Thursday, June 14, 2012

Fed Data Shows Corporations Not Increasing Cash Hoards – But Not Spending It Either

Another Blow to the Myth That Lower Corporate Taxes Are Needed

A bedrock claim of Conservatives is that corporations need lower taxes so they will have the incentive and the financial resources to invest and hire.  Even though effective corporate tax rates are relatively low (Conservatives focus on the statutory rate of 35% which almost no big corporation pays) the argument is that taxes are what is keeping businesses from spending.

The Federal Reserve keeps track of such things like corporate cash, and the Fed recently made news by revising their computation of just how much corporate cash is out there.

The Federal Reserve on Thursday came out with its quarterly “flow of funds” report, which for two years now has reflected the steady increase in the amount of cash on corporate balance sheets. Sure enough, the report showed that corporate cash ticked up yet again in the first quarter of the year by around $12.6 billion, to $1.74 trillion.

But here’s the funny thing about that figure: Back in March, the Fed said nonfinancial companies ended the year with a record $2.23 trillion. The new release revised that figure down to $1.72 trillion. Even for the Fed, a half-trillion-dollar revision is a big deal.

Of course the interesting thing here is that even with the revision corporations still have cash on their books, a lot of cash.

The revised data — at least if it is to be believed — changes all of that. Under the new narrative, companies still rebuilt their reserves in the wake of the financial crisis, boosting their cash holdings from $1.4 trillion at the end of 2008 to $1.7 trillion in mid-2010. Since then, however, the cash hoard has barely budged, as companies neither draw down their reserves nor continue adding to them.

The Fed does not go into detail about why cash balance of companies are not increasing despite record profits.  One explanation is surely that companies are paying down debt and paying shareholders in the form of stock re-purchases.  And companies are investing, even if they are not doing so at a pace that would produce robust economic growth.

But the main thing here is that the Fed now estimates that corporations increased their cash by $12.6 billion and that they now have $1.74 trillion on the books, ready to spend when public policy promotes growth.  As for corporate tax cuts, the main result of that policy will be to place even more cash on the books of companies, not cause more investment.  But that’s okay too, that just means they have more money to supply to political campaigns to generate more tax breaks to have more money to supply to political campaigns to . . .well, you get the picture. 

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