One of the columnists over at the BBC has posted an article detailing what it describes as ‘cash hoarding’ by US firms. The article expresses its suprise that the low interest rates and stimulus spending by the Fed and US gov’t have failed to encourage companies to invest. What boggles my mind is the failure of the author to ask WHY. It is one of the questions kids are taught in elementary schools to ask when they want to understand a situation. It is clear that US companies are hoarding more cash, and even borrowing at a beautiful prime rate to expand cash holdings. You can find out these facts by reading the quarterly reports filed by any publically traded firm.
The question that the article should be asking is why are US firms not investing this cash and creating more jobs? The answer to this could be found by having a conversation with almost any business owner. If I don’t have predictability, any semblance of cost stability in a given jurisdiction, I may not be willing to invest in that jurisdiction. I wish I had time to investigate this, i really do. It wouldn’t suprise me to see capital outflows heading outside the US to stable jursidictions.
Obama has restructured a considerable portion of the US tax code, required health care insurance from all Americans, invested trillions in stimulus spending. The only thing that businesses can infer from this is that they have absolutely no idea what the hell the government will do next. The rhetoric against corporate fat cats continues to spew, and thus companies continue to hoard money. Why would they invest in new factories if they don’t know what costs will be one month, six months, 12 months down the road? The continued stimulus spending drives up the cost of low-skilled labour in numerous jurisdictions, further preventing these companies from expanding. A recession is supposed to be an opportunity for companies to buy up low priced capital/labour, but if the economy isn’t allowed to correct itself, how will this happen? Throwing trillions of dollars at a few industries will reduce the supply of given types of labour.
The situation isn’t that complicated, and we saw it in Alberta not that long ago. The boom forced up the price of labour because private industry, governments, and small business were all competing for access to the same labour pool. The price was driven up, and expansion slowed. The government restructed royalty rates, tearing up dozens of long term contracts with industry. Industries responded by reducing expansion. The inability of a firm to trust a government is a dangerous precident. Firms might as well invest in Venezuala. At least they know Chavez can guarantee cheap labour. Even Russia, with questionable property rights, has allowed for predictability. You want to see growth? Stop screwing with the economy. You won’t see expansion as long as you keep re-structuring something every other week.
The development presents something of a chicken-and-egg situation: Corporations keep saving, waiting for the economy to perk up — but the economy is unlikely to perk up if corporations keep saving.
This situation underscores the limits of Washington policy makers’ power to stimulate the economy. The Federal Reserve has held official interest rates near zero for almost two years, which allows corporations to sell bonds with only slightly higher returns — even below 1 percent. But most companies are not doing what the easy monetary policy was intended to get them to do: invest and create jobs.
The companies aren’t investing and creating jobs because the government isn’t doing what will allow companies to invest and create jobs. The answer is simple, and it should be easier for government. Do as little as possible. The results will be fantastic.
