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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

September 16, 2013 at 10:52 AM

Why companies are keeping so much cash

Since the end of the recession, U.S. public companies have amassed record amounts of cash. They’re not using it to hire people or, in many cases, to develop new products and services. Instead, it is sitting in corporate treasuries — or more likely, bouncing around the shadow banking system. Juan Sanchez and Emircan Yurdagul of the Federal Reserve Bank of St. Louis have a new paper that seeks to answer the question, why? I warn you, it’s worky going.

Here’s the shorthand: This is a new phenomenon.  In 2011, companies were holding four times as much cash as in 1995 and 11 times as much as in 1979. The reasons don’t appear to be correlated to research and development, worries over taxes if foreign earnings are repatriated, or volatility in sales and cash flow. The two researchers find a closer tie to uncertainty over productivity and policy.

The first is closely tied to the Great Recession, or, as they write, “the idea is that firms learn from experience.” Companies that entered the Panic of 2008 with a strong cushion survived and performed well. If every Joe and Jill Schmo that answers an online poll believes the financial system remains dangerous, it’s a safe bet that corporate leaders do, too.

Policy uncertainty is a situation that can be argued across the spectrum, from Obamacare on the “left” (even though it was born at the Heritage Foundation and implemented first by Mitt Romney) to the continued hostage taking by the congressional right, holding what used to be the routine raising of the federal debt ceiling to the threat of national default. You can argue it in the comments.

An area that wasn’t explored was the sea change over the past 30 years where maximizing shareholder value has come to be a company’s No. 1 reason for existence. Companies aren’t just holding cash at record levels, corporate profits after taxes are at a historic high. At the least, plenty of cash allows companies to buy goodwill on Wall Street through share buybacks and dividends. Nor do the St. Louis Fed researchers delve into the role of “rent seeking,” where big companies extract “rents” through monopolies/oligopolies, government subsidies and set-asides, etc. Whether this behavior can keep these firms innovative and healthy, much less sharing productivity gains with workers is an open question.

And Don’t Miss: Thinking about doing business | Baseline Scenario

Today’s Econ Haiku:

Larry walked the plank

He’ll find a job on Wall Street

It’s always Summers

 

 

 

Comments | More in Corporate governance

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