Encyclopedia Brown and the Case of the Cash Reserves
October 11, 2012 7:26 AM Subscribe
What am I missing?-filter: I feel like I have a lot of the pieces of this notion that companies are holding onto enormous cash reserves and waiting to see how the election shakes out, but I can't quite put it all together.
The 47% speech is maybe the most obvious manifestation of this idea that the economy would improve with a Republican administration because businesses will "be happier" with that.
What are the components of this? We all know capital exists to make more capital, so companies should always been spending on themselves and not hoarding unless they feel like they spending will not give them sufficient returns. Companies feel personal and corporate tax rates are too high, reducing their incentive to make an investment that increases their marginal tax rate, although I don't see how that math works. (I can see "more worth it" vs. "less worth it", but I can't see "not worth it.") But I don't see what their end game is -- if they made an investment last year, then if their preferred candidate wins, as that investment (in personal, in assets, whatever) moves forward in time, it will be taxed at the new rate, so paying current, higher taxes is a small moment of pain. Because if their candidate doesn't win, surely they're not going to forestall domestic investment for another four years. Are their motivations direct (e.g. it is truly fiscally unwise to invest right now because of "uncertainty") or indirect (e.g. proving a point, like McConnell saying his #1 job was to deny the president a second term)?
Or is this idea that companies are sitting on cash an urban legend? If not, is there precedent for this level of intransigence between the corporate world and Washington?
I'm happy to do outside reading on this matter.
The 47% speech is maybe the most obvious manifestation of this idea that the economy would improve with a Republican administration because businesses will "be happier" with that.
What are the components of this? We all know capital exists to make more capital, so companies should always been spending on themselves and not hoarding unless they feel like they spending will not give them sufficient returns. Companies feel personal and corporate tax rates are too high, reducing their incentive to make an investment that increases their marginal tax rate, although I don't see how that math works. (I can see "more worth it" vs. "less worth it", but I can't see "not worth it.") But I don't see what their end game is -- if they made an investment last year, then if their preferred candidate wins, as that investment (in personal, in assets, whatever) moves forward in time, it will be taxed at the new rate, so paying current, higher taxes is a small moment of pain. Because if their candidate doesn't win, surely they're not going to forestall domestic investment for another four years. Are their motivations direct (e.g. it is truly fiscally unwise to invest right now because of "uncertainty") or indirect (e.g. proving a point, like McConnell saying his #1 job was to deny the president a second term)?
Or is this idea that companies are sitting on cash an urban legend? If not, is there precedent for this level of intransigence between the corporate world and Washington?
I'm happy to do outside reading on this matter.
Best answer: There's clear evidence that a lot of major corporations are sitting on an awful lot of cash. What there is not is clear evidence (note: I did say clear) that this has anything to do with the election. We're still in a recession, and corporations all over the board are gun-shy about doing anything with it that might incur a loss. Consider how incredibly hard it is for many small businesses and consumers to get loans. This isn't necessarily about taxation or politics; if we apply Occam's Razor, the simplest explanation is "They're sitting on cash because they don't feel safe lending it out/spending it in a touchy economy."
posted by Tomorrowful at 7:42 AM on October 11, 2012 [3 favorites]
posted by Tomorrowful at 7:42 AM on October 11, 2012 [3 favorites]
Best answer: I think the idea is a bit apocryphal, though not wholly. First, there are companies like Apple and Google that have huge cash stockpiles--large enough that, in effect, there's not enough they want to spend it on. Apple has been making target acquisitions in the past few years, but it's not like when they bought NeXT--it's just little nibbles. Apple has such an embarassment of riches, in fact, that they began paying a dividend this past quarter. It was just unseemly how much money they had.
Otherwise, I think companies are 1) loath to hire new employees if the work isn't there; 2) reluctant to spend on capex if the business isn't there, and 3) hoping that a new administration will boost the economy to create the work and business in 1) and 2).
It's not as much a marginal tax rate question (obviously, corporations don't really pay at graduated rates anyway), as far as I've seen. A higher rate will allow higher deductions for capex while they're in effect, and facing a rate decrease, businesses attempt to accelerate expenses (to the extent possible and consistent with their accounting method for tax purposes).
Other tax uncertainies do exist--look at the clean energy credit, which applies (in part) to new wind facilities put into operation through, I think, the end of the year. It cannot be overstated how important that credit is to the wind industry--and with it expiring, there has been incredible contraction.
posted by Admiral Haddock at 7:44 AM on October 11, 2012 [1 favorite]
Otherwise, I think companies are 1) loath to hire new employees if the work isn't there; 2) reluctant to spend on capex if the business isn't there, and 3) hoping that a new administration will boost the economy to create the work and business in 1) and 2).
It's not as much a marginal tax rate question (obviously, corporations don't really pay at graduated rates anyway), as far as I've seen. A higher rate will allow higher deductions for capex while they're in effect, and facing a rate decrease, businesses attempt to accelerate expenses (to the extent possible and consistent with their accounting method for tax purposes).
Other tax uncertainies do exist--look at the clean energy credit, which applies (in part) to new wind facilities put into operation through, I think, the end of the year. It cannot be overstated how important that credit is to the wind industry--and with it expiring, there has been incredible contraction.
posted by Admiral Haddock at 7:44 AM on October 11, 2012 [1 favorite]
Best answer: Corporations don't need to plow profits into themselves, they also have the option to return money to shareholders via dividends or share buybacks. In 2004 there was a tax holiday for corporate profit repatriation (which was bad and dumb), my guess is that companies are assuming they would be able to lobby a Republican administration for a repeat, which would save billions in taxes for their shareholders.
posted by ghharr at 7:49 AM on October 11, 2012 [1 favorite]
posted by ghharr at 7:49 AM on October 11, 2012 [1 favorite]
Best answer: It's a bit of a chicken and egg problem: investors aren't investing because there aren't many investment opportunities in a recession, and we're in a recession because investors aren't investing. But I don't think anyone seriously thinks the outcome of the presidential election (either way) will magically kick us out of that feedback loop.
Companies feel personal and corporate tax rates are too high
Both are at their lowest point in decades. "High taxes are stifling the economy" is a partisan talking point, not economic truth.
posted by ook at 7:55 AM on October 11, 2012 [4 favorites]
Companies feel personal and corporate tax rates are too high
Both are at their lowest point in decades. "High taxes are stifling the economy" is a partisan talking point, not economic truth.
posted by ook at 7:55 AM on October 11, 2012 [4 favorites]
Best answer: They are sitting on cash. Its because there are fewer customers. The rest is Mitt lying.
posted by Ironmouth at 8:10 AM on October 11, 2012 [4 favorites]
posted by Ironmouth at 8:10 AM on October 11, 2012 [4 favorites]
Best answer: The reasons companies probably have high cash reserves are 1) not enough demand in this still soft economy for their products and services to warrant investing a lot of that cash in new facilities, plants, and equipment, and 2) a more conservative approach to business as a result of lessons learning in the Great Recession.
What Paul Krugman calls "The Confidence Fairy" is indeed probably just a convenient tool for conservatives to use for political purposes. That is to say, it's largely a myth rather than the reality. However, since there's a CEO who apparently thinks he'll have to fire people if Obama is re-elected, it's not hard to imagine that there are some companies that buy into this myth.
posted by Dansaman at 8:20 AM on October 11, 2012 [1 favorite]
What Paul Krugman calls "The Confidence Fairy" is indeed probably just a convenient tool for conservatives to use for political purposes. That is to say, it's largely a myth rather than the reality. However, since there's a CEO who apparently thinks he'll have to fire people if Obama is re-elected, it's not hard to imagine that there are some companies that buy into this myth.
posted by Dansaman at 8:20 AM on October 11, 2012 [1 favorite]
Best answer: However, since there's a CEO who apparently thinks he'll have to fire people if Obama is re-elected, it's not hard to imagine that there are some companies that buy into this myth.
You'll notice that most of these companies are privately-held and run by egomaniacs/self-styles feudal lords. Sloppy thinking about political risk is not rewarded in large, publicly-held companies, and I'd be seriously shocked if businesspeople - disciplined by investor expectations - are passing on opportunities for profit to spite Obama.
posted by downing street memo at 9:11 AM on October 11, 2012 [2 favorites]
You'll notice that most of these companies are privately-held and run by egomaniacs/self-styles feudal lords. Sloppy thinking about political risk is not rewarded in large, publicly-held companies, and I'd be seriously shocked if businesspeople - disciplined by investor expectations - are passing on opportunities for profit to spite Obama.
posted by downing street memo at 9:11 AM on October 11, 2012 [2 favorites]
I think companies are sitting on this cash because if Romney gets elected, he and the Republicans will sell off Federal government assets from databases to Interstates, and from satellites to National Forests to broadcast spectrum, as Yeltsin did in Russia, and for pennies on the dollar, also as Yeltsin did in Russia.
And companies don't want to be short on cash when steals like that are to be had.
posted by jamjam at 9:20 AM on October 11, 2012 [3 favorites]
And companies don't want to be short on cash when steals like that are to be had.
posted by jamjam at 9:20 AM on October 11, 2012 [3 favorites]
Response by poster: Thanks. "Confidence Fairy" FTW.
posted by blueshammer at 9:21 AM on October 11, 2012 [1 favorite]
posted by blueshammer at 9:21 AM on October 11, 2012 [1 favorite]
This thread is closed to new comments.
No, it is actually true, but it's that capital has no place "to go." Yes, you could use the capital to start a new widget factory, but there's no demand for widgets. You could open a restaurant, but no one would eat there because so many people are unemployed and there wouldn't be customers. The capital could be used to build lots of new housing developments, but who would buy the houses? And so on...
Keynes would argue that we're on the left side of the aggregate supply/demand curve, such that lack of demand means that there's no motivation to increase supply.
The conservative interpretation claims that the problem is about regulatory uncertainty because of the Obama administration, but that doesn't seem to be borne out by economic surveys.
posted by deanc at 7:42 AM on October 11, 2012 [6 favorites]