this problem (the fact that companies can't find anything better to do with their cash than hoard it) has been building throughout the bush administration, noticed by everyone other than bush-league economics sycophants for whom nothing has ever been more awesome than the bush economy....

Profits have risen substantially the past ten years, while business investment has not kept pace.

Another significance of these reservoirs of cash is how productivity advancements, starting around 2000, showed up as extraordinary corporate profits, not shared in the form of higher compensation for employees.

Wages flat, productivity grows, profits grow.

Isn't this another result of outsourcing and selling goods manufactured overseas? In the old days, a lot of the assets were in manufacturing plants. Now, they stay in cash -- which is used to buy goods and services from overseas and resell them here.

"Now, they stay in cash -- which is used to buy goods and services from overseas and resell them here."

Not really. If they were using that cash to buy goods, it wouldn't be cash, it would be inventory. Now , obviously that inventory will become cash when it's sold. But that can't be booked as cash until there's a sales contract. If they have excess cash on hand, it means there aren't enough goods to be bought and sold at a profit. Now there are plenty of goods worldwide, so the problem is mostly likely related to soft demand for those products here. Outsourcing isn't the issue. The issue is high corporate profits during a slowing economy. Corporations don't see a good return on money invested now because they see falling demand. So they aren't investing.

OK, can you explain what happens when an asset-heavy company sells its plants and starts importing what it used to manufacture? Do its assets shrink because it no longer owns the plants? Doesn't cash increase if real assets are sold?

I think you're forgetting one of the most important messages or meanings of companies being flush with cash. These companies--including, oh, let's say Microsoft--are profoundly immoral and are, in fact, thieves.

There's a fair price for items. Software, even with development expenses, should cost around $10-$20. It should never cost in the $100-$140 range that Microsoft and other companies their their due. And it should not constantly be superseded and made redundant by new "improved" software full of obnoxious bells and whistles that simply clog and hog the computer's memory.

THAT is why these companies are flush with cash. They don't charge fair prices, they form monopolies, they conspire with their competitors, etc. Why do earplugs, made with 10 or 30 cents worth of foam, all have the same vastly inflated price, no matter the manufacturer? (Not that we're generally talking about the monolithic multinational earplug conglomerates.)

So the question is: Where is this money coming from? It's coming from you and me. And I'm pretty damn poor. And a lot of people are pretty damn poor. I say we bring back the guillotine and revolt and storm River Oaks and slit the throats of all of those rich pigs.

You take a country to such political and economic extremes and the end result is revolution. Period.

From the NYT article:

Stulz team’s paper shows that rising cash levels were, to some degree, influenced by a drop in capital spending on hard assets, which can be used as collateral for borrowing...

Which seems to suggest that, as a company lightens up on tangible assets (which can be because it no longer manufactures what it sells) it needs more cash to operate. Also:

Moreover, cash has traditionally been just one component of “working capital,” along with inventories and accounts receivable. But innovations like “just in time” supply chains and faster payment systems have reduced the role of inventories and accounts receivable and, conversely, raised the role of cash on corporate balance sheets

"OK, can you explain what happens when an asset-heavy company sells its plants and starts importing what it used to manufacture? Do its assets shrink because it no longer owns the plants? Doesn't cash increase if real assets are sold?"

It sure does, but it should only be temporary. The extra cash on hand should be used to generate more profits by buying even more goods to sell. That's how you expand your company. No matter what the source of your cash, it's just being wasted if it's in that form. Cash earns no money, investments earn money. Corporations usually try to find something better to do with their money than making a zero growth investment. But, apparently, there's a shortage positive gain investments. So corporations are deciding that keeping money in cash is better than making a losing investment.

That said, a certain amount of cash is needed to protect the company against interest rate changes or drops in demand. Higher interest rates can lower the value of future profits that may have already been booked under mark to market rules. So cash is needed to hedge those contracts. Also, drops in demand cut revenue and cash is needed to cover debt payments. Companies need flexibility. And they apparently may need it more than investment now. Stocking cash is a good way to protect a company from future rising interest rates and falling demand.

Having cash during an economic downturn is the way to be DOMINANT when the economy turns upward.

If companies aren't currently planning productive investment with the cash that they have, that is a different story.

Actually, the cash on hand is making money interest minus inflation. The companies may just see that there is no better place to have it at this time.

Except, maybe for bigger bonuses for the biggest pigs at the trough.

A lot of cynicism here. This is basically good news, for the cash will stabilize any downturn in the economy or stock market. My red revolutionary days are long gone, so I will take stablizing factors, thank you very much.

1) To what extent are these figures skewed by the tremendous amount of cash accruing to natural-resources producers (i.e. Exxon)? Big Oil, for one, isn't investing in US infrastructure such as refineries, and has no incentive to invest in production (in part b/c higher production would only lower oil prices without significantly increasing demand).

2) As others have pointed out, the excess cash certainly isn't going to workers, whose wages have stagnated for decades. And higher dividends/executive bonuses won't stimulate the economy b/c the folks who receive them, by and large, bank the money (until recently, in real estate) or send it overseas for manufactured goods.

Although it seems downright Marxist to those of us steeped in the myths of capitalism, it seems high profits are destructive to our system, and are emblematic of a dangerous imbalance that leads to recession. Big profits aren't recycled into the economy to enhance demand. Instead, the money is either idled in financial instruments (which are being rapidly devalued), or used for "corporate purposes," which are generally monopolistic.

A healthy capitalist system requires that profitability remains modest, restrained by intense competition for sales and workers.

Rather than cut taxes for people who don't really need the money, wouldn't it make more sense to eliminate them on any excess profits that are distributed to workers?

Wasn't the entire reason for corporate tax cuts (which in fact raises corporate revenue) supposed to provide opportunities for company growth which would provide more jobs, which would provide or contribute to national economic growth? Company profit equals survival. When companies expand they do so through carefully crafted risk mitigation plans. Don't they sometimes need to take uncomfortable risks (spend money)to create growth? So why would companies want to continue to grow and assume unnecessary risk when they already have the revenue they wanted to begin with?

Republicans have regressed in their understanding of economics and public policy to the pre-mercantilist era. Any claim, any explanation, any plan should be assumed to be wrong, since they have demonstrated over their 20 years of running the Presidency since 1981 that they are wrong and do not know what they are doing.

Remember how they whine that we shouldn't have price controls on drugs because that would interfere with PhARMA's profits, er, ability to reinvest? Completely bogus. If PhARMA cared about that they would be investing more in development and less in misleading or unnecessary advertising.

There is also the possibility that a lot of the MBA types that business schools churn out don't have a creative bone in their bodies, except for financial manipulations.

Gosh, I don't supposed these corporations might actually take the money and share it with their employees who are, in fact, the ones making the money? Nyahh. The stockholders would never stand for that, it would lower profits.

Kevin,
When the economy is headed down, you want to be flush with cash. Towards the peak of the boom, many PE firms were paying 8x revenue for acquisitions. That is a very expensive multiple. So smart investors, like Warren Buffett, hold onto their cash at the end of booms and wait for the blue light special that occurs when the market bottoms out.

Holding onto cash doesn't mean there aren't any investment opportunities, it means the ones available are too expensive to justify making them (FYI, cash is not just cash, it means cash plus marketable securities, so that's the return you're trying to beat). At the beginning of every recession, companies are cash heavy. As companies start spending the cash, the economy turns around and the circle of life continues.

As noted by other comments above, this problem is not new and has been around for a while. Kevin and others have noted some of the reasons for this. One additional reason (although this may be more of an overriding general principle within which all the other stated reasons fall) is that business, in general, does not like uncertainty. And from the get-go with the Bush administration (and its enablers in the GOP-led Congress), from Bush v. Gore, to 9/11, to the ill-conceived and ill-fated war in Iraq, to the administration's intentional decision to govern to its base (and not the needs or beliefs of the majority of the country), etc., etc., etc, the climate for business and overall economic confidence, certainty, investment return has been shite (except for industries that profit from war). This overall uncertainty has caused business to entrench themselves and wait for better days. Business did not know what assinine policy decision would be made next. Interesting how, in recent history, when there were different parties controlling the executive branch and the legislative branch, both willing to exercise their checks on the other, and there was no real worry that one side could do anything way outside of the 'norm,' that business did not hoard cash and put that cash to work.

I've got a theory that interest rates have been *too low* historically for about a decade and it leads to "dumber" uses of money. I think that if interest rates were higher, money would be dearer, and it would be invested "smarter". Perhaps there would be more capital investment, subsequent depreciation write-offs and less "idle" cash. I think that Keynes was the one that asserted that higher interest rates "crowds in" investment. Just a thought.

There's a different take on the cash surplus that speaks of a sort of creativity rot in America's business management: Our business management has learned that the sure, dumb way to profit (and profits must increase forever and ever, amen) is downsizing and offshoring...and for a long while this works, this 'robbing the pillars', 'selling the seed corn'. Eventually the roof falls in. IBM has been doing this since the days of Gerstner and before.
What has been forgotten is the real, substantive way to lasting profit and the benefit of your country is creating new products, new industries to create new wealth...rather than gutting the old. But that's risky, it takes cleverness, an ability to recognize and foster talent and an acceptance that true growth and profit happen over the long-term.
That's not what is taught or rewarded these days.

Doesn't this scenario in which corporations accumulate cash yet do not invest in expanding, extending, developing or researching their operations give lie to the conservatives' argument that people or entities with money "create" jobs? They argue that just because those actors will have loads of cash that they will necessarily invest it. This report demonstrates that argument is totally fallacious. It's time to raise taxes significantly on the corporations and uber-wealthy and put that money to some good use. Demand creates jobs, not gold sitting in some vault being defended by dragons.

In tech, which I know well, the big pot of cash has, in some way, been a defensive move by companies that raised a lot in IPO's, but still face stiff competition. The big pot of cash has delayed shakeouts in market sectors, losers dieing, and winners becoming more profitable.

I think it's likely that a similar fear factor is behind the cash reserves in other industries. The Bush years have given us lots of fears and uncertainty with an oil war going on, and a budget trend that everyone knows is unsustainable. Not a good time for new risks. So cut costs, hunker down, and collect cash.

The big pot of cash, however, is soon likely to become a small pot of cash from inflation.

Bottom line on Corporations:

They don't care about this country.
They don't care about their shareholders.
They don't care about their employees.

An economic system based on the above is supposed to miraculously make the citizenry safe and prosperous.

Good luck with that.

"...huge cash holdings suggest that corporations don't have a lot of good investment opportunities. They're not spending money to expand operations as aggressively as they could afford to; they aren't seeing a lot of attractive acquisition targets; they aren't expanding into new business areas; and they've got the money to spend on productivity-enhancing capital equipment but apparently aren't finding that a very appealing prospect."

So the 30-odd year load of Republican horsehit that businesses are always struggling under a crushing load of taxes, desperately trying to expand and buy new equipment, but simply unable to unless their taxes are cut might not be so?

Funny how these "struggling" compnaies can pay millions to CEO's and now sit on a pile of cash under these awful conditions.

The cash overload disproves (as if it needed disproving at this point) the whole supply-side "trickle down" theory, that claimed that if you cut corporate taxes, they'll use the money to hire people, invest in equipment, etc., essentially pumping the money back into the economy.

Nope.

They hoard it.

This is why none of Bush's corporate tax giveaways have helped the economy. They didn't hire new people, give their employees raises, open new plants, etc. They sat on the cash to boost their earnings profiles and their stock prices.

Any new tax break should be specifically contingent on hiring new workers and investing in equipment. Period. None of this "give them the money and they'll do the right thing."

As for stimulating the economy by boosting dividends, people who are living off their dividends are already pretty well off, and likely spending at maximum capacity. The extra dividends will just go into their kids's trust funds.

Cut corporate tax breaks, and tell them if they want the money back, they have to pump some into the economy first.

Buffett warns on US recession

By Krishna Guha in Washington and Michael Mackenzie in New York

Published: March 3 2008 20:46 | Last updated: March 3 2008 21:08

The US is in recession by “any common sense definition” of the word, the country’s most successful investor said on Monday.

Warren Buffett told CNBC that while the US might not have met the formal tests of recession, “most people’s situation – certainly their net worth – has been heading south for a while now”.

Meanwhile, Alan Greenspan, the former Federal Reserve chairman, told the Financial Times that “the rate of growth in economic activity is effectively zero”.

The comments from Mr Buffett and Mr Greenspan came as gold and oil hit record highs and the dollar suffered early losses, before all three moderated on profit-taking.

Meanwhile, the ISM manufacturing survey declined to 48.3 in February from 50.7 in January – indicating a decline in manufacturing activity.

However, the index did not fall as sharply as some economists had feared.

Separate data showed commercial construction fell 0.8 per cent in January after a 0.5 per cent decline in December, the first hard evidence that non- residential investment in property is slowing sharply.

Goldman Sachs said: “We expect more and steeper declines”.

Mr Buffett said stocks were “not cheap”. He said the financial markets were experiencing “waves of deleveraging” and warned that the dollar would continue to decline.

He said Ben Bernanke, the Fed chairman, had a difficult task balancing the risks to growth and inflation, but said “it is nothing like 1973, 1974 yet”.

While several other high-profile figures also now argue that the US is now in recession, the economic debate remains open.

The hard economic data suggest the US economy stalled in December and January – neither expanding nor shrinking. Real consumption was flat for two months in a row, industrial production was broadly unchanged and there was a small decline in private employment.

Mr Greenspan said he was still not prepared to call a recession, although he said “the probability that we will experience some negative growth is better than 50/50”.

The former Fed chief said he would define a recession as “the onset of a significant set of discontinuities” in an economy. “We are beginning to see signs of that in the US, but it is not yet fully conclusive,” he said.

Copyright The Financial Times Limited 2008

Campany executives think the cash they have hoarded belongs to them instead of the company's stock holders.

The accumulation of liquid assets by corporations means more than just a lack of investment opportunities. It also means the company's employees who actually added the value to the goods and services sold for revenue had too much of the surplus their value added labor created withheld, and the stockholders are being cheated out of company profits that rightfully belong to them. The split of the value added surplus is out of equilibrium for workers and employers, in favor of employers. The owners of companies, the stockholders, have no actual ownership of the profits their companies earn. The political economy needs a new deal.

This is actually a global phenomenon. Obviously US corporations could invest more overseas if it were just a matter of a subpar economy in the United States. That they can't find sufficient investment opportunities anywhere on earth speaks to the weakness of the global economy.

The reason for this "excess" of cash (and I do believe it is an excess) is clear; U.S. industrial investment has been nil for some time. In some sectors, real investment has actually been negative. In almost all cases, government investment has been negative (it's hard to add infrastructure when revenues won't cover maintenance on what you already have). So the question is, is excess cash really a problem, what will it result in , and what should we do about it?

First off, any time you have a great disparity between those at the top and those at the bottom, you've got a problem. In fact, if we could solve the disparity issue, we would eliminate nearly all of the economic issues the United States has today. We would never have had a "sub-prime crisis" were it not for the great income disparity we have in the country today.

What will be result of the industrial cash glut? Although the Times article says otherwise, it will lead to the mass privatization of currently public companies. These privatizations have historically never been good for share holders. Be prepared to see your retirement portfolio shrink while your insurance cost rise. Nor have they been good for employees or vendors. It won't be universal, but we'll see a lot of companies taken private.

What can we do? The only tool the nation currently has to deal with this is tax policy. Tax regulations are already set up to encourage investment, but do not discourage savings (after all, how could savings be bad?) First, we need to throw away everything thats been done tax wise in the last eight years. Second, we need to make it expensive for foreign companies to do business in the U.S. Third, we need to (tax wise) make it cheaper to invest than to sit on your money. And most importantly, we need to do away with civil penalties for business infractions, and replace them with stiff, mandatory criminal sentences for violations of health, labor, environmental, fraud, tax,and other statutes.

Addendum:

I wonder how much of this cash is in U.S. dollars? Not much, you can bet. Most of it isn't in currency at all, (rather in stocks and bonds), but what is in currency, is no doubt in something stable like the Euro. And the fact that U.S. corporations have been hedging on the dollar (as is prudent) no doubt has much to do with their glut of cash; they've simply made a wise investment. This doesn't excuse the lack of investment, but helps to explain how that pile of cash got to be so big.

There is a lot of good info in these comments but some of it is a little shaky too.

The first thing to know is that publicly held businesses have a lot of different laws as compared to privately help businesses.

In a privately help business if I make a big profit I can pretty much do whatever I want with that money. If I want - Hawaii here I come. In a publicly held business the execs and not the only owners, so they are supposed to maximize stockholder value. That is a pretty gray area.

As many have pointed out, extra cash (whatever that means) could be held and used to expand the business after the recession. It could be used to raise worker's pay if that will attract better workers or make them more productive. It could be used to purchase new equipment if that will increase productivity. It could be used to buy back stock or raise dividends to increase stock prices. It could also be used to expand the business, but expansion can be risky too and expansion that is too big or too fast can kill the company.

The executives can make a case for almost any of these options. That is one reason why they can pretty much get away with whatever they want.

So 'trickle down' could work in certain cases but there is no guarantee or requirement that businesses must use the 'extra' cash in ways that benefit workers.

Actually, Karl Marx predicted this pretty well. The final crisis of capitalism (simplified for the understanding of a chattering monkey such as myself) boils down to this: When the corporations have all the cash, and the consumers have none, the corporations begin to wither away.

What takes their place? Probably not a workers' utopia. That is the part that Marx got wrong.

All the people saying "this disproves Republican theory" or "this disproves supply side economics" are missing the point. Everyone knows supply side economics is bullshit. Everyone knows that taxes are, in fact, not the devil. Everyone knows that tax cuts are not a panacea. Everyone knows that sometimes tax hikes are necessary. Everyone knows that the best economy this country had since the beginning of Republican dominance was when a Democrat was President, and after a tax hike no less.

This "everyone" includes Republicans. But they don't care because they are beholden to the ideologues in their party. And as long as they are beholden to them they will push these fantasies onto the American people. So the question is, how do we make sure these people can't even get near positions which allow them to push these fairy tales?

I know economics issues don't appeal to everyone, but to me this is one of the very best blog posts and discussions to come down the pike on this blog for a long time. It should be distributed widely!

Why haven't they reinvested?
What is driving that decision?
Accumulating cash instead of distributing it to their shareholders should worry shareholders.
What exactly would it take to inspire them to reinvest or pay out to shareholders?
Are CEOs holding it to make bonus payouts...to themselves?

Would they even make payouts as a collective way of saving the economy by pushing cash flows and spending?

Is this the corporate way to show they've got the economy in their hands and that there's nothing government could possibly do to run the show?

There are a lot of questions and very few answers here.

I wonder what Krugman or Stiglitz have to say about this.

So 'trickle down' could work in certain cases but there is no guarantee or requirement that businesses must use the 'extra' cash in ways that benefit workers. Posted by: Tripp

Trickle down is the problem or, to employ yet another cliche, providing crumbs. It would be fine if supply side worked in such a way that it really provided substantial increases in wages, but it doesn't. Supply side economics rewards capital and not labor.

And as long as CEOs and the like think that they have a sort of divine right of kings to make 200-2,000 times what their employees or customers (think hedge funds) earn, then taxes are the only way to redistibute income in a positive fashion.

Not everyone can be "rich," but there is no reason to penalize the working poor, particularly since most wealth is inherited and that that is "earned" is done so by people born into at least a modicum of economic advantage. Statistics bear this out - there is still, even in America, very little socio-economic mobility in capitalist societies.

It's not that the game is rigged, but it still favors the house.

there is no guarantee or requirement that businesses must use the 'extra' cash in ways that benefit workers.

Threre is no laws now that require higher wages for incorporations' employees or that require incorporations to pay out all net profits to shareholders, but there could, and should, be.

There is also the possibility that a lot of the MBA types that business schools churn out don't have a creative bone in their bodies, except for financial manipulations. Posted by: demisod

So true. If business schools were truly places of learning and holders of MBAs such sharpies, why do we even have a business cycle any more? Or, taking into account that no one economy can really right the wrongs practiced in other economies light on MBAs and economic PhDs, the troughs and peaks of the cycle should be shallower and not quite as high.

Then, of course, there is the dishonesty factor you allude to ("financial manipulation"). This is exactly why capitalism needs more regulation, not less.

The MBA only serves the same accreditation function a bachelor's degree did around the middle of the previous century.

thersites,

Actually, Karl Marx predicted this pretty well.

Computer simulations show the exact same thing. In a perfectly fair market with any number of participants someone by chance will become an early leader. That gives him/her an advantage that tends to grow. Eventually and inevitably the simulation ends when one person has all the chips and everyone else has none.

This is one of the many flaws in Libertarian philosophy and it also explains why 'taxes' (or whatever you want to call redistribution of wealth) is necessary to keep the game going.

But the words "taxes" and "wealth-redistribution" have become profane to Republicans.

Jeremiad Jones touched on this upthread: the current situation is related to the home mortgage meltdown, and in both the current situation and the mortgage crisis, the culprit is the same: too much money in too few hands chasing fewer and fewer investment opportunities. The entire Bush monetary policy has fueled this situation. Consumers were already pretty close to being tapped out on discretionary spending 5 years ago. Look what's happened since then: we had the bankruptcy "reform" passed to insure that those tapped out would remain tapped out; interest rates were kept artificially low to keep those not already tapped out spending; off-shoring was not deterred and in fact in many cases was granted incentives; and corporate tax giveaways and tax breaks helped to insure that the money kept flowing in one direction only. The only thing that's kept anything afloat for the past several years is the housing boom, which was fed by pressure from those excess funds in the hands of the few chasing dwindling investment opportunities, leading to laxer and laxer mortgage lending standards until the inevitable happened and the house of cards collapsed...and now home mortgages aren't an attractive investment option either. This is going to get really ugly, because there isn't a good solution for it, at least not until things get so bad that Joe Sixpack decides he's mad as hell and he's not going to take it anymore. But that's not too far off at this juncture.

While Bush economic policy brought this to a head quicker than we might have seen otherwise, it's been trending in this direction for over 30 years. You can only get away with exporting nothing other than cash for so long before it catches up to you. American corporations have gleefully participated in slitting the throat of the goose that laid the golden egg through outsourcing and offshoring. While other nations have seen great increases in per capita wealth, for the most part, boats haven't been raised enough for your average Chinese or Indian citizen to be able to afford durable goods such as cars, televisions, and refrigerators. Manufacturers of these types of products may well find demand shrinking even as Chinese and Indian peasants become more prosperous. Because they've got a very long way to climb to reach the level of middle-class prosperity that allows this type of consumption. I think the current situation US automakers find themselves in kind of spells it out...it's great that you can produce a Ford Explorer in Mexico for a third of what it costs to make it here, but those Mexican assembly line workers making $2.50 an hour are never going to be able to afford to buy one...and the guy in Detroit you bitched about paying $40 an hour could have and would have bought one if you hadn't laid him off. With the $7.50 per hour he's making now at Burger King, he'll never be buying another one of your new shiny automobiles.

American corporations are so cash rich, bceuae they are UNDERTAXED. The average US corporate tax rate is at its lowest point since the 1950's. US Corporations contribute something paltry, like 6% of the taxes collected by the IRS. It is way past time to change that.

They could give bonuses to their hard-working CEOs.

Some analysts [] speculate that these cash-rich companies may start sharing their wealth with investors through special dividends, providing welcome stimulus for the economy.

Dividends to investors won't stimulate the economy, it will go disproportionately to the people most likely to either invest or to spend outside of the domestic economy, and do little to increase demand for goods produced within the domestic economy. If anything, it will exacerbate the consumption:production imbalance noted in the Kevin's 11:50AM post.

When companies cannot find places to invest their accumulated capital, the D word will soon be in common usage. There are no good places to invest any longer because the corportions have done a very good job of lowering wages all over the world. There are no longer enough affluent consumers to generate revenues for them.