Tag Archives: economic

Are Corporations Hoarding Cash? It’s Complicated.

by ArdenCulbert Posted on March 18, 2014

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Over at the newly launched—or relaunched—FiveThirtyEight.com, Ben Casselman updates us on the enormous mountains of cash that have been piling up in company treasuries ever since the recession ended:

One of the early narratives of the economic recovery was that companies were “hoarding” cash….The data backed up the story: The Federal Reserve in 2011 reported that American companies had more than $2 trillion stashed away in overflowing vaults.

Then the Fed revised its data. New figures released in early 2012, based on more complete tax filings, showed that American companies actually had close to half a trillion dollars less cash than previously thought….The revision didn’t just change the numbers—it undermined the whole narrative.

….It’s understandable that so many experts bought into the “cash on the sidelines” narrative. What’s less understandable is that they’re still buying into it. Despite the big revision, the corporate-cash narrative remains very much alive.

Hmmm. I think there’s a little more to it. It’s true that two years ago the Fed revised down its corporate cash estimate1 for the first quarter of 2012 from $2.2 trillion to $1.7 trillion. But even taking that into account, corporations have been increasing their cash holdings about 15 percent per year since 2008. In 2013 corporate cash increased another 12 percent. That’s a pretty steep increase.

Beyond that, David Cay Johnston estimates that when you count cash worldwide, not just domestically, American corporations are holding something like $7.9 trillion in liquid assets. He calculates that this number has grown six times faster than corporate revenues since 1994. “When liquid assets grow six times faster than revenues, it tells you that companies are hoarding cash, not investing or spending.”

Now, it’s true that the huge spike initially reported in 2011-12 was mostly illusory. But it’s not clear to me that this undermines the entire “cash hoarding” narrative. Even without that spike, corporate cash holdings have been growing strongly over the past decade. What’s more, corporate profits have been booming ever since the recession ended—without a correspondingly dramatic increase in capital expenditures.

There are plenty of other arguments floating around. If you remove the tech sector, the whole phenomenon looks less dramatic. Corporate debt has been increasing too thanks to ultra-low interest rates, which suggests that companies are simply making a rational decision to borrow rather than spend their own cash. Cash overseas is piling up because companies don’t want to repatriate it and pay the taxes that would be due. Etc.

In other words, it’s complicated. I think Casselman has a point that the Fed’s revision wasn’t very widely reported or acknowledged, but I’m not sure that’s quite as damning as he suggests. The corporate cash pile-up, though less startling than we thought in 2012, is still real. Probably.

1Actually, this is an estimate of “liquid assets.” We’re just using cash here as shorthand.

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Are Corporations Hoarding Cash? It’s Complicated.

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Relearning the Past: Yes, Rising Inequality is Bad for Economic Growth

by LynetteF1 Posted on February 27, 2014

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Does high income inequality lead to lower economic growth? There are two main reasons to think it might. The first is simple: rich people spend a smaller percentage of their income than the non-rich. Thus, as more and more income accrues to the rich, we get less net consumption and thus slower growth.

The evidence on this score turns out to be pretty hazy. It seems logical, but if you look at consumption trends over time you just don’t see it. But there’s a second theory that’s more interesting: as inequality rises, the rich increasingly need to find good places to invest all the money they’re accumulating. Eventually concrete business opportunities start to become scarce, so they look around for other places to put their money to work. In practice, this means the rich become net lenders to the middle class. They can hardly be loaning money to each other, after all, since they all have more of it than they can use for current consumption.

So the rich lend money to the middle class, which is an eager recipient because their incomes are stagnant. But as the debt load of the middle class increases, this lending becomes ever more Byzantine and ever more risky. Eventually, the middle class simply can’t take on more debt and the whole system comes to a screeching halt. The result is an economic recession as consumers try to work themselves out from under the mountain of debt they’ve run up.

There’s an intriguing amount of evidence to back up this theory, and in a new report released yesterday a team of IMF researchers provides another reason to believe it. They find that high inequality is indeed associated with slower growth, but the mechanism for that slower growth comes in reduced growth spells. That is, it’s not that countries with high inequality have steady growth rates that happen to be a little lower than countries with low inequality. Rather, they have shorter spells of economic expansion. In particular, the authors find that a 1-point increase in a country’s GINI score (a measure of inequality) is associated with a decrease of about 7 percent in the length of its growth spells.

In other words, countries with high inequality simply can’t maintain economic booms as long as countries with lower inequality. This is consistent with the idea that growth in these countries is driven partly by the rich loaning money to the middle class, which is obviously less sustainable than growth driven by an increase in middle-class wages. In high-inequality countries, growth is too dependent on financialization and leverage. When the merry-go-round stops, as it inevitably must, the boom times are over.

The IMF team also found that—within reason—redistribution doesn’t seem to harm growth. In fact, just the opposite: “The combined direct and indirect effects of redistribution—including the growth effects of the resulting lower inequality—are on average pro-growth.”

To pick up on the theme of the previous post, this is something we all understood back in the era when unions were powerful advocates for the middle class. Of course rising middle-class wages are a prerequisite for sustainable growth in a mixed consumer economy like ours. And the more stagnant those wages are—and the aughts were by far the worst decade for stagnant wages since World War II—the more fragile economic growth is.

Now we have an IMF report to add to the technical evidence that middle-class wage stagnation is bad for the economy. But who has the raw political power to force the business community to listen to it?

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Relearning the Past: Yes, Rising Inequality is Bad for Economic Growth

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The Tech Revolution Might Kill Economic Growth But Make Us All Happier Anyway

by d3gz0t Posted on February 19, 2014

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Matt Yglesias makes a point worth sharing about technology and economic growth:

It seems entirely conceivable to me that future technological progress simply won’t lead to that much economic growth. If we become much more efficient at building houses, that will increase GDP, because the output of the housing sector is selling housing. But the output of the health care sector is selling health care services, not curing illnesses, and sick people already buy a lot of health care services. People with cancer tend to buy cancer treatments. If those treatments become more effective at curing cancer, that’d be great for patients and their families but it’s not obvious that it would raise “productivity” in the economic sense.

Yglesias provides a couple of example of this ambiguity. The printing press didn’t do much for GDP growth, because books just aren’t a big segment of the economy and never have been. But that doesn’t mean the printing press wasn’t a revolutionary invention. Likewise, if someone invented a pill that cured cancer, that might actually reduce GDP by eliminating all the money we spend on cancer care. But it would still be a huge contribution to human welfare.

This is a point that plenty of economists have made, but it’s worth repeating. Facebook is a big deal, but it hasn’t added an awful lot to measured GDP. In terms of the market economy, it employs a few thousand people, owns some buildings, and operates some large server farms. That’s not a huge contribution. On the flip side, if 100 million people spend more time on Facebook and less time going to the movies or reading books, it could actually be a net GDP loser. Ditto for video games, which might reduce economic output if the time and energy spent buying games and game consoles is less than what people used to spend all those hours on.

This isn’t a bulletproof case. It’s just meant to illustrate a point. If, in the future, we spend a lot more time on activities that are relatively cheap to produce—social networking, video games, virtual reality, etc.—we could end up in a world where people are as happy as they are now (or happier) with far less in the way of the traditional production of market goods. I doubt that this dynamic has had much effect on growth yet, but it’s quite possible it will in the future. Living in the Matrix is pretty cheap, after all.

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The Tech Revolution Might Kill Economic Growth But Make Us All Happier Anyway

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Forget TV, It’s Internet Access at Stake in the Comcast Deal

by KathleenEdmundl Posted on February 17, 2014

Mother Jones

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Paul Krugman says we made a mistake when we stopped worrying about monopolies:

At first, arguments against policing monopoly power pointed to the alleged benefits of mergers in terms of economic efficiency. Later, it became common to assert that the world had changed in ways that made all those old-fashioned concerns about monopoly irrelevant. Aren’t we living in an era of global competition? Doesn’t the creative destruction of new technology constantly tear down old industry giants and create new ones?

The truth, however, is that many goods and especially services aren’t subject to international competition: New Jersey families can’t subscribe to Korean broadband. Meanwhile, creative destruction has been oversold: Microsoft may be an empire in decline, but it’s still enormously profitable thanks to the monopoly position it established decades ago.

….And the same phenomenon may be playing an important role in holding back the economy as a whole. One puzzle about recent U.S. experience has been the disconnect between profits and investment. Profits are at a record high as a share of G.D.P., yet corporations aren’t reinvesting their returns in their businesses. Instead, they’re buying back shares, or accumulating huge piles of cash. This is exactly what you’d expect to see if a lot of those record profits represent monopoly rents.

It’s time, in other words, to go back to worrying about monopoly power, which we should have been doing all along. And the first step on the road back from our grand detour on this issue is obvious: Say no to Comcast.

I can’t find anything to disagree with here. Our current situation is mostly a result of the Borkian revolution in antitrust law, which began in the 1970s and has since upended the way courts think about monopolies. Instead of caring about competition per se—or its lack—Bork invented a beguiling tautology in which any company with lots of customers is ipso facto creating a lot of consumer welfare and must therefore be OK. And since successful monopolies always have lots of customer, consumers must be benefiting.

This has been a huge mistake. Competition is what drives creative destruction, and it’s valuable for its own sake. We’ve lost sight of that, and it’s time to reverse course.

In the case of Comcast, of course, it’s possible to argue that cable TV is already a monopoly in every geographical area, so it doesn’t really matter who the monopolist is. That’s not entirely true, but it’s true enough to give one pause. More clearly dangerous, though, would be Comcast’s newfound monopoly over broadband internet in half the country. There are, theoretically, multiple ways to get broadband internet in your home, but in practice you’re limited to cable in about 90 percent of the country. That monopoly has given us some of the world’s worst broadband, both painfully slow and painfully expensive.

What’s more, as Michael Hiltzik points out, broadband is a direct competitor to cable in the streaming video market, and having a single company with a monopoly position in both is just begging for trouble. Comcast will almost certainly be willing to make promises of net neutrality in order to win approval for its merger with Time-Warner, but those promises will be short-lived. The truth is that if this deal were allowed to go through under any circumstances, it would probably deal a serious blow to our ability to use the internet the way we want, not the way Comcast wants us to.1 But if it goes through under our actual existing current circumstances, in which enforcement of net neutrality has already been reduced to a husk of its former self, then we can just kiss streaming video goodbye.

Our real public priority ought to be figuring out a way to insist on broadband competition. There are various ways of doing this, some more free-marketish than others. But that should be the minimum price for approving this merger. A bigger cable TV provider might or might not be dangerous. A bigger monopoly in broadband internet will undeniably be. Competition is the answer to this, the more the better.

1Just to be clear for those new to this, Comcast wants us to use the internet only in ways that don’t interfere with the money they make from bringing TV and other video streams into our homes. In other words, their self-interest is directly opposed to net neutrality: they will push at every turn to block, slow down, or otherwise interfere with access to high quality streaming video over the internet. They want you to get that stuff from Comcast via cable TV, not via Netflix or Hulu or BitTorrent or any other provider via high-speed broadband.

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Forget TV, It’s Internet Access at Stake in the Comcast Deal

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You don’t have to live on a coast to get flooded out by climate change

by PiperNTZqsvydfw Posted on February 15, 2014

You don’t have to live on a coast to get flooded out by climate change

By

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Sub-Saharan? More like tragically submarinin’.

The landlocked country of Zimbabwe has been ravaged by deadly floods since heavy rains set in last month. It’s the latest soggy chapter in a climate-changed region where the number of people affected by cyclones and flooding has increased sixfold over two decades. SW Radio Africa reports on the Zimbabwean inundation:

Many parts of the country, from Muzarabani up in the north to Beitbridge down in the south, are now experiencing the worst floods in many years, as water inundates villages, farms, homes and major vital roads. …

Weeks of heavy rain have left large parts of the Masvingo, Midlands and Matabeleland South provinces under water with the levels of most dams and rivers appearing to have peaked, leaving the situation critical in many areas, particularly along rivers.

The crisis has prompted the country’s leaders to plead for international aid. They are asking for $20 million of assistance to evacuate more than 2,000 families living downstream from the Tokwe-Mukorsi dam, which is so overladen with water that experts fear it is about burst.

Such floods may be a symptom of climate change, which is also ravaging the impoverished country with rising temperatures and increasingly frequent droughts.

“When these capitalist gods of carbon burp and belch their dangerous emissions, it’s we, the lesser mortals of the developing sphere, who gasp and sink and eventually die,” President Robert Mugabe said at the 2009 U.N. climate conference in Copenhagen. (Fair point. But he might have more credibility if he weren’t a corrupt and violent tyrant.)

The following graph from a paper published last year in the International Journal of Humanities and Social Science reveals how erratic the nation’s rainfall is becoming:

Philippe Rekacewicz, UNEP/GRID-Arendal

Click to embiggen.

The University of Zimbabwe researchers who authored the paper described global warming’s impacts on the nation’s farmers:

The past three decades have been characterized by an erratic rainfall pattern over Africa’s sub-tropics and a significant decline in the amount of rainfall. This has resulted in droughts which have significantly affected agriculture and food production. Crops and livestock have failed to quickly adapt to these harsh climatic conditions. Research on the impacts of climate change in Zimbabwe shows that the country’s agricultural sector is already suffering from changing rainfall patterns, temperature increases and more extreme weather events, like floods and droughts.

The rising frequency of floods in southern Africa isn’t limited to Zimbabwe, as the following chart from the paper shows:

International Journal of Humanities and Social ScienceClick to embiggen.


Source
Worst flooding in years swamps Zimbabwe, SW Radio Africa
Thousands at risk as rains strain Zimbabwe dam: government, Reuters
The Effects of Climate Change and Variability on Food Security in Zimbabwe: A Socio-Economic and Political Analysis, International Journal of Humanities and Social Science

John Upton is a science fan and green news boffin who tweets, posts articles to Facebook, and blogs about ecology. He welcomes reader questions, tips, and incoherent rants: johnupton@gmail.com.

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You don’t have to live on a coast to get flooded out by climate change

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Economy Grows Fairly Decently in Q4

by Teofilnpc Posted on January 30, 2014

Mother Jones

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Economic growth slowed down a bit in Q4, but remained fairly healthy. The BEA announced today that real GDP increased 3.2 percent last quarter, due almost entirely to private sector growth. Slowdowns in federal spending actually cut GDP growth by 0.98 percent—about two-thirds due to cuts in defense spending and one-third due to cuts in domestic spending. This is the price of austerity: if federal spending were growing at a normal rate at this point in a recovery, GDP growth last quarter probably would have stood at around 4.5 percent or so.

Everything else was pretty positive:

The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and state and local government spending that were partly offset by negative contributions from federal government spending and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

Consumer spending increased decently, and inflation was extremely subdued at 1.2 percent. All in all, a decent report, if not a spectacular one. Now we all get to wait and see if it’s good enough to offset all the turmoil in emerging markets that’s got everyone so jittery.

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Economy Grows Fairly Decently in Q4

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Why Have Investors Given Up on the Real World?

by BettyWhitefoord Posted on January 13, 2014

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How should we respond to sustained economic weakness? Brad DeLong has a lengthy post today comparing two approaches. To oversimplify, we have Larry Summers on one side, who believes the answer is higher government spending on infrastructure. On the other side is Olivier Blanchard, the IMF’s chief economist, who thinks the answer is higher inflation.

In a nutshell, the argument for higher inflation is simple. Right now, with interest rates at slightly above zero and inflation running a little less than 2 percent, real interest rates are about -1 percent. But that’s too high. Given the weakness of the economy, the market-clearing real interest rate is probably around -3 percent. If inflation were running at 4-5 percent, that’s what we’d have, and the economy would recover more quickly.

There are two arguments opposed to this. The first is that central banks have demonstrated that 2 percent inflation is sustainable. But what about 5 percent? Maybe not. If central banks are willing to let inflation get that high, markets might conclude that they’ll respond with even higher inflation if political considerations demand it. Inflationary expectations will go up, the central bank will respond, and soon we’ll be in an inflationary spiral, just like the 1970s.

The second argument is the one Summers makes: sustained low interest rates are almost certain to lead to asset bubbles. So even if higher inflation works in the short run, it’s a recipe for disaster in the long run.

DeLong draws several conclusions from this. He agrees that higher government spending is a good idea—and so do I. The drop in government spending since 2010 has been unprecedented in recent history (see chart below). He’s ambivalent about a higher inflation target, since he agrees that at some level it risks turning into a spiral. (But he’s not sure what that level is.) And finally, he thinks the real demand-side problem is in residential construction, which has plummeted since the housing bubble burst. This could be addressed with policy changes at the FHFA, which might be a better alternative than higher inflation anyway. I have two observations about all this:

Central bankers seem to think that over the past 30 years they’ve demonstrated credibility in restraining inflation, something they’re loath to give up. That’s why they hate the idea of raising their inflation targets above 2 percent. But it strikes me that they may be wrong: what they’ve really done is demonstrate credibility in following the Taylor Rule, which provides a formula-based target for short-term interest rates. But right now, the Taylor Rule suggests that interest rates should be below zero.1 A higher inflation target that’s in service of rigorously following the Taylor Rule might increase the monetary credibility of central banks, not decrease it. (Or, possibly, have no effect at all on their credibility.)
The Summers view that sustained low interest rates lead to bubbles may be correct. But this is only true if there just flatly aren’t enough good real-world investment opportunities available, which would leave investors with no place to put their money except in risky asset plays. DeLong seems to agree with this. When Ryan Avent asks, “Are we really arguing that there aren’t enough good private investment opportunities in America?” DeLong answers, “Yes. We are.”

DeLong has much more to say about all this, and I’m dangerously oversimplifying here. But I’m doing it to make a point. First, I think central banks have a lot of leeway to pursue higher inflation as long as they’re clear about what they’re doing and can credibly say that they’re merely following the same monetary rules they’ve been following for the past three decades. Second, it’s surprising that we haven’t paid more attention to the suggestion that asset bubbles are the result of a (permanent?) condition in which there simply aren’t enough good private investment opportunities. This deserves way more discussion, not just a footnote in a broader essay. If it’s true, surely this is the economic challenge of our day. No matter what else we do, we’re in big trouble if markets simply don’t believe there are enough factories to expand or new companies to invest in. If investors have essentially given up on the real economy, no amount of fiscal or monetary policy will save us.

So why isn’t this getting more discussion?

1Actually, this depends on which version of the Taylor Rule you use. But let’s leave that for another day. For now, it’s enough to say that there’s a conventional version of the Taylor Rule which says real interest rates should be well below zero.

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Why Have Investors Given Up on the Real World?

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Chart of the Day: American Cars Are Getting Older

by Anatoleia3 Posted on January 3, 2014

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Americans are keeping their cars longer than ever before. In 2007, the average age of cars on the road was a little over 10 years. Today it’s a little over 11 years.

The proximate cause of this is the Great Recession. If you don’t have enough money to buy a new car, you’re going to keep your car longer. But I wonder how much is the result of cars being more reliable than in the past? My car is nearly 13 years old, and it basically still runs fine. A couple of decades ago, even a Toyota would have been getting a little long in the tooth at that age.

This mainly matters because it has an impact on what happens over the next few years as the recovery (hopefully) picks up steam. New car sales are a prime driver of economic recoveries, and if the aging of the US fleet is producing pent-up demand for new cars, this will help the economy. But if consumers are keeping their cars a little longer because they still run fine, then there might not be as much pent-up demand as we think.

We’ll have to wait and see, because current data is inconclusive. Automakers had a pretty good year in 2013, but they finished up with a tepid December. And the existing fleet continued to age in 2013 despite those strong sales. Considering the higher reliability of modern cars and the weakness of the recovery, I wouldn’t be surprised if car sales in 2014 are OK but not great, and the fleet continues to age a bit.

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Chart of the Day: American Cars Are Getting Older

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Liz Cheney’s 1988 Op-Ed on Anti-Apartheid Protestors: "Nobody’s Listening"

by BeulahI86tb Posted on December 10, 2013

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In a 1988 op-ed for her college newspaper, Liz Cheney, the daughter of Vice President Dick Cheney who is now running for the Republican Senate nomination in Wyoming (and kicking up a family feud and a GOP civil war), had a stern message for anti-apartheid activists campaigning for freedom in South Africa: “frankly, nobody’s listening.”

The Cheney family has a complicated history regarding South Africa and the effort to end the racist regime that ruled that nation for 46 years. When he was a congressman, Dick Cheney voted against imposing economic sanctions on South Africa’s apartheid government and opposed a resolution calling for Nelson Mandela to be released from prison, saying Mandela was a “terrorist”—a position Cheney defended as recently as 2000, when he ran for vice president. Liz Cheney, who is hoping to unseat three-term GOP Sen. Mike Enzi, has not spoken publicly on Mandela since his death last week. Her campaign did not respond to a request for comment.

In the 1980s, when Liz Cheney was attending Colorado College, a campus group called the Colorado College Community Against Apartheid led regular demonstrations to push the college to adopt a policy of divestment—a form of economic protest in which the college would agree not to invest in companies that had business interests in South Africa. Throughout the country in those years, students at universities and colleges were pushing administrations and boards to dump their investments in firms that engaged in commerce with South Africa, including such corporate powerhouses as IBM. The Colorado College group, as did protesters on other campuses, constructed a “shanty town” on the quad, and it organized an on-stage demonstration at the school’s 1987 graduation ceremony. That year’s commencement speaker: Liz Cheney’s mother, Lynne.

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Liz Cheney’s 1988 Op-Ed on Anti-Apartheid Protestors: "Nobody’s Listening"

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Nuns’ Group Responds After Rush Limbaugh Says Pope Spouts "Pure Marxism"

by TrinidadOctoman Posted on December 4, 2013

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In late November, when Pope Francis promised to remake the Catholic Church as a decentralized institution that would agitate against the economic injustices of capitalism, Rush Limbaugh was quick with an explanation: “Somebody has either written this for him or gotten to him.”

Limbaugh’s remarks—in which he also assailed the Pope’s agenda as being “pure Marxism”—have drawn the ire of many Catholics, and one group, Catholics in Alliance for the Common Good, is already calling for the radio host to apologize.

On Wednesday, Donna Quinn, who coordinates the National Coalition of American Nuns, a liberal activist group of several thousand nuns, joined the Catholics denouncing Limbaugh’s comments.

“Men and women who are educated and those who have street smarts see right thorough those kind of statements,” she says. (Quinn, who is well-known for her support of gay marriage and reproductive rights, notes that she is a big supporter of Sandra Fluke, the women’s rights activist who gained national notoriety when Limbaugh called her a “slut” and “prostitute” on his program.)

Quinn adds that although she does not count herself among those “smitten” with Pope Francis—”enough of the words,” she says, “we want to see some action”—she is troubled by Limbaugh’s callousness toward the people about whom Pope Francis was speaking. “In these dire times…those are the people that it would behoove Rush to take a look at. To see what’s best, not for his program or for his rowdy statements, but rather for the people of God.”

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Nuns’ Group Responds After Rush Limbaugh Says Pope Spouts "Pure Marxism"

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