Because they can

Q: Why are corporations sitting on mounting piles of cash? A: Because they can.

All kinds of folks (like Paul Krugman, Tyler Cowen, Noah Smith, and Timothy Taylor) are trying to figure out why U.S. corporations are holding their earnings in short-term marketable securities instead of, for example, investing them or distributing them to shareholders.

So, what’s going on? First, income is being redistributed from labor income to corporate profits.

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Second, of these profits, the ratio of cash to net assets is at an all-time high.

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Corporations are sitting on large piles of cash because, first, the amount of surplus they’re able to appropriate from workers has been increasing and, second, they’ve chosen to keep a large chunk of those profits in the form of cash until they have the opportunity to use them to make even more profits.

In other words, corporations are sitting on the profits because, within current economic arrangements, it’s their decision to do what they want with the enormous surplus in their hands. If they don’t want to accumulate capital—and thus create jobs for the millions of unemployed workers—or distribute it to shareholders—and thus enriching the top 1 percent even further—they don’t have to.

They’re doing what they’re doing because they can.

Politics, economics, and business cycles

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In the midst of the Second Great Depression, mainstream economists continue to heap scorn on one another concerning the relative merits of their “screw-the-unemployed” monetary-policy-has-no-effect and “hydraulic Keynesian” IS-LM-in-the-liquidity-trap models.

And they continue to ignore the “political-business-cycle” model of Michal Kalecki, which I wrote about a year ago, and which has been rediscovered by Steve Waldman.

Here is Kalecki describing with preternatural precision the so-called “Great Moderation”, and its limits:

The rate of interest or income tax [might be] reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.

Dude wrote that in 1943.

What we’re watching right now is a race to the bottom, with both interest rates and income taxes, in an attempt to boost private consumption and investment. The result is that corporate profitability and income inequality continue to rise and, yet, full employment remains as elusive as ever.

*The graph shows the real (deflated) Federal Funds Rate, which is the interest rate at which banks trade with each other (usually overnight, on an uncollateralized basis) the balances they hold at the Federal Reserve. This is the rate Casey Mulligan got wrong in his initial post, and later had to correct.

Chart of the day

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I would have written “chart of the day, year, and probably decade” if it included data for stagnant real wages. Then, it would be the single most important chart of the Second Great Depression.

As it stands, it indicates that

since the Great Recession officially ended in June of 2009 GDP, equipment investment, and total corporate profits have rebounded, and are all now at their all-time highs (non-financial profits are near their historic high). The employment ratio, meanwhile, has only shrunk and is now at its lowest level since the early 1980s when women had not yet entered the workforce in significant numbers.

So current labor force woes are not because the economy isn’t growing, and they’re not because companies aren’t making money or spending money on equipment. They’re because these trends have become increasingly decoupled from hiring — from needing more human workers.

Our task is to explain these trends, not as the simple result of the “computer age” (as Andrew McAfee sees it) but as the consequence of the way capitalism is currently being reorganized—culturally, politically, and economically (including technology)—in the midst of the Second Great Depression.

Capitalism 101

That’s how capitalism works!

John Taylor (and, following him, Gregory Mankiw) presents the graph above as if they’ve made some brilliant new discovery: there’s a negative correlation between unemployment and private investment (such that, as unemployment declines private investment goes up—and, conversely, as private investment rises unemployment falls). They’ve discovered nothing but that, within capitalism, private investment is related—as a consequence and determinant (since they’ve measured a correlation, not a relationship of causation in either direction)—to how many jobs are created and people employed.

But, of course, it’s not an iron law. What they’d like to show is that higher capitalist profits lead to more investment and then to lower unemployment. The problem is, first, profits can rise while corporate investment remains stagnant (because of “animal spirits” and capitalists’ unwillingness to make new investments at a particular point in time, as against using profits to buy back equity or to engage in mergers and acquisitions) and, even if investment does go up, it’s quite possible not enough new jobs will be created to keep up with the growth of the labor force (if, for example, the capital-labor ratio rises).

And that’s a pretty good description of what’s happening with U.S. capitalism right now. But you won’t hear that from Professors Taylor and Mankiw, who prefer to stop at the lessons of Capitalism 101.

Update

As it turns out, Taylor arbitrarily chose the initial year—and thus cherry-picked the data—to get the nice correlation he was looking for (and that Mankiw liked so much). According to Justin Wolfers, here’s what the scatter plot looks like if data going back to 1970 are included: