Commentary Magazine


Contentions

The Strike of Capital

In the 1930s an economic phenomenon known as a “strike of capital” helped prolong the Great Depression. A strike of capital occurs when companies, banks, and individuals with capital to invest or money to loan decline to do so for fear that the investments might not prove profitable due to business conditions or government action.

A strike of capital would seem to be what is going on now. As the New York Times noted in an editorial yesterday, American corporations are sitting on vast piles of cash. Apple Corporation alone has about $140 billion in the bank. Altogether publicly-listed corporations in the United States are holding about $4.75 trillion in cash, not far short of one-third of annual GDP. In 1995, they held only about $1.2 trillion in cash, and cash has about doubled as a percentage of corporate assets since that time, to 12 percent.

The Times notes that since interest rates are very low right now, all that money isn’t earning much parked in the bank. But it doesn’t come to grips with why corporations are reluctant to invest right now. Could it have something to do with the fear that federal economic and tax policies, and Obamacare, might either throw the economy back into recession or make any investment less profitable and more risky? Could be.

What companies have been doing is increasing both dividend payments and the buying back of their own stock, both of which tend to increase stock prices, part of the reason the market has been rising.

Instead the Times decries the fact that corporations have been keeping profits earned abroad in foreign countries rather than bringing them home. But while the federal government taxes corporate profits earned abroad, it does so only when that money has been repatriated to the United States. Is the Times editorial board really puzzled as to why so many corporations prefer keeping 100 percent of their earnings abroad rather than having only 65 percent of them here? It seems so. The Times writes:

Some businesses have brazenly proposed that Congress temporarily lower the rate on repatriated profits in exchange for a promise to spend some of that cash on plants and equipment or in dividend payouts. It should not take a tax break for companies to get on with investing for the future. That is what they are supposed to be in business to do.

Actually, corporations are in business to create wealth. Corporate managers “invest in the future” only when that seems the best way to fulfill their fiduciary responsibility to the stockholders to maximize the return on invested capital.



Join the discussion…

Are you a subscriber? Log in to comment »

Not a subscriber? Join the discussion today, subscribe to Commentary »





Welcome to Commentary Magazine.
We hope you enjoy your visit.
As a visitor to our site, you are allowed 8 free articles this month.
This is your first of 8 free articles.

If you are already a digital subscriber, log in here »

Print subscriber? For free access to the website and iPad, register here »

To subscribe, click here to see our subscription offers »

Please note this is an advertisement skip this ad
Clearly, you have a passion for ideas.
Subscribe today for unlimited digital access to the publication that shapes the minds of the people who shape our world.
Get for just
YOU HAVE READ OF 8 FREE ARTICLES THIS MONTH.
FOR JUST
YOU HAVE READ OF 8 FREE ARTICLES THIS MONTH.
FOR JUST
Welcome to Commentary Magazine.
We hope you enjoy your visit.
As a visitor, you are allowed 8 free articles.
This is your first article.
You have read of 8 free articles this month.
YOU HAVE READ 8 OF 8
FREE ARTICLES THIS MONTH.
for full access to
CommentaryMagazine.com
INCLUDES FULL ACCESS TO:
Digital subscriber?
Print subscriber? Get free access »
Call to subscribe: 1-800-829-6270
You can also subscribe
on your computer at
CommentaryMagazine.com.
LOG IN WITH YOUR
COMMENTARY MAGAZINE ID
Don't have a CommentaryMagazine.com log in?
CREATE A COMMENTARY
LOG IN ID
Enter you email address and password below. A confirmation email will be sent to the email address that you provide.