Why are corporations sitting on their money?

[ProSense]

Why are corporations sitting on their money?

At this morning's jobs discussion. I asked the panelists -- Labor Secretary Hilda Solis, AFL-CIO President Rich Trumka, Chamber of Commerce honcho Tom Donahue and Columbia University Professor Jeffrey Pfeffer --why businesses are sitting on $1.8 trillion in reserves. Clearly, they're worried about the near-term, and maybe long-term, economy, and are holding reserves to protect themselves. But why? Is it because there's not enough demand, and not enough expectation of demand growth, for their products? Fear of further dips and crises? Concern about government actions? Something else?

Donahue argued that it was concern over future taxes. Businesses look at the deficit, he says, and they know they're going to be taxed. What's odd about this argument is that the deficit hasn't changed in a way that would dramatically transform the long-term tax burden. The major deficit issue is a long-term imbalance between revenues and spending, not the stimulus over the past two years. To put that in terms of numbers, a mid-range projection would put debt in 2022 at 21.5 trillion. The stimulus was about 3.5 percent of that. If businesses are worried about future taxation now, it means they were ignoring the numbers three years ago. Which is possible, of course. But future taxation is not an invention of the economic crisis.

Pressed on the subject, Donahue allowed that fears of further market turmoil and insufficient consumer demand were also players in business decisions. At this point, Pfeffer offered a useful addition: Businesses are herd animals, he said. They tend to spend all at once and hoard all at once. So the fact that many of them are hoarding now is convincing the rest of them to hoard now, and the question is how you break that cycle so a few major players step out and invest and make their competitors feel like they'd be missing out if they didn't do the same. But that sort of change requires some positive shock -- great jobs data, say -- and it's not clear where that'll come from.

By Ezra Klein

Maybe they want Republicans back in power.

[The Magistrate]

1. They Are On Strike, Ma'am, Against A Democratic Government

[Beetwasher]

5. Yup

A good deal of them may be deliberately trying to sabotage the economy so Dems will be defeated. Wouldn't surprise me.

[tridim]

8. Isn't that economic blackmail?

If there were a law, it would be against it. -Homer

[Pirate Smile]

23. Exactly. They know it helps Republicans & hurts Obama and Dems. I'd love to get it on tape to show

how Repubs and Big Business/Wall Street are conspiring to depress hiring and the economy to hurt Democrats. "Country First" - what a joke.

[RUMMYisFROSTED]

2. Because nothing else is expected of them.

:shrug:

[Joanne98]

3. Cause they're Benedict Arnold CEO's who want the country to fail!

[phantom power]

4. Because our crappy economy has consumer demand flat-lined?

Because our crappy economy has businesses trying to keep a cushion of liquid assets?

[Lost4words]

6. End of year Bonus Bucks! nt

[Bgno64]

7. Exactly

Consumer credit has dried up, families are retrenching, demand is flat, most businesses already have excess capacity. The line that they fear future taxes is pure and utter bullsh*t.

[hughee99]

9. Regarding future taxation, it's not that complicated...

The current administration is more likely to push to raise business taxes than the previous one, that's why they're more concerned about taxation now than three years ago.

[OllieLotte]

15. Do you have those figures? n/t

[hughee99]

17. Which figures?

All I said was that Obama is more likely to raise taxes on corporations than *, who bent over backward (or forward) to try to lower them, did. Do you disagree with that?

[TreasonousBastard]

10. Oh, bullshit! Having actually spent some time working in a large company...

unlike the geniuses on that panel, I see a hesitance to invest without a good chance of return.

Basic B-school stuff-- if it takes a 10 million to bring a product to market, and the cost starts at $500 per unit, dropping 5% a year, how many units do you need to sell at what price to make a profit over 5 years?

So, you stir the numbers over low heat for a while and look at your stock price, your retirement options, the chance of the product actually making money vs losing a bundle, and you decide it's not worth it to take the risk when you can make more money churning Euros.

Investing in capital like new factories and equipment, or hiring-- same thing. They have to see the prospects of increased production before they'll invest.

Companies will take the risk when they think they can make some money out of it. A great new product, a new market, a competitor in trouble, increased demand in a segment... But, there always has to be the high probability of profit before they take the plunge and invest.

[napi21]

11. That's absolutely right. That's the way large corps operate.

Smaller ones can turn around faster, and until they see an increase in demand, they're not just going to make inventory!

[OllieLotte]

13. Agreed. Large and small business doesn't know what to expect.

They will bet their money, if they think that they will get a good return. They are worried about a downturn in business, about additional health care costs and they are worried about higher taxes. They are also worried they cannot get a loan when they need one, so they are saving cash.

[Exilednight]

19. Your post reminds me of something I heard this morning no NPR ......

the chance of the product actually making money vs losing a bundle, and you decide it's not worth it to take the risk when you can make more money churning Euros.

A leading economist was on NPR this morning and stated that a bank can make more money playing the foreign currency market than they can by lending to the public.

[jwirr]

12. I was born in 1941 and I do not think I have ever seen such an uncertain

economy. Everyone has a different theory and no answers. Plus the uncertainty of global warming, peak oil, food shortages, seemingly endless wars, etc. None of this contributes to confidence in the system.

FDR came up with a plan which he outlined in plain language to the people of America to convince them that we needed to act. It seems to me we are moving first one way and then another today. Help the rich - no - help the poor; go to war - no - end the war; global warming - no - climate change; peak oil - no - drill baby drill; stimulate the bankers - no - create jobs; rebuild what we have - no - localize the economy; etc. In this atmosphere no one knows what to do and I think that includes businesses and congress. Especially small businesses.

We need a plan.

[OllieLotte]

14. We need a "good" plan.

The rub is that we can't agree what a "good" plan is.

[jwirr]

21. And that is exactly my point. Until we know what we are doing we are

not going to fix any of this mess. We will just continue to put bandages on the sore.

[jody]

16. One factor is low interest rates permitting businesses to hold inventory rather than lowering prices

to meet true customer demand.

Bloated inventories in turn mean no reason to start or increase production that ripples back to minimum opportunities for investment in new production facilities.

There are other reasons but what I described above is correct and similar effects occur in the residential and commercial real estate market.

[glinda]

18. Becasue they are waiting for the MN lawsuit in hopes they win big to give money to rethugs and

because they are not Patriotic. And because they are total asshats. And because they are thinking they need it to fly to another planet in case this one goes totally down the crapper. Want more reasons?

[jobycom]

20. The fatal flaw of Reaganomics.

Reaganomics believes that a business will invest money just because it has the money to invest. That goes against common sense, history, and basic economics. Businesses invest when there is money to be made. If there's money to be made, they will find a way to borrow or steal enough to invest in ways to get that money.

But when people don't have money to spend, businesses will not invest. Markets are created by demand, and without money, consumers demand less. Thus, there's no reason to create a supply, thus no extra jobs are created, thus there is still no money to be made.

Republicans don't get this. They think that cutting taxes will stimulate the economy, or giving tax credits will stimulate the economy. It will to some degree, but those are short term gains that disappear as soon as the tax credit is spent. There is no time for businesses to gear up research, development, and production, so they don't bother. (Meanwhile, the value of the dollar is decreased as the tax cuts increase our debt, having the reverse of the desired effect).

This Tom Donahue person realized that, which is why he gave a bullshit political answer to dodge the real question. The way to stimulate the economy is by getting that money back into circulation. You can do that by government stimulus packages that invest in the economy while raising taxes on the wealthy (if they hold onto the money, they are more likely to lose it in taxes--the reverse of Donahue's comment). Retrain employees for new skills, invest in new industries (green energy, for instance), put people to work building the infrastructure (which not only puts wealth back into circulation, but also invests in the basic resources of our nation), invest in education (not gimmicks like NCLB), and police, and other areas that put real people to work doing long-term skilled jobs with genuine benefits to the nation. That gets money into the pockets of individuals who then spend on the products that these businesse will start to build when they realize there is a market for building them. And even the companies that whine loudest about Robin Hood and Wealth Redistribution and Socialism and whatever other buzz words they use profit more than if the money was just left buried in a hole.

Businesses exist only to make money. They will only spend money to make money. There's no use complaining about the morality of that, it's just the basic definition of the word. You have to regulate businesses to keep them from hurting anyone and keep them playing fair, and you have to find incentives for them to invest, even if you have to spend some of their money for them to do it. A free market leads to feudalism, which is just fascism without a centralized government. A regulated market has always been the secret to economic growth.

[GeorgeGist]

22. Because they didn't EARN it.

[Jakes Progress]

24. Because they are corporations

They don't care. Caring would be against their purpose.

[impik]

25. Because they want to kill the recovery and help the Republicans, of course

[DailyGrind51]

26. They are sabotaging Dems to prepare for the plutocracy!

[golfguru]

27. With 18% people unemployed consumer demand is down

businesses won't hire until demand picks up. It is a vicious circle.

[NJmaverick]

28. They sit on their money at the GOP's behest

That's my working theory

[sad sally]

29. greed - pure and simple.

It ain't American to care about what's good for the Country, only what's good for the bottom line. Regardless of what the Supreme Court ruled, corporations aren't human; greed is good, what's mine is mine, no taxes for wealthy businesses.

[Odin2005]

30. Typical Capital Strike, squeezing us peons.

We the People should confiscate their wealth.