The Capital Strike Of 2010
American businesses are sitting on a big pile of cash, and giving no indication that they have any intention of spending it any time soon.
Today’s Washington Post reports on a phenomenon that many financial commentators have been noting for some time now; the fact that many of America’s largest companies are sitting on large piles of cash rather than investing in new business or expanding existing ones:
Corporate America is hoarding a massive pile of cash. It just doesn’t want to spend it hiring anyone.
Nonfinancial companies are sitting on $1.8 trillion in cash, roughly one-quarter more than at the beginning of the recession. And as several major firms report impressive earnings this week, the money continues to flow into firms’ coffers.
Yet all the good news from big business hasn’t translated into much promise for jobless Americans, leading many to wonder: If corporations are sitting on so much money, why aren’t they hiring more workers?
The answer to that question has become a political flash point between the White House and big business groups such as the U.S. Chamber of Commerce, which held a jobs summit Wednesday and accused the Obama administration of dumping onerous regulations on businesses. That has created an environment of “uncertainty,” which is causing firms to hold back on hiring as the unemployment rate has hovered near 10 percent, the Chamber said.
The White House countered that companies are wary of hiring not because of new regulations but because they’re still waiting for consumer demand to return. The administration also claimed credit for 3.5 million jobs created by the stimulus bill from last year.
In some ways, I think that both the Chamber of Commerce and the White House are diagnosing the problem correctly.
The Obama Administration’s policies, including health care reform, cap-and-trade, proposed immigration reforms, financial reform, and the continued threat of so-called “card check” regulation, are indeed creating a vast amount of uncertainty in businesses across the country, especially as they learn of the massive book-keeping requirements that the new health care law will impose upon businesses of all sizes in the very near future. Given all of these new regulations, and the threat of more such regulations in the future, it’s not at all surprising that businesses would be reluctant to invest in the future.
Small business owners attending the U.S. Chamber of Commerce meeting this week seemed to confirm the uncertainty hypothesis:
The White House’s attempts to tamp down the growing narrative of President Barack Obama as an enemy of the business community are not resonating with an important audience — business owners themselves.
A number of small-business owners attending the U.S. Chamber of Commerce’s jobs summit Wednesday said the administration is responsible for policies that have made them uneasy about hiring or investing in their businesses. And several of the owners interviewed by POLITICO said they believe the White House has demonized their work.
Bill Glacken didn’t hesitate when asked if the president is anti-business.
“Yes,” said Glacken, owner of a sporting events planning company. “There’s always uncertainty in business but [even more so] if you have the feeling that someone is not out there to help you.”
Daryl Hancock owns an information technology consulting company in Maryland and said Obama’s sweeping changes to the health care industry and new restrictions on Wall Street have only exacerbated the uncertainty of a bad economy.
Hancock said he’s “very nervous” about the future and has put off improvements. “It’s easier for me just to sit and wait,” he said.
Jim Wordsworth, who owns eight businesses in Northern Virginia and chairs the Chamber’s small-business council, said, “I’m offended. After all these years, I feel like I’ve done an evil thing, like profit is a bad thing.”
At the same time, the state of the economy, while better than it was a year ago, is still largely uncertain and it looks as though we are headed for, at best, an anemic, jobless, recovery which is unlikely to result in the massive boosts in consumer demand that would justify expansion on the part of business. By some estimations, we could end up falling into another recession within the next two years. With forecasts like that, you’re simply not going to see businesses willing to spend cash, which may mean that the forecasts of another recession will end up becoming a self-fulfilling prophecy.
Finally, though, I think that a phenomenon like this suggest strongly that the business community has lost confidence in the political class and views Washington as potential enemy at this time, rather than a necessary evil, something that has happened before:
The term was popularized by the Manhattan Institute’s Amity Shlaes. In her 2008 bestseller, The Forgotten Man: A New History of the Great Depression, Shlaes documented how uncertainty on the part of business leaders as to the intentions of the New Dealers after FDR’s 1936 re-election and the creation of large Democratic majorities in Congress. In response to the president’s attempt to pack the Supreme Court and Congress’ creation of a host of new regulatory agencies, there was a second stock market crash in 1937 and new business investment ceased. This capital strike prolonged the Great Depression which began in 1929 until America’s entry into the Second World War in December, 1941.
I’m not quite sure that things are quite that bad this time around, but businesses sitting on cash would seem to be something we’ll be dealing with for some time to come, and the economic consequences of that fact could be quite painful.
It has nothing to do with “regulation” or capital strikes. It has to do with demand. Basically there’s still plenty of spare capacity in US industry (the auto industry in particular has just made huge capacity cuts)and until business sees some prospect of a consistent uptick in demand why would they invest in expanding capacity? Sans the Chamber spin (when do they ever say anything other than Democrats hate us?) and the Shlaes la la land stuffl your diagnosis is broadly correct. As it happens I bought a new car this morning and was talking to the General Manager of the dealership I always buy from and he was actually fairly upbeat about the outlook. Business while not booming (we’re not going to see a 17 million auto market for a long time) is definitely on it’s way back to what he considers more normal levels of activity which he defines as an annual auto market of around 13.5 million units.
Doh, you should be reading Barry Ritholtz, then you wouldn’t be behind the curve:
http://www.ritholtz.com/blog/2010/07/corporate-cash-has-been-piling-up-since-1982/
This is apparently a 30 year trend, that conservatives wake up and blame on Obama.
Yawn.
Tyler Cowen concurs, saying “As I’ve been saying, there is less to this issue than meets the eye.”
http://www.marginalrevolution.com/marginalrevolution/2010/07/corporate-cash-hoarding-as-longterm-trend.html
Now I’m going to put this in very general terms, rather than argue specifics, but if existing companies feel comfortable enough to sit on their capital, then doesn’t that seem to indicate that there is not enough competition?
Not so much for small local businesses, but if larger companies have an overabundance of production, they could be spending that capital on updating infrastructure, research and development, future projects or even spread the wealth a bit to their employees that made them so profitable. All of which would help the economy as a whole.
I am definitely not in favor of dictating (regulating if you will) what a company does with it’s profits, but my whole life I have heard platitudes how a business has to move forward and can’t stagnate or it will be destroyed in the free market. If the business class as a whole feels comfortable enough to let itself sit back, then maybe we need to find out if there is some new people willing to take risks in whatever regulatory environment may come up and find ways to get them some capital.
I would also not be against creating an environment that heavily favors the start up company over the large established company, but that would definitely have to be carefully considered.
Let’s go back to income and investment:
You are a small (or large) businessman. You have a history of investing in inventory, staff, and services, under one condition only. That is, when you see a positive ROI.
For that, you need customers. You need an expectation that you can expand gross sales, from there net, and finally your personal income.
If you don’t see the customers, if your store traffic is down, if consumers are reducing their spending across the board, what is really stopping you? Your taxes? It is to laugh.
Uncertainly hypothesis my rear end. It’s a fact.
Hunkered down businesses may need that cash for the continued recession or to meet the costs of the coming mandates and tax increases. Anyone who doesn’t understand how Obama and the Dems are attacking business then they just haven’t been paying attention.
As for a recovery we just keep seeing negative data as often as we see positive data. Throw in huge deficits, European uncertainty, unstable energy prices and policies, state and local tax hikes, warnings of public pension costs, a general Carter malaise and you can see why there is still no business confidence.
“This is apparently a 30 year trend, that conservatives wake up and blame on”
It is a long term trend but it did get reversed in the period 2005-2009 as Ritholtz’s FT chart shows because US business did invest in a lot of new capacity, modernizing systems, and so forth. There is simply no reason for them to go on a new investment binge at present which is why consumer spending is so important. Too important in the long term. Another factor which Ritholz mentions is that the numbers are somewhat skewed by the huge cash balances at places like Microsoft. I have to assume a lot of this cash is being actively managed by people like Goldman and J. P. Morgan.
Steve P. – And my response would be the business environment is always risky, or at least should be. Great risks, great rewards and all that.
If it isn’t then the system is out of balance in some way.
One man’s “reversal” is another man’s “noise” .. especially given the “regression to mean.”
I love the fact that stuff like this is given without concrete examples:
It’s easier to say “you haven’t been paying attention,” rather than “I got nutthin'”
Steve Plunk says:
Thursday, July 15, 2010 at 14:17
“Anyone who doesn’t understand how Obama and the Dems are attacking business then they just haven’t been paying attention.”
Don’t be ridiculous. Obama and the Fed have saved businesses’ bacon over the past 18 months as Warren Buffett was pointing out the other day.
Sadly, we are repeating the failures of the
RawNew Dealers. Soon we’ll have even more calls for confiscation of corporate cash. The cash will be appropriated and spent on non-productive ventures by government technocrats, well at least that part not siphoned off by connected insiders. Sure they’ll pay for another year of teacher or police salaries but those, while necessary, are cost centers not profit centers. Or we can pave some more roads that don’t need it for trucks that will never carry the goods that are never made because any profit that might be made is just confiscated by the DC crowd.Businesses invest when their are good opportunities for, you might want to sit down, profit. Since with this administration and congress, profit is bad, they aren’t investing. Plus, no one seems to really be able to predict just what expenses DC is going to impose next.
If Obama and his cohort were serious about job creation, they would not be keeping things in turmoil (uncertainty), or allowing the capital gains and dividend taxes to increase (trapping capital in less productive activities) or constantly going on about people making “enough” money. Instead, they would keep CG taxes down with assurance for long haul to free up capital for investment in new small business, which are the jobs generators. They would streamline regulation to facilitate creation of small business who can’t afford a whole department to meet all the foolish reporting requirements of the confiscatory class.
Instead the money is going into the mattresses and will stay their until the current regime is dramatically changed. We could see this if their is a Republican upset in congress that at least promises to tangle up the wheels of government before they grind under productive activities.
c.red – certainly business investment has risk but those risks must be quantifiable or at least believed to be quantifiable. Otherwise, the risks are better in Vegas. The fear of loss through confiscation or government mandate will always override the lure of profit. I any case, if we believe Obama, profit is bad and businesses should stop pursuing it.
Or the shorter version is Obama has brought so much change that business has lost hope. Perhaps a breather in all the change rather than doubling down on doubling energy costs would be appropriate?
john persona, I’m not sure that I trust that cash-to-assets ratio for purposes of that argument.
The tend I’ve observed us the largest companies own fewer and fewer assets. Banks no longer own their buildings, trucking companies no longer own their trucks, offices no longer own their desks.
A second trend is that with high insurance costs (medical and liability), the big companies are self-insuring, which requires they maintain a pool of cash or near-liquid assets. Where the government gets involved they generally require the company to maintain minimum ratios, and the smaller the ratio the more paperwork is required. For example, a self-insurer taking on $1 million of actuarial liability may be required to show a minimum of $10 million in cash quarterly, or $100 million annually. So the regulatory incentives increase the effect.
Ritholz doesn’t link to “total cash” numbers because they’re skewed to a handful of companies with massive cash hordes. That sounds to me like there are a handful of companies which are being used to suggest business-wide trends not based in reality.
“Anyone who doesn’t understand how Obama and the Dems are attacking business then they just haven’t been paying attention.”
Steve, do you play any other song? Or is this the only 45 in your jukebox?
Count me out of your view of business as feeble, government-dependent, fear-motivated partisans. Not only is it an inaccurate view of how business actually works, it’s not even a preferable one.
“The fear of loss through confiscation or government mandate will always override the lure of profit.”
Bah…..not true in Mexico. Not true in China. Definitely not true in the United States.
The stupid herd animals who almost destroyed the American economy are acting stupidly again?
Wow, big surprise.
@Plunk
“Uncertainly hypothesis my rear end. It’s a fact.”
But don’t businesses always operate in an environment of uncertainty? The basic problem, from my reading, is that there is a dearth of customers. But, businesses need customers; customers need wages; businesses won’t pay wages; businesses need customers…
@Herb
It’s the “backfire effect.” The more evidence to the contrary you present, the louder the song becomes. It’s a phenomenon that is more pronounced in conservatives than liberals. There may be some open vs closed mind thing going on with this.
I don’t understand how people go from “government gives bailouts” to “government is business friendly”. Bailouts help a small subset of (politically connected) companies. Bailouts are about as business unfriendly as possible.
It’s simply a question of incentives. Which is more profitable, to spend your capital improving business and making customers happy, or to spend your money on politicians campaigns in the hope that they will through a large bone your way? If the government is throwing around billions of dollars, the latter marginally becomes a better and better option.
through = throw…
typo gremlins….
I think big business and their Republican cronies read the ’08 landslide as “the peasants are revolting!” Now they are trying to hold the economy hostage until the revolting peasants learn their lesson.
There are reports of working people in isolated communities across the country who can still afford food and shelter. Some Wall St. investment firms have reported that their executives are afraid to travel for fear of having to witness first-hand one of these pockets of non-desperation. Republicans are hoping for big victories in November in order to bring back Bush-era economics and put an end to the aforementioned stubborn holdouts. Meanwhile, business leaders are sitting on their piles of cash, hoping for a return to serfdom or, at least, and end to all this “working middle-class baloney.”
Herb,
It’s not my song, it’s Obama’s, Pelosi’s, Reid’s, etc..
Jason, the ZIRP, the Primary Dealer Credit Facility, the stiumuli., were supposed to push liquidity into all business. It was a stated goal (and I don’t think they were first-level dishonest) of the Obama administration to do that.
Unfortunately lobbying has been expanding with spending (no surprise to some I’m sure), and made distribution of cheap funds ‘lumpy” to say the least. (Maybe that is second-level, diffuse, Washington-wide, dishonesty.)
So, we have no more taxes (so far) than we did in January 2009, and a lot more spending directed toward business. That’s business friendly. Sure it is.
(I indirectly benefit from car companies kept afloat, as I offer services for dealers.)
I have unease about the future, but I don’t really see anything in the future to explain the present. The present is adequately explained by the past.
The forces of cheap labor and big profits goes against the middle class. This is a once in a lifetime event that we are seeing. It is a major upheaval and someone better do something as it is almost too late to do anything.
http://finance.yahoo.com/tech-ticker/the-u.s.-middle-class-is-being-wiped-out-here%27s-the-stats-to-prove-it-520657.html;_ylt=AgazlCDW.EZYkFaM6dqLQ7a7YWsA;_ylu=X3oDMTE1b2ZiNTlxBHBvcwM4BHNlYwN0b3BTdG9yaWVzBHNsawNwcm9vZnRoYXR0aGU-?tickers=%5EDJI,%5EGSPC,SPY,MCD,WMT,XRT,DIA&sec=topStories&pos=6&asset=&ccode=
http://theeconomiccollapseblog.com/archives/shipping-our-economy-our-jobs-and-our-prosperity-to-china
Here is an example of what the business community is facing.
Uncertainty is a big issues as is the costs of the programs the obama administration has jammed through congress.
All My Business Problems Diagnosed
“all my employees are retired, so they already have health care plans, but that does not affect the penalty”
Is he sure about that? If none of his employees are insured through a state exchange set up pursuant to the law, he’s not liable, or so I read this:
Are his retired employees on Medicare, btw … then he is certainly not liable.
John,
Try again with that Ritholtz link. The graph for liquid assets is an absolute measure and what we need to look at is the relative measure. That is the trend might not be much of trend once we look at the appropriate ratio.
That is one of the important lessons of economics, it isn’t the absolute price that is important, but the relative prices. Increase the tax on commodity X and commodity Y, a substitute, looks more attractive.
Ritholtz does look at some research that notes that case and liquid assets relative to overall assets has increased, but it is is due to….increased risk–i.e. business are less sure of their situation so they hold more cash and assets that can be converted quickly into cash. Now, Doug points out that we have a policy environment where businesses once again might feel an increased level of risk and uncertainty and businesses respond by…gasp upping their cahs/liqui assets holdings. Granted, the poor economy would magnify the effect as well.
Right now, we are told we are in a bad recession. Instead of responding by reassuring businesses that the Administration is going to ensure an environment favorable to businesses the Administration embarks on a very aggressive policy regime change. Health care reform being the central component with cap-n-trade not too far behind. Remember Rahm Emmanuel’s comment, “Never let a good crisis go to waste?” Well they aren’t. Now the time is ripe to make serious changes to policy…but the corollary is that it also increases policy regime uncertainty and that makes businessmen turtle up when it comes to expanding and spending.
sam said,
Emphasis mine and that illustrates the problem.
His accountants think the law applies a penalty to him. They have direct knowledge of the company so I tend to believe they are better equipped to make this decision as opposed to a general CPA article on the web.
The accountants you cite provide information that it might not apply.
Which means there is a great amount of uncertainty regarding one portion of a massive bill.
This uncertainty will continue until the IRS rules are promulgated. But it won’t end at that point. Their are likely be lawsuits at that point and the uncertainty will continue until those cases are decided.
That uncertainty is present throughout the economy and there is no doubt that the pervasive uncertainty is killing job creation.
Steve asks me to revisit Ritholtz and look for cash-to-ratio. I find:
The average cash-to-assets ratio for corporations more than doubled from 1980 to 2004. The increase was from 10.5% to 24% over that 24 year period. That was the findings of a 2006 study by professors Thomas W. Bates and Kathleen M. Kahle (University of Arizona) and René M. Stulz (Ohio State). When looking for an explanation, the professors found that the biggest was an increase in risk.
When I revisit it, perhaps the most interesting thing to note is that study date: 2006
Steve also asks me to consider risk in the bad recession. Sure, acknowledged. But I note at the same time that the argument seems to be “look at this bad recession … if it wasn’t for future taxes …”
As I said, I find the past to be sufficient explanation for the present.
Obama and the democrats are helping big corporations, knee capping small business, hindering job creation, harming technology developmnet, and effectively crippling the economic recovery.
Dodd-Frank and the Non-Delegation Doctrine
Damaging, bloated, ignorant legislation like this is another reason capital is not being deployed into the economy.
An enormous amount of time and resources are going to be wasted just figuring out what is in the legislation.