Posts Tagged ‘cash’


The capitalist machine is broken—and no one seems to know how to fix it.

The machine I’m referring to is the one whereby the “capitalist” (i.e., the boards of directors of large corporations) converts the “surplus” (i.e., corporate profits) into additional “capital” (i.e., nonresidential fixed investment)—thereby preserving the pact with the devil: the capitalists are the ones who get and decide on the distribution of the surplus, and then they’re supposed to use the surplus for investment, thereby creating economic growth and well-paying jobs.

The presumption of mainstream economists and business journalists (as well as political and economic elites) is that the capitalist machine is the only possible one, and that it will work.

Except it’s not: corporate profits have been growing (the red line in the chart above) but investment has been falling (the blue line in the chart), both in the short run and in the long run. Between 2008 and 2015, corporate profits have soared (as a share of gross domestic income, from 3.9 to 6.3 percent) but investment has decreased (as a share of gross domestic product, from 13.5 to 12.4 percent). Starting from 1980, the differences are even more stark: corporate profits were lower (3.6 percent) and investment was much higher (14.5 percent).

The fact that the machine is not working—and, as a result, growth is slowing down and job-creation is not creating the much-promised rise in workers’ wages—has created a bit of a panic among mainstream economists and business journalists.

Larry Summers, for example, finds himself reaching back to Alvin Hansen and announcing we’re in a period of “secular stagnation”:

Most observers expected the unusually deep recession to be followed by an unusually rapid recovery, with output and employment returning to trend levels relatively quickly. Yet even with the U.S. Federal Reserve’s aggressive monetary policies, the recovery (both in the United States and around the globe) has fallen significantly short of predictions and has been far weaker than its predecessors. Had the American economy performed as the Congressional Budget Office fore­cast in August 2009—after the stimulus had been passed and the recovery had started—U.S. GDP today would be about $1.3 trillion higher than it is.

Clearly, the current recovery has fallen far short of expectations. But then Summers seeks to calm fears—”secular stagnation does not reveal a profound or inherent flaw in capitalism”—and suggests an easy fix: all that has to happen is an increase in government-financed infrastructure spending to raise aggregate demand and induce more private investment spending.

As if rising profitability is not enough of an incentive for capitalists.

Noah Smith, for his part, is also worried the machine isn’t working, especially since, with low interest-rates, credit for investment projects is cheap and abundant—and yet corporate investment remains low by historical standards. Contra Summers, Smith suggests the real problem is “credit rationing,” that is, small companies have been shut out of the necessary funding for their investment projects. So, he would like to see policies that promote access to capital:

That would mean encouraging venture capital, small-business lending and more effort on the part of banks to seek out promising borrowers — basically, an effort to get more businesses inside the gated community of capital abundance.

Except, of course, banks have an abundance of money to lend—and venture capital has certainly not been sitting on the sidelines.

Profitability, in other words, is not the problem. What neither Summers nor Smith is willing to ask is what corporations are actually doing with their growing profits (not to mention cheap credit and equity funding via the stock market) if not investing them.


We know that corporations are not paying higher taxes to the government. As a share of gross domestic income, they’re lower than they were in 2006, and much lower than they were in the 1950s and 1960s. So, the corporate tax-cuts proposed by the incoming administration are not likely to induce more investment. Corporations will just be able to retain more of the profits they get from their workers.

But corporations are distributing their profits to other uses. Dividends to shareholders have increased dramatically (as a share of gross domestic income, the green line in the chart at the top of the post): from 1.7 percent in 1980 to 4.6 percent in 2015.


source (pdf)

Corporations are also using their profits to repurchase their own shares (thereby boosting stock indices to record levels), to finance mergers and acquisitions (which increase concentration, but not investment, and often involve cutting jobs), to raise the income and wealth of CEOs (thus further raising incomes of the top 1 percent and increasing conspicuous consumption), and to hold cash (at home and, especially, in overseas tax havens).

And that’s the current dilemma: the machine is working but only for a tiny group at the top. For everyone else, it’s not—not by a long shot.

We can expect, then, a long line of mainstream economists and business journalists who, like Summers and Smith, will suggest one or another tool to tinker with the broken machine. What they won’t do is state plainly the current machine is beyond repair—and that we need a radically different one to get things going again.


No one can deny the United States faces an epidemic of poverty.* Not when more than one in five American children live in poverty.

But some significant portion of the political and economic elite in the United States chooses to blame the poor for their plight and to deny that handing them cash will significantly improve their plight.

But they can’t simply ignore the results of studies like the one conducted by Jane Costello [ht: sm], an epidemiologist at Duke University Medical School, after the Eastern Band of Cherokee Indians in North Carolina’s Great Smoky Mountains decided to distribute the profits from their casino among its members.

Professor Costello wondered whether the extra money would change psychiatric outcomes among poor Cherokee families.

When the casino opened, Professor Costello had already been following 1,420 rural children in the area, a quarter of whom were Cherokee, for four years. That gave her a solid baseline measure. Roughly one-fifth of the rural non-Indians in her study lived in poverty, compared with more than half of the Cherokee. By 2001, when casino profits amounted to $6,000 per person yearly, the number of Cherokee living below the poverty line had declined by half.

The poorest children tended to have the greatest risk of psychiatric disorders, including emotional and behavioral problems. But just four years after the supplements began, Professor Costello observed marked improvements among those who moved out of poverty. The frequency of behavioral problems declined by 40 percent, nearly reaching the risk of children who had never been poor. Already well-off Cherokee children, on the other hand, showed no improvement. The supplements seemed to benefit the poorest children most dramatically. . .

A cash infusion in childhood seemed to lower the risk of problems in adulthood. That suggests that poverty makes people unwell, and that meaningful intervention is relatively simple.

I understand, the idea that cash infusions directly and dramatically improve the lot of the poor runs against the grain of a discourse according to which anything and everything should be done to make sure people are forced to have the freedom to sell their ability to work for a wage in order to survive.

But that just means the members of the elite prefer to keep poor people dependent on them and their decisions about when and where to hire them, and to continue to ignore the “relatively simple” means whereby we can actually eliminate the epidemic of poverty and its consequences—on children and adults alike—in the United States.

*OK, not quite. There is a small group of neoclassical economists, the “poverty deniers,” determined to fiddle with the numbers in order to show that poor Americans are not all that poor.

Chart of the day

Posted: 6 October 2013 in Uncategorized
Tags: , , , ,



U.S. corporations are sitting on a lot of cash right now, and they’re not using it to hire more laborers. Instead, they’re moving some of it to offshore tax havens and using the rest for dividends, buybacks, and acquisitions in the United States.

According to Emily Chasan, U.S. nonfinancial companies held $1.48 trillion in cash as of 30 June, which is up about 2 percent from $1.45 trillion at the end of last year, and up 81 percent from $820 billion at the end of 2006.

The technology sector had the largest amounts of cash in its coffers, holding some $515 billion, followed by the health care and pharmaceuticals industries which held $146 billion in cash.

Both of those industries often move intellectual property and drug patents to low tax jurisdictions, which lets earnings from those assets pile up offshore to avoid paying a U.S. tax rate of 35%. Moody’s estimated overseas corporate cash represented 61% of the total, or about $900 billion, up from $840 billion at the end of last year.

What is it the Moor wrote about hoarding back in 1867?

money itself is a commodity, an external object, capable of becoming the private property of any individual. Thus social power becomes the private power of private persons.


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.



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



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.