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.