From Paul Krugman’s blog:
There’s now a lot of talk about the fact that U.S. corporations are sitting on a lot of cash, but not spending it. I don’t find that particularly puzzling: with huge excess capacity, why invest in building even more capacity. But almost everyone seems to agree that if we could somehow get businesses to spend some of that cash, it would create jobs.
Which then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs? (Brad DeLong has tried to make this argument repeatedly).
I didn’t know that U.S. corporations were sitting on a lot of cash, but this sort of ties in to something Yves Smith and Rob Parenteau wrote for the New York Times a couple of days ago, “Are Profits Hurting Capitalism?” In a nutshell, Smith and Parentau argue that over the past decade and a half corporations have been saving more and investing less in their own businesses. Smith and Parenteau continue,
The reason for all this saving in the United States is that public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on.
Rather than incur such expenses, companies increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in purely financial speculation. But this means they also short-circuit a major driver of economic growth.
Krugman says that the corporations need an incentive to stop sitting on all that idle cash. Krugman discusses the famous exchange between President Lincoln and General McClellan, in which Lincoln asked McClellan if he could borrow his army, since McClellan wasn’t using it. Krugman continues,
We don’t literally have to borrow from the corporations; they’re parking their funds in the money market, and the feds would borrow from that market. But the end result would be to put some of that idle cash to work — and, ultimately, to give the corporations a reason to start investing, too, so that the deficit spending would crowd investment in, not out.
To which Brad DeLong adds,
After all, simply rename the United States government something like: “United States Joint-Stock Corporation” and then if it borrows and spends, or even spends more rapidly, employment goes up. The argument for the ineffectiveness of fiscal policy in all of its forms requires a rigid (or, at least, a completely interest-inelastic) velocity of money and money multiplier. And that means that increases in private desires to spend also have no effect save to raise interest rates–the full Say’s Law.
I had never heard of Say’s Law, so I looked it up. Apparently there are a lot of different “Say’s Laws,” including one that seems to support supply-side economics, but I don’t think that’s what Brad DeLong is talking about here. From what I glean from Wikipedia, Says (18th-19th century economist and businessman) said that what really drives an economy is the exchange of commodities, and that money is just a facilitator. That works for me.
I have long thought that we lose sight of what an economic system is for, which is to enable people to trade with each other for goods and services they need and want without having to do face-to-face negotiation for every little thing. So raw materials and finished goods all move to where they need to be without, say, the shoemaker having to barter directly with the tanner, and what if the tanner already has enough shoes?
Further, as I understand it, Say’s Law says the process of producing and exchanging goods and services will drive an increase in real income to purchase goods and services. That’s the part that gets picked up by supply-siders, but the flaw in supply-side theory is that just cutting taxes on businesses doesn’t necessarily translate into investment into more production of goods and services. As we see from the real world, it’s just as likely to create a class of hyper-rich corporate executives who sit on their money.
I think what Brad DeLong is pointing to here is that a desire for goods and services by itself will not grow an economy. It also suggests that when an economy becomes more about acquiring and hoarding money rather than producing goods and services, it will stagnate.
I thought this was all particularly interesting given the discussion that followed the last post. The righties who joined in continue to believe the private sector can save itself. In theory, I suppose it could. But the private sector is sitting on its hands, and there is no “market based” incentive in sight that might persuade it to do otherwise.