Hoarding Cash Is Nothing New

There is a bit of a cat fight going on between Paul Krugman and Tyler Cowen over the propensity of companies not to spend their considerable cash balances. Basically Krugman says it’s retarding the recovery while Cowen says that’s nonsense given that the companies invest their cash balances in vehicles from which it can be recirculated. Here are the links if you want to follow it blow by blow – Krugman 1,2,3 and Cowen 1,2.

Now these sort of tiffs among economists are pretty standard fare on the web so generally I’d not spend much time on the subject beyond reading the back and forth. There is, however, a whiff of indignation in Krugman’s arguments tying the growth in corporate cash to a redistribution of profits from labor to capital with the income accumulating on corporate balance sheets in the form of cash. It’s not far from creating that narrative to sniffing around for ways to grab some of that cash. After all, there’s $5 trillion sitting there and even a slice of that is catnip to the political class.

So a little searching yielded some rather surprising information – there is nothing new about these accumulations of cash, it’s be going on for several decades. Timothy Taylor’s Conversable Economist nicely demonstrates the point.

He takes the data from a paper published by the St. Louis Federal Reserve and this is just one of a number of graphs on his post. I chose this one as it accounts for overall growth of the economy. The graphs showing the simple raw accumulation of cash are more striking. Given that Apple has been the catalyst for so much of the talk about cash hoards this graph makes clear that it isn’t an outlier within its industry.

Notice that tech firms have consistently had a propensity to operate with much higher cash balances than other industrial companies.

So why have firms opted to accumulate cash over the past two decades. Here are a couple of ideas.

First, Timothy Taylor offers this explanation:

Broadly speaking, there are two reasons for firms to hold more cash: precautionary motives and repatriation taxes. Precautionary motives refer to the notion that firms operate in a situation of uncertainty, including uncertainty about what stresses or opportunities might arise, and whether they will be able to get a loan on favorable terms when they want it. Cash offers flexibility. The authors explain repatriation taxes this way: “[T]axes due to the U.S. government from corporations operating abroad are determined by the difference between the taxes already paid abroad and the taxes that U.S. tax rates would imply. Importantly, such taxation only takes place when earnings are repatriated. Therefore, firms may have incentives to keep foreign earnings abroad.” To put it a little differently, if firms are thinking that they may wish to reinvest foreign profits in foreign operations, then the tax code gives them an incentive not to repatriate those profits.

The Epicurean Deal Maker did a really good job recently of explaining the nature of precautionary motives:

Businesses do not invest in existing or new business lines in a vacuum. In addition to exogenous factors over which they have no control and usually very little ability to predict, like customer demand, general economic conditions (including the exogenously determined market cost of the capital which it decides to invest), and competitive response, no business has the ability to predict with high confidence the actual financial or operational results of any investment. Businesses make investment decisions under often daunting conditions of significant uncertainty. When general economic conditions are weak or unsettled, as they are now, the uncertainties surrounding any investment decision are that much more worrisome.

Based upon my years of experience and interaction with senior business executives and company directors through both good and bad economic times, I can tell you with confidence business decisionmakers typically react to such conditions with the most natural, intelligent, and rational human response imaginable: caution. Failure to invest under conditions of economic malaise, recession, or disruption is not cowardly, stupid, or irrational. It’s often just plain common sense. Furthermore, executives and directors of corporations owe a fiduciary duty to their stakeholders to make rational and prudent decisions. If prudence dictates caution, who will gainsay a CEO’s or board’s decision to defer that new manufacturing line or acquisition until conditions become clearer? Who indeed, other than a central planner or politician who would like someone, anyone, to take the first step.

Going beyond the Krugman/Cowen dustup what do we know. Well, there’s nothing new about US companies accumulating cash, they’ve obviously been doing it for a long time. Our tax policy most likely contributes to parking excess cash overseas and may stymie the distribution of profits to shareholders and tech firms seem to  lead the hoarding pack. I suppose that last fact has something to do with the knowledge that any given tech firm is just one invention or innovation away from extinction. That does tend to focus one’s attention and perhaps lead to an abundance of caution.

In the end it seems rather pointless to criticize US firms for exercising an abundance of caution for maintaining large cash surpluses. After all, we have just spent the last four or five years excoriating individuals, government and the financial sector for irresponsibly leveraging themselves and in the process doing great harm to our collective good. Perhaps thrift like no good deed goes unpunished.



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