The other argument Tyler makes, from a person I presume believes in efficient markets, is equally puzzling: that "to the extent there is a problem, the loanable funds market does not know how to invest it at a sufficiently high ROR." Gee, markets don't work.

Or, maybe he's saying there is insufficient aggregate demand....hmmm....that sounds like he agrees with Krugman....

"The other argument Tyler makes, from a person I presume believes in efficient markets, is equally puzzling: that “to the extent there is a problem, the loanable funds market does not know how to invest it at a sufficiently high ROR.” Gee, markets don’t work."

Tyler claims that the market does not know how to invest large amounts surplus marginal capital at high ROE. You claim that its failure to do so is an EMH failure. Here's some other things the market doesn't know how to do: build a warp drive, make humans immortal, design self-aware AI, cure acne. None of these things invalidate EMH. The market doesn't know how to do a lot of things, the problem is neither does anyone else. A technological stagnation is not a market failure. It may not even be a failure at all, simply an exogenous property of the technological space that our civilization is currently in.

To claim the failure of EMH you must show: 1) a set of investment opportunities that produce superior risk-adjusted returns to the current market, 2) an under-investment in these opportunities, and 3) the ability for some actor given sufficient capital to invest in these opportunities. You're claiming that the market is under-investing in all these high ROE investments out there, the market's also under-investing in warp drive as well. The problem is you can't identify what all these supposed high capacity, high ROE projects are, just the same as I can't identify how to build a warp drive.

And if you can identify a bunch of high ROE projects that the inefficient market's supposedly missing, how come you're not rich? You shouldn't be lamenting Tyler on his blog, you should be out raising capital for all these easy investments the inefficient market's is missing.

I don't think Bill is actually arguing against EMH here; regardless of whether EMH is true or not true, how is corporations throwing a bunch of cash to a "market does not know how to invest large amounts surplus marginal capital at high ROE" not a problem?


Doug, the whole point is if the market is working, they don't have to be high ROE projects. The high supply of loanable funds means that even low return projects are economic.
To Bill's point - just sounds like a problem of deficient aggregate demand/excess demand for liquidity and safe assets. And when the whole market acts this way, it becomes rational for the individual actor to act the same way, and continue to hoard.

+1 In classical economics, markets always clear, don't they. But, they never heard of liquidity traps, either. As to EMH, if you think futures markets in 2007 anticipated this, there sure was an opportunity to make money by shorting, but you would have seen that in the futures market. And, if you think ", the loanable funds market does not know how to invest it at a sufficiently high ROR" is an endorsement of an efficient market, let me know. Saying a market doesn't know how to invest is interesting. Or, maybe this is Tyler's way of saying liquidity trap without using those words. Who knows.

"+1 In classical economics, markets always clear, don’t they."
No, only in Keynesian's strawmen.

"As to EMH, if you think futures markets in 2007 anticipated this, there sure was an opportunity to make money by shorting, but you would have seen that in the futures market."

In EMH, the futures market does not predict the future price level of the underlying. If it did, an arbitrage opportunity would occur. We should be able to derive a futures price by multiplying the current spot price by the holding period safe risk-free rate of return until the expiration date. If the price was too low, an investor could short the underlying, invest the proceeds into the risk-free security, and take the buy side of a futures contract. At expiration, the trader pays the futures contract with part of the risk-free security's proceeds and uses the underlying to cover his short. The trader has now made a risk-free profit. (Reverse these trades for a futures price that's too high.)

I think part of the arguments is that it's not a foregone conclusion that weak AD is the primary cause of the excess of cash holdings versus, say, a kind of technological or innovative plateau (The Great Stagnation). Thus, the problem isn't corporate cash holding per se, but rather the fact that we are at a point in the technology/innovation cycle where there are simply fewer worthwhile investment opportunities. Whether that is actually true, see TGS and the ensuing debate.

So, the Great Stagnation suddenly appeared in 2008? Mighty stealthy that TGS, like a tiger it can spring on you.

I guess it makes sense to put those words in Tyler's mouth. If the growth rate before 2008 was TGS limited, returning to the TGS growth rate (even without a return to the long term trend line) is as good as it gets.

I'm trying to imagine this in terms of counterfactuals. I'm trying to imagine a counterfactual where we assume that TGS is indeed limiting growth, but the crisis didn't happen. In that non-crisis counterfactual, what would GDP be today?

I think you're saying, it's not the red line seen here:

Are you saying that the red line there is nonsense? That the "true" read line that would have happened without a crisis would have slowed so much that the blue line we're on has actually already hit the "true" red line?

Are you saying that growth was about to slow tremendously due to TGS anyway, so that red line is inaccurate, and the "true" read line (the counterfactual to the crisis) should be much lower, and not only that, so low that we've already met back up with it? AKA, there is no output gap?

I think Bob's point is essentially, "Wow, what a coincidence that would be if the slope of the red line drastically changed for reasons unrelated to the crisis, but right at the exact same time of the crisis."

Micheal, ok, so I said below that TGS cannot be the whole story, but it certainly can be a part of it. I like to tell the story through expectations...about house prices and income growth. Up until mid-2000s households were quite optimistic (by TGS too optimistic) about asset prices and income growth. Feeling wealthier this led them to consume more, and some of that consumption came by borrowing. There was a big increase in household debt in this period, based on assumptions about income and asset prices that did not pan out. Now were we too optimistic because we didn't recognize the signs of TGS as we borrowed away? And when the credit dried up in crisis only then did households realize how bleak their actually prospects were (and had been for some time). I believe that's why you get a stream of 'we aren't wealth as we thought' posts here. It has to be a part of the story. Personally, I think you need an extra kick of pessimism (or rebuilding of buffer stocks or credit restraint or something) to explain the weak recovery. But maybe not.

To add yet another point of view (AD sympathetic), here's a new note by Mian and Sufi:

There's short-term trends, e.g. business cycles, and long-term trends, e.g. technological growth rates. A shift in the latter doesn't nullify the former. You'll still have business cycles in a long-term slow growth segment. But the boom times will be weaker and the bust times will be more painful. Even the boom time was of 2000-2008 had slower growth in developed countries then for example the boom years of the early 1960s. In contrast the bust of 2008-2013 was longer, more painful and slower to recover than for example the recession of the early 1980s.

Imagine a person gets AIDS. They might go on being marginally healthy, until they catch the flu at which point they die. Dr. Tyler Cowen diagnoses the cause of death as AIDS. You snarkily reply, "oh well pretty interesting that the AIDS that he's had for five years just so happens to suddenly kill him a few days after he gets the flu." Both HIV- and HIV+ people go through cycles of having upper respiratory infections. But the former recover quicker from them and return to a higher state of health when they're gone.

We got the flu

In '32


TGS is an argument that doesn't quite sit right either...I can't imagine a CFO saying "whelp, no more innovation after the internet, might as well hold cash".

Even if we assume that innovation has come to a dead stop (singularity folks notwithstanding) why would that incentivize excess cash holdings? Why not just distribute cash back to shareholders, which, if Say's law is even partially true, presumably increase consumption/demand? You would think that Apple, in the case, would actually make a good counter example - the best reason for its cash holdings is that it needs it to innovate and disrupt other industries.

So even if innovation is dead, what relation does that have with corporate cash reserves? I can't claim to be an expert, but Occam's razor would imply that corporates hold cash for the same reason as every other recession - they want to stay liquid and are playing it safe.

Most executives don't want to distribute back cash because they're into empire building. Giving cash back the shareholders reduces their own power and influence by making the treasury they control smaller. Almost all of these cash-hoarding tech stocks get big bumps when they announce dividends. That's evidence that the market doesn't value the argument of holding cash to guard against disruption.

Which, in an efficient market, would have activist investors forcing to happen anyway. While this is a cool topic, I also think it's a separate one from the effect of TGS on cash holdings.

With or without TGS, the incentive for empire building should remain constant; I don't see how slowing innovation would cause executives to change their preferences. Since the same happens in both cases, empire building wouldn't be a cause for TGS to effect cash reserves. And presumably, investors would want their cash back either way (unless EMH is true under one state of innovation but not the other??)

Which leaves me back to my original question: even with TGS, how is cash hoarding not a problem?

Investors shouldn't want cash back because of high dividend taxes. Better to let the cash convert to equity value and sell shares, taking the smaller cap gains hit.

@Stephen L,

It's a fair point you're making. But consider that corporate executives can do three things with earnings: A) re-invest them in actual tangible projects, B) return cash to shareholders or C) hoard cash. Say during a pre-stagnation period executives allocated earnings 40% to A, 40% to B and 20% to C. Now we hit stagnation and there are no tangible projects remaining to re-invest in. Will the share going to A shift to B or shift to C? I see no ipso facto reason for companies' relative preference for B to C to change. So whatever surplus from the lack of A will got to B and C proportional, in this case the new mix will be 0% to A, 66% to B and 33% to C.

So cash hoarding goes up despite no change in propensity to empire building. In fact it may even more go to C than B, since A and C were both empire building and B is not. It could be the corporate executives are going to allocate 60% of earnings to empire building, so with the absence of A all of that goes to C. I.e. 0% to A, 40% to B and 60% to C.

Either way with TGS empire building inevitably turns into cash hoarding, so the extent that empire building exists we'd expect to see more cash hoarding during stagnation.

At the extreme's Peter Lynch called it "Deworsification" when companies couldn't find better things to do with the cash and instead invested poorly in the business or started buying other companies in effort to keep growing.


I agree with Stephen L.

Machlup had a theory called "satisficing" which explained that executives would act for stability, and not necessarily for the interests of the shareholders.

While the corporation may not have alternative, good uses for their cash hoards, I can assure you that their shareholders do, if the earnings were distributed to them. If shareholders get their hands on the money, they would spend it. So, if the company doesn't, the shareholders do.

It is only because the interest of managers and shareholders diverge can a well-capitalized corporation with a cash hoard, earning low interest whiich is not being invested, exist.


So now you're a shareholder activist? Hard to keep up.

Um...shareholders are free to sell their stock and redeploy.

Alternatively, remember the LBO craze? Companies sitting on cash were, and may again be, takeover targets. You know, buy the company, use the company's own cash to finance the deal, buy out current shareholders at an above market price, load the company up with debt, suck the cash out, buy a yacht. Cash hoard solved!

These guys are your heroes now?

Yes, I do favor shareholders. And, no, shareholders do not have the power you think they do--there are many impediments to hostile takeovers which is why the days of greenmail are over.

Cash hoarding is the same as doing a service or selling a good for free. You don't impose your own costs on the economy until you attempt to spend your cash.

This is some pretty serious horseshit you're spewing.

It sounds like you are saying corporate hoarding itself isn't the problem, rather the lack of sufficient investment opportunities is the problem and we should view it from that perspective.

I read Krugman as implying that this is all part of the general AD problem ... corporate cash, when sitting on the sidelines, contributes to a lack of investment opportunities, which leads to further cash hoarding, ad infinitum. In that case you can't really separate the corporate hoarding from the lack of investment demand; it is both cause and effect.

Yup. To the man with the fiscal policy hammer, everything (and everyone) looks like a nail.

But equally, to the man who disbelieves hammers, there are no nails.

I love symmetry.

personna shoots, he scores!

Nah. He's talking about some hypothetical world where TC didn't go through The General Theory chapter by fucking chapter. Whereas, back in the real world, PK can't way to strawman himself out of his rhetorical sloppiness.

"Corporations are piling up cash!" "Okay, sure, maybe not cash, but other stuff, what, you don't understand that other savings stuff can be kind of like cash!" "Okay, sure, maybe the corporations aren't causing the cash crunch, per se, but them being cautious...oh nevermind, and forget all that stagnation crap, you don't seem to realize that 'Keynesianism, QED."

You guys are still out here arguing that Krugman isn't Krugman. Good luck. It is exactly what the man says himself.

Here's a special delivery just for you msgkings

or this

Does this view extend to individuals (consumers)?

If everyone saves and doesn't spend discretionary income, that can't possibly be bad for the macro economy. Right?

It makes no difference. If you never spend, its the same as doing something for free.
This applies even if you store actual cash in actual vaults.

I presume you'd make the same argument for Apple then.

But I did specify discretionary spending. And I didn't say "never." I don't think most people save with the intention of never spending money; it's held back as a time preference for something better that is presumably coming down the road.

However, if enough people were to turn into savers (of all discretionary income), even for a shortish duration, it would have a profound effect on the macro economy. Just as it would if major corps withheld from spending discretionary funds.

Is putting money in your bank the same as cramming it in your mattress?

Have you asked the bank their opinion?

No, they're not the same thing but nice strawman since I never claimed they were the same.

Am I to assume that you agree with the premise that consumers depositing discretionary funds into banks for savings is just as good for the macroeconomy as the scenario where they instead spend that money on goods and services?

Or, put another way, is having a large "loanable" pool of funds as important as driving demand?

I'm with you, dead.

Why is no one asking what the banks are doing? Aren't they a central part of this money recycling? Don't we already know that the banks aren't lending?

*banks aren't lending to risky ventures, at least. They're hoarders as well.

"Is putting money in your bank the same as cramming it in your mattress?"
In an interest rate targeting regiem they are the same. Money you crame in your mattress is offset by money that the Fed creates.

The first thing you do in any business plan is look at whether there is demand for the thing the business provides: No demand -- no investment.

The tragic thing right now is that the economy actually would benefit if half the unemployed were paid to dig holes in the ground and the other half paid to fill the holes in.

This is the result of insane political economics.

Paying unemployed people like this would result in benefit simply because wealth is so insanely maldistributed that the demand side of the economy is failing to attract capital to job-creation.

Jump in the hole and I'll fill it in.

You are confusing demand with aggregate demand. Aggregate demand is NOT a type of demand (despite the name). Demands tell the economy which goods to produce, costs tell the economy how much to produce.
AD is the scalar projection of the supply vector onto the demands. An AD shortfall means that what people want isn't being produced.

****Paying people to fill in holes**** just makes the demand problem WORSE.

So have corporations drastically changed what they do with money and did it not have anything to do with a loss of credit credibility?

Well the "giant pools of money" that swamped AAA investments, leading to "aspirational" AAA ratings, is a fairly recent thing, isn't it?

It's been a trend in the blogging wars that others (not just Krugman) misread Tyler. Maybe there's a case to be made for Tyler expressing himself less abstrusely.

There's definitely a case from that, but TC's invocation of TGS should have tipped Krugman off that his post didn't have anything to do with Say's Law.

Tyler's shortest comments benefit by being pithy. Readers look for the most intelligent reading. That's part of the fun. When you're trying to make a specific policy point, that may not be the easiest route. Lead the horse to water, rather than just nodding toward the gate.

Tyler overlooked the ambivalent nature of Krugman's column when Krugman said "the level of corporate profits, which is arguably serving as a kind of sinkhole for purchasing power" and attributed to Krugman a much stronger statement. Tyler got smacked down for his troubles - and rightly so.

Why corporations are piling up cash and what the economic consequences of two trillion in cash reserves are, are legitimate and important questions.

Are tech companies completely different than traditional companies? Most of the cash hording is based around a whole bunch tech companies than spend a lot on R&D but practically nothing on physical investment. (Their physical investment is done by FoxCon but it still would not be that largeif they had to directly pay.)

This seems a sensible strategy for tech companies as the barriers to entrants are relatively low and their position can change anytime in the marketplace. Sure Apple a top now but just how important cash was 15 years ago. Look at AOL which still exists through the Huffinton Post. They have been out of fashion for 10 years.

Of course this does not solve the macro-economic problems as these bank funds will take years to invest in the US and China is not about to give up it manufacturing base.

Haven't 'cash hoarders' of all stripes been punished for going on five years now, prodded to get back in the pool by Fed policy?

Paul Krugman: "What's in your wallet?" commissar. Go away dude.

Sayeth Professor 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."

So he can't be bothered to understand what Say meant but he knows that opponents of Keynesian economics are falling into the same fallacies. Reading Say's "Of the demand or market for products" is well worth the effort, to understand how he was misinterpreted.

Yawn. Ok, so we're back to there's a mystery and only added that macro economists have poor manners and hobby horses? I find TGS unconvincing for behavior following a massive business cycle shock. And yet, I am skeptical that AD is so easily and sustainably goosed. (Note: retail sales are NOT normal.) So what is it? Something about liquidity or risk preferences/constraints of firms/households? Some expectations shock, above and beyond real shocks? Something else? There's a lot going on here...but I guess we could talk about who needs new glasses instead..

Note, retail sales ARE normal

Another opinion:

But you have to explain why AD deficit (even if people stopped de-leveraging, they're not re-inflating their debt load and since their income hasn't grown, they're spending less than before) + tight credit by banks are not enough of an explanation, in an of themselves.

For me, it's no mystery companies are hoarding cash/not borrowing heavily. They see no Revenue growth and they are thus more bent on raising profitability - i.e. extract as much as possible from every unit of existing Revenue by crushing costs (incl, esp, labour costs).

Do they see no Revenue growth because of TGS? Maybe but I doubt it. Because, from the driveless cars to the colonisation of Mars and incl. biotechs or AI or robots or nanotechs or solar or climate change reduction technologies, I can see us, as a civilisation, on the cusp of tons of life-changing inventions that are desperately needed.

But you need solvent demand for all those techs to be worth investing in. You need a justified sense of optimism. Africa needs HIV vaccins. It's not getting any coz 'hey, Africans are always going to be too poor to make worth our while'. The day that changes, HIV vaccins will be good business.

So yeah - You had a real shock, you have an on-going balance sheet recession (individuals and governments but not corporates) and, on top, you have a tremendous shock to expectations.

See my previous comments on the subject. I really don't think you need more to explain what's going on.

Another example: In some parts of the USA, for some segment of the population, life expectancy is declining! Declining! That's just supposed to be impossible. But for these people, health care progress is something they cannot partake in. Why? I doubt they WANT to die earlier than richer folks. They cannot afford health care is a lot more likely explanation. What would happen if they could? Prices would rise? A definite possibility given the cartel-like/guild-like structures of healthcare supply? But what if healthcare supply was also free-er? Any doubt that output would rise to meet this new solvent demand? I don't think so.

"They cannot afford health care is a lot more likely explanation."

As if healthcare was the decisive influence on life expectancy.

There is an epidemics of obesity in America. In the last 20 years, Americans have put on enormous amounts of fat. Every Euro visitor is stricken by the sheer amount of morbidly obese people everywhere (that is not to say that Euros are generally slim, but the super-heavy category is much smaller on the continent, while common in the USA).

This translates to glut of high blood pressure, diabetes, metabolic syndrome ...

... and no, even contemporary healthcare can't do miracles and negate effects of decades of bad lifestyle. After some time, the above-mentioned things will just kill you.

Fredric, there is much in your comment so let me just share a few reactions:

1. When analyzing business cycle movements, it is essential to be aware of, isolate, and maybe even remove long-standing trends. De-trending runs the gamut in quality but it is important. For example, it would be very hard to have a sensible conversation about the declines in labor force participation without noting the ongoing impact of demographic trends. In some cases, the trend shifts the definition of "normal" a lot.

2. And yet, trends should generally not explain cycles, though they can interact. Potential output, or the productive capacity of the economy is often thought of as a measure of AS...what we could make if all pistons were firing. But it's not really pure AS because it's also related to capital deepening. If there's low AD and there's less capital investment, well guess what the pistons wear out and our capacity, AS, takes a hit. However, if all this was caused by a temporary dip in AD then when it picks up capital deepening will pick up and voila potential is back to full speed. Clearly not the TGS story, but might be observationally equivalent from some time.

3. A high profit share (hoarding?) and high ratios of debt to income (de-leveraging?) are, at best, symptoms of a problem...they are not really problems per se. It's pretty clear from this and a gazillion other posts that Krugman thinks AD is the first order problem and Tyler thinks AS is the first order problem. I don't see either of them being super convincing (unless you started in their camp), but I think Tyler has a tougher row to hoe.

As an aside, I used 'mystery' in my first comic to mimic a TC response in the last post in this series. I think expectations are huge, but if that's where you end up, you've got a big mystery on your hands since we don't understand them much at all. I'll end with my favorite post from yesterday:

well there's auto-correct with the last paragraph, I meant "first comment" not "first comic"...

No worries - I had gotten that you were not talking about your first 'Amazing Spiderman'... :)

As to the rest, yes, trends matter and can influence the conversation. Because I do not buy TGS (except in the sense that huge corporations have become comfortable rent-exploiters and thus tend to shy away from disruptive innovation), I do not really think that's worth over-analyzing here.

With regards to capital investment not occurring i.e. capital deepening being delayed, I think this works better. It certainly jigs with my intuition and experience that corporations are more interested in maximising every ounce of profit out of every ounce of existing labor, capital and revenue than in investing 'for the future'.

But my point is that we do not know so very little about expectations and how they're formed. The things I mentioned may be symptoms but they're also proofs i.e. if people/companies/governments are delevraging/hoarding cash/going bankrupt despite trying to cut spending, it's proof enough that the economy is in a negative spiral. It's like - deflation due to price going down because of technological improvement being passed down the consumer is good deflation, deflation due to output gap gapping wider is bad.

And you can usually tell the difference very clearly.

As we discussed before - With expectations for a brighter future at an all-time low, everyone is playing it safe and thus the economy is staying in a bit of a funk.

As opposed to Krugman, I don't really believe that governments can borrow and spend us into a durable recovery. It'd take some considerable time, money and international coordination. I don't like or believe in monetary 'solutions' such as 'raising inflation expectations' (not to mention that the reactions of people to expected inflation is often the same as to expected future big bills - you save preventively).

IMO, what it will take is attacking expectations heads-on. You can't do much about businesses. Lowering the tax rates in general or on specific items like R&D is mostly a waste. It won't change people's expectations.

The only thing you can really do is give people back some purchasing power. And some clarity about their future (healthcare spending, education of kids, retirement, housing prices to a lesser extent). Do that and people's expectations will evolve back towards a more positive outlook.

This is not an entirely complete survey but, imho, it'd be interesting to compare a country where people have had a negative outlook for a long time (France) with one where people were more optimistic till the crisis (UK, USA?), especially using qualitative surveys...

People's main concerns and what to do with money above basics is pretty telling, though. Companies are bound to react by saying 'the future? what future? let's exploit our milk cows for as long as we can. Apres moi, le deluge'

Frederic, you wring your hands about "expectations for a brighter future at an all-time low".

First of all, I think this is nonsense. What you mean to say is that expectations aren't where you think they should be.

I think we should think about 'undue pessimism' or 'undue optimism'. Are expectations unduly pessimistic right now? Maybe, but this is not clear cut- you people are not scientists, despite what you tell yourselves.

What about 1999? Expectations then were perhaps at an all-time high. Well, if that's the opposite of today's environment, that must have been awesome. And the mirror image of the vicious cycle y'all are wringing your hands over now would have been a virtuous cycle in that environment ad infinitum, no? Didn't pan out.

The idea that expectations become self-fulfilling prophecies is way overdone. To me, the question is how expectations line up with reality. In 1999, they didn't and that was bad. Today, maybe they don't in the other direction, and that may be bad too. Maybe. But people with skin in the game- they make the decisions. All the hollering from the sidelines- meh.

Keynesians look at the past four years and think of missed opportunities. I figgered this was always gonna be a long slog, as unduly rosy expectations were realigned with reality. We were not as rich as we thought we were. The fact that companies are making money and have strong balance sheets, and that consumers are getting their balance sheets in order- these are good things that will bear fruit over the long-term, but it takes time.

Meanwhile, we've added $4 trillion to our debt and taxed away 10% of wealth sitting in cash via inflation, and yet, all we hear from the left is more more more public profligacy. You know- to get us unstuck.

There's the weird asymmetry to the Keynesian world view, inasmuch as low expectations are always a bad thing and high expectations always a good thing. Fiddlesticks.

I cannot reply to Bill Donohue directly so I am using the nearest post allowing a reply.

And, basically, you read me wrong. People are RIGHTLY pessimistic, as far as I am concerned, as things stand.

That's my point. You need to give them reasons, objective reasons, to believe that, now that we know house prices don't climb to the sky and tech stocks don't climb to the sky (etc. Emerging mkts don't climb to the sky...), there is still a future with good jobs, safe pensions, decently priced higher education, accessible health care etc...

Without that, forget about it. We will remain in a lower performance economy for a long long time...

Frederic, speaking for myself, my biggest concern with the future is the $16 trillion (and growing) millstone of federal debt, along with another $3-$4 trillion in unaffordable promises made to state and local government employees (pensions, health care), all of which will come home to roost in the next 10-15 years.

These are exactly the policies you propose to make us feel more optimistic. More gasoline on the fire, the way I see it. I'm more pessimistic about Europe than America precisely for these reasons.

If government could make it all better just by providing these's just too easy. Wouldn't we all be rich by now? Wouldn't socialists countries be roaring along?

This is getting too long a discussion for a comment thread, Bill, but I'll try to answer quickly.

First, the deficit is actually under reasonable control for the next 10 years. Afterwards, yes, according to quite a few people, it explodes upward. But much of that is based on healthcare cost projections. What happens if the reduction in healthcare inflation hold? What if progress/supply-sided reform finally kick productivity gains in this sector? You can go back and redraw your long term exploding graphs...

Second, I am definitely of the position that the ultra-wealthy need to be taxed a heck of a lot more while taxes on the 99% (thus including most small owners and entrepreneurs) need to be lowered. ( )

Finally, yes, those promises are good and useful but not sufficient either. Take France for example. First, people do not truly believe that the pension system will last (same issue as with your healthcare. On present trend, it'll implode. And retirement doesn't lend itself to technological revolution the way healthcare might). Second, most people can see that there is a dearth of jobs, esp. jobs in relation with their diplomas.

So, for France, though I would support earned income growth there too, my solution mix would be quite different than for the USA. It's not a one-size-fits-all.

I don't get the premise of your critique. The moment a corporation that's supposed to invest starts hoarding cash in the money market, there's an automatic problem.

Of course, you can still criticize Krugman because he made the mistake of comparing business investment to history rather than the counterfactual.

It's not literally the hoarding of cash by GE/Apple that's the problem. The cash hoard mirrors an investment shortfall. The lack of obsolescence of cash-hoarders suggests 1) highly risk-averse, leverage-loving investors 2) An ossified industry structure where there simply isn't enough pressure on incumbents to innovate or die.

And there's your problem. Krugman's mistaken because he's trying to blame the big bad corporation alone. But it's not quite accurate of you to suggest that the *loanable funds* market is giving us a sub-optimal result in a generalized way. Apple is supposed to be at one end of the loanable funds market. That it has chosen to be at the other, and that investors/competitors/regulation is willing to let it, is the problem.

"I don’t get the premise of your critique. The moment a corporation that’s supposed to invest starts hoarding cash in the money market, there’s an automatic problem."
no there isn't. It just means they are doing stuff for free. Stephen Landsburg had a great post about this a year ago.

"An ossified industry structure where there simply isn’t enough pressure on incumbents to innovate or die."


You cannot take Paul "Kick the can down the road" Krugman seriously. His solution to everything is to print funny money.

Sorry Tyler. I'm a loyal reader, love your stuff. Loved The Great Stagnation. Agree with it. Am not predisposed to agree with Krugman over you. But I read your blog post exactly the same way he did and I find his response pretty appropriate. As I read your post, all I could think of was the first chapter of The General Theory.

Maybe what clears it up is that Krugman was never really arguing that corporate profits are a demand sink. If he was, you would be right. There's nothing special about corporate profits that makes them especially problematic for a market economy. He's just arguing that corporations have a large share of national income right now and a low propensity to spend out of that income, which places a lot of adjustment pressure for market prices to induce other sectors to do the spending. It sounds like you substantively agree with that point as a practical matter, and never should've taken Krugman to account to begin with. And you were probably taking him to account for a position he doesn't really hold. At least, when I read him, I didn't get the impression he holds the position that position. I may be a more charitable reader than you are.

But at this point the disagreement has escalated to disagreeing about who was wrong and who deserved to be called out. And it doesn't contain a lot of substance. This is bound to happen from time to time when egos are involved and this time, acting as fair arbiter, I put a greater share of the blame at your feet.

Yet again, economists like Krugman think the world is composed of bobbleheaded wandering gaussian pidgeons. We are not.

Say's law is correct if one understanda that we are container ergodicity, as in Paul's Nobel prize. The economy contracts, the overall bandwidth of the economy is less. What appears to be hoarding is simply Say's Law acting with a reduced rank distribution network.

In order to get the issue, one has to understand how and why aggregate agents act, are they time periodic or are they container ergodic.

Think of it this way. If the shoelace industry decides to deliver shoelaces in a dozen per pack, rather than two to a pack, it appears as if the shoelaces are being hoarded. No, they are simply being sold so folks can buy more of them less often.

One thing that's not been considered here is why corporate profits are so high.
The hoarding is not (just) a function of lack of business investment, it is a function of increased cash flowing to businesses.
As far as I can tell, the main reasons are that 1) wages are depressed, and the labor share of GDP is low 2) interest costs are very low due to (take your pick - weak economy/loanable funds balance/monetary policy/China).
Amid this backdrop, corporate balance sheets improve at the expense of the rest of the economy - household balance sheets and government balance sheets. Households are balance-sheet or income constrained from consuming, and politicians afraid of deficits rush to limit gov't net borrowing.
It's not good for the corp sector to net save, esp not now.


Tax (big) companies again, revive unions and/or force them to pay their workforce properly and see all those macro problems/mysteries and TGS issues disappear in the mist...

That is basically the French way. It is bedeviled by its own set of problems, including very high youth unemployment (the incumbent workers represented by unions have all the incentives to protect their workplaces against new competing entrants).

True. I cannot restate my whole worldview in just every post but you're right. Unions do tend to have a strong bias to status quo.

In France, the problem is a bit more complex. Unions have been gutted too, if not to the American extreme (membership is extremely low but non-unionised members will mobilise to defend the status quo too). However, the labor market is made extremely rigid by something called CDI, basically a job-for-life guarantee unless you make a serious professional mistake. Of course, that's not quite as solid as all that if you work for a small company (the company might fold) but, if you work for one of the big CAC40 companies, it's a gold platted armour.

Unsurprisingly, companies responded by recruiting as little as possible, abusing shorter term contractors.

But, even more, it skews people's expectations and attitudes to life. If banks start requesting a CDI before giving a mortgage, if women only want to marry men with CDI etc, what's a person to do? Try and create your own start-up? Fuck that. You studied your ass off for 5 years. You managed to beat the competition which is pretty intense since most higher education is only opportunity cost in France. Are you going to risk it all? No. You're going to play it safe and try and become a manager in one of those big companies and have a career...

I can't quite prove it with hard numbers (though I'll give it a try in one of my coming post on my blog) but, imho, France has an issue with a lack of entrepreneurship and start-ups being created and grown.

Krugman seems to have pegged your argument about right.

The Coase Theorem? Really? If you still believe the Coase Theorem applies in any sense to the real world, especially to lending for potential investment projects and all transactions that are group efficient in a macroeconomy, you are a real quack.

Would the cash hording be a problem if the cash is (as in Apples case) mostly held overseas? Capital is mobile, but it the 'primary' source is overseas, surely there is more potential 'leakage' from US circulation.

Yes overseas cash is a problem. You can't distribute it or you pay a big tax.. You can put it in the bank in the USA. You can invest it overseas and get more bang for your buck because you can invest gross of tax versus net of tax in the USA. At least part of cash problem to the extent it may exist is largely the result of dumb government tax policy that is now unique to the USA in the whole world.

Having lived through several near death experiences as a CFO and CEO because of lack of liquidity I can also see why corporations become more conservative in their blance sheet structure. My experience is that companies make the big win when they have cash and everyone else does not during hard times.

Krugman seems to assume that those entities which are receiving corporate investments, e.g. banks, aren't actually spending that money at all: "If you put money in a bank, the bank might just accumulate excess reserves. If you buy securities from someone else, the seller might put the cash in his mattress, or put it in a bank that just adds it to its reserves, etc., etc.."

Is there any evidence that banks are actually accumulating reserves rather than loaning out money? From what I've read, bank profits are soaring, presumably from lending and asset sales. I don't think banks can make these kinds of profits by letting their reserves sit.

Additionally, if corporate hoarding of cash is symptomatic of the recession and the unwillingness of consumers to spend, then why have corporations been holding on to cash since the 90s (at least according to Tim Taylor) when consumer spending was booming?

If I do a service, then don't ever spend the money, to the real economy I've done the service for free.
This is Stephen Landburg's argument to why cash hoarding is actually a good thing.
People who hoard real goods are not being generous, but cash hoarders *are*.

Krugman is making the same mistake Tyler did in an earlier post. He needs to model the economy based on barter then split each transaction in half by using money.

You've made this same claim three times now. It doesn't make it any more true.

Saving doesn't equal burning. Eventually, unless the saver dies and doesn't bequeath the money to an heir, the money will be spent. Saving is a shifting of time, not an eradication of value forever.

Are you saying cash hoarding is always good? I guess that implies consistently reducing the monetary supply is a good thing. That doesn't seem like a good thing on the face of it. Maybe I am missing something here...

+1. DocLandburg there hasn't seem to considered the opportunity cost that comes from money being held by one entity and not another.

The monetary supply isn't reduced by cash hoarding. Cash hoarding in a mattress is offset by the fed since it fixes interest rates in the short term. Cash hoarding in a bank account actually increases the money supply.

"Cash hoarding in a mattress is offset by the fed since it fixes interest rates in the short term"

But if the fed offsets the missing money then you are at net zero change right? That is arguing that hoarding doesn't matter not that it is a good thing. And saying that the fed offsets the missing money sounds a lot like Krugman's baby sitting coop getting out of a recession by issuing more scrip.

It is very confusing idea that having everyone reducing consumption at the same time could possibly be a good thing. But then again I am a person who cannot fathom the idea of wanting to tie the value of your currency to some physical object like gold (is it because gold is shiny that people want to associate it with money - just don't get it...). There seems to be a line of thought here that must have some rational basis that I remain unable to grasp.

This sort of analysis completely misses the point. Let's consider two economies:

Economy A: Businesses on average reinvest their profits in new factories, equipment, R&D, facilities, etc. and also use money flowing into the company to hire additional workers to produce more goods and services for the public while continuing to earn profits. This economy tends to have low unemployment and a healthy rate of economic growth.
Economy B: Businesses continue to sell products but, on average, they do not have plans to expand, repair existing facilities or build new ones nor are they doing much hiring or R&D work. This economy is characterized by high unemployment and low economic growth.

I'm not particularly interested in whether Landsburg or anyone else considers the businesses in economy B to be "generous" or not. What I am interested in is whether there is a set of policies that economy B might pursue in order to look more like economy A to avoid the negative political, social and economic consequences of long-term unemployment.

As Krugman himself often notes, economics is not always a morality play. We don't need to tally up all the virtues and vices of people in the economy and pin blame on someone before we can say what set of policies will help achieve stable economic growth, a steady business cycle and full employment. "Hoarding" sounds like a value judgment of some sort but I really think it's intended by be descriptive most of the time when it is used by economists. That's certainly how I read Krugman's original post. If you think he was implying corporations were being insufficiently "generous" by hoarding cash, can you point to which passage gave you that impression?

Wouldn't Krugman just respond that the multiplier is one (in particular when the economy is weak and non-pecuniary factors may be leading to depressed lending), therefore government spending is sufficient raise aggregate demand?

I guess the argument then comes down to the effectiveness of government spending (which is certainly not a discussion of Say's law..Krugman invents an irrelevant debate).

I have a fair and balanced solution to the continuing debate over who misunderstands or mistates the words of whom.

Tyler, in his posts, should provide a 1-800 number that anyone can call to ask for a clarification of his post.

And, Krugman would be required to call Tyler at the 1-800 number before he writes about Tyler's comments in the NYT to make sure he understood the post; and similarly Tyler would be required to call Krugman's 1-800 number to ask for any clarifications as well before he comments on Krugman.

The only negative would be that this would reduce the amount of website content and comments in MR or the NYT.

But, that is the price of progress.

So you're saying Tyler and Paul are fabricating arguments in order to drive up content? Genius!

Keep it to yourself and don't tell them that controversy drives readership.

If viewers want to learn some facts about how corporations manage their cash balances and why they hold them, here is a 2012 study of 200+ corporate treasurers

I wonder what Krugman is investing in.

How does a company storing dollar bills in the back room (cash hoarding) cause an economic problem?

It just means that some people are essentially working for free. In exchange for piece of paper they give people things and expect nothing in return. Isn't that awesome! That's like Manna from Heaven. I wish more people were like that. Give me stuff and all I have to do is give you a mark on a piece of paper.

If you think cash hoarding is a problem, I don't think you understand economics.

How is cash hoarding different than reducing the monetary supply? Is hoarding the cash different than burning it? If everyone tried to accumulate as much cash as possible by eliminating spending on non-necessities would that be a good thing?

Although its a couple years old, this article gives a good breakdown of where Apple puts its cash

It seems that among the great many things Krugman doesn't understand is that "cash" on a balance sheet is not just currency.

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