Big corporations are accumulating massive cash hoards. Despite record profits, there is a dearth of investment in production. Corporate surpluses, moreover, are linked to public-sector deficits. Cash hoarders should be subject to an immediate levy on idle capital to finance public works and reduce mass unemployment.
“Business is not just about making money, as vital as that is: it’s also the most powerful force for social progress the world has ever known”, David Cameron told a recent business conference (23 February 2012). The historic justification of capitalism, recognised by Karl Marx, was that the accumulation of capital, driven by the capitalists’ drive for profit, developed technology and created powerful means of production, the basis of modern life.
But is this still true? In all the advanced capitalist countries today there are clear signs that capitalism has reached an impasse. There is a stagnation in the world economy, following the worst slump since the 1930s. Governments, households and many small businesses are weighed down with unsupportable debt. Yet, at the same time, big corporations are accumulating massive hoards of cash while hordes of unemployed workers despair at finding decent jobs. According to the International Labour Organisation, over 200 million workers have lost their jobs as a result of the economic crisis.
“Everybody knows that companies worldwide are sitting on cash, generating cash and have the capacity to borrow yet more. But where will it go? The optimistic answer would be into the real economy. The reality is probably into mergers, acquisitions and [share] buy-backs”. (Reuters, Breakingviews, 3 April 2012)
In the UK, non-financial companies are estimated (by accountants Deloitte) to be holding £731.4 billion (Q3 2011), the highest level on record. (Press release, 7 February 2012) As with other countries, this figure does not include cash held in offshore accounts to avoid taxation at home. This hoard is six times bigger than total UK business investment for 2011 (£118 billion). One example is Rolls Royce, one of British capitalism’s most successful companies. “Like much of corporate Britain, Rolls Royce has been piling up money for a rainy day. At the end of 2010 it had £2.9 billion in cash stashed away. Its net cash (ie excluding debt) rose to £1.5 billion last year, equivalent to around 15% of revenues”. (The Economist, 19 May 2011)
The same magazine comments: “British firms in aggregate have been spending less than they earn for most of the past decade. Saving has increased since the financial crisis struck: at the end of last year the corporate funds left after capital spending, tax, interest and dividends reached 6.2% of GDP… Companies are meant to be repositories of peoples’ savings, but instead have been huge savers themselves”.
Estimates of the cash hoards vary, but the picture is the same in Europe and the US. In the eurozone, the cash hoards are estimated to be almost €2 trillion – most of it held in short-term, overnight deposits. (Cash-Hoarding Companies Seem Unable to Splash Out, Financial Times, 11 March 2012)
In the US, the Federal Reserve reported last year that non-financial companies held more than $2 trillion in cash and other liquid assets, the highest level since 1963. (Companies Shun Investment, Hoarde Cash, Wall Street Journal, 17 September 2011) Moreover, the Federal Reserve figures do not include the substantial amount of cash held at many US companies’ foreign subsidiaries, which would be subject to taxation if the companies repatriated it.
Writing in the Financial Times (29 January 2012), John Authers comments: “At present, cash accounts for more than 6% of the assets on the balance sheets of US non-financial companies. That is the highest in at least six decades, and represents the fruit of record high profit margins. Companies cut costs through redundancies during the post-Lehman economic swing, while negligible interest rates reduced their borrowing costs. As a result, US corporate profits are higher, as a share of gross domestic product, than at any time since 1950”.
Apple is a notable example, sitting on a cash mountain of more than $100 billion. It is noticeable that the industries hoarding the most are advanced technology sectors which have expanded rapidly in recent years: technology ($264bn), pharmaceuticals ($141bn) and energy and consumer products (each holding more than $100bn). (US Firms Pile Up Cash, But Not Jobs, AFP, 11 August 2011)
A cushion against crisis
Last year, President Barack Obama urged US corporations to “get in the game” and invest some of the cash sitting idly on their balance sheets. This appeal, however, fell on deaf ears in corporate boardrooms.
Why are the big corporations hoarding cash in this way? In the first place, it was an immediate response to the financial crisis that was triggered by the collapse of the US housing boom and subprime mortgage crisis at the end of 2007. The big corporations were hit by the severe credit squeeze that followed the collapse of Lehman Brothers. They still lack confidence in a sustained recovery, and fear the possibility of renewed crisis.
Behind this short-term reaction, however, there is a long-term trend. Despite the increase in corporate profits since the turn towards neo-liberal policies after 1980, and the huge increase in the share of wealth taken by the super-rich, investment as a ratio of national output has fallen in all the G7 economies (the US, Japan, Germany, France, the UK, Italy and Canada). This trend reflects the inability of capitalism to find sufficient opportunities for profitable investment. If this trend continues, as it is likely to do, it will spell prolonged stagnation for the world capitalist economy.
In response to the post-Lehman credit squeeze, most of the big corporations decided that they had to rely on their own reserves as a cushion against the downturn. The normal function of the banks, to supply credit to businesses (often on the basis of credit lines that were available as required), broke down. The corporations reduced their reliance on the banks, and at the same time they reduced investment, cut down dividend payments to shareholders, reduced share buy-backs, and cut costs through squeezing wages and laying off workers.
“Four years after the onset of the global financial crisis”, comments Ian Stewart, Deloitte chief economist, “the world remains an uncertain place. From uncertainty about the future of the euro to worries about an Iranian blockade of the oil supplies coming through the straits of Hormuz, corporates face a dizzying array of risk. High levels of corporate cash are seen as an insurance policy against such events”. (What to Do with Corporate Cash, Deloitte press release, 7 February 2012)
Obama in the US and Cameron on Britain have called upon the big corporations to invest in production. But, according to Deloitte, a poll of 136 large businesses in the US found that the most appropriate use for corporate cash in 2012 – cited by over a third – was “holding onto it”. According to the chief economic adviser to Ernst & Young: “The climate of uncertainty has caused firms to sit on their cash and, even after this week’s deal for Greece, it’s difficult to envisage this situation changing significantly in the short term”. (Evening Standard, 24 February)
A bonanza for investors?
Companies with cash hoards are coming under pressure to dispose of some of the cash, not only from political leaders, but – surprise, surprise! – from shareholders. They are calling for cash-rich companies to return to paying dividends (during the boom most investors made their money through capital gains as share prices rose, rather than dividends). They are also pushing for share buy-backs, whereby companies effectively hand out cash to shareholders through buying back their shares. The reduction in the total issued shares pushes up the share price (as profits per share rise). This especially benefits executives whose bonuses (in many cases, share options) are enormously inflated by the ‘good performance’ of their companies’ shares on the stock exchange.
“Corporates appear to have decided to run themselves for cash, and not for growth”, comments David Bowers (Financial Times, 8 February 2012). The big corporations are run for short-term aims. “UK corporates are run not for long-term health, but for executive wealth, with bad results for the businesses themselves and, still more, for the entire economy”. (Martin Wolf, Britain Needs to Whittle Down Corporate Cash Piles, Financial Times, 16 February)
Without investment by the major companies there will be no growth, and the current stagnation will continue. This has serious implications for the huge debt burden currently crippling most western governments. “Growth is a necessary condition for successful management of public debt”, writes Martin Wolf. At the end of 2011, the British government’s fiscal deficit was 8.8% of GDP, while corporations held a surplus of 5.5% of GDP.
“We’re seeing a symbiotic relationship between government ‘borrowing’ and corporate ‘saving’ the likes of which has rarely been seen before”, says Ian Harnett of Absolute Strategy (quoted by John Authers, Financial Times, 29 January). For governments to reduce deficits, corporations need to spend their surplus cash.
A capital levy to finance public works
Political leaders have been appealing for investment, but it has not been forthcoming. Last year, George Osborne declared that “what I’ve got to do over the next coming months is to persuade them to start spending that money”. (Corporate Finance: Rivers of Riches, Financial Times, 22 May 2011)
“It will be hard to cut public deficits without some aid from corporate cash, which investors want paid to them”. (John Authers, Financial Times, 29 January 2012) A number of commentaries in the big-business press hint that governments are, behind the scenes, discussing the issue of raising corporate taxes, in an effort to encourage investment spending. David Bowers, of Absolute Strategy Research, says: “Politicians and policymakers are going to have to ask the question: how much longer are we going to allow companies to run themselves for cash?” (Financial Times, 29 January)
However, capitalist leaders like the Con-Dem government in Britain are completely cowardly when it comes to confronting big business. They are spineless before the so-called free market. Yet the coexistence of massive cash hoards with horrendous levels of unemployment points to the need for a capital levy. In Britain, for instance, even a 50% tax on unused cash reserves would produce approximately £370 billion – cash which could be invested in housing, schools, infrastructure, etc. Together with a capital levy on profitable banks and finance houses, this could form the basis of a massive programme of investment in public works.
Such a programme would create millions of jobs and stimulate growth in the wider economy. No doubt, big business would object that a capital levy amounts to ‘expropriation’ of their wealth. But their profits are all ultimately derived from the labour of the working class, and if they refuse to invest their idle cash in the expansion of the economy they lose any justification for their role as capitalists.
“Don’t attack profit”, proclaimed US Republican presidential hopeful, Mitt Romney, arguing against taxes on big business. “Profit… is what allows businesses to hire people and grow”. US corporations have been enjoying record profits and historically low levels of taxation. But where is the growth? Where are the jobs? Big business would rather hand out money to shareholders (and company executives) than invest in jobs and growth.
If big corporations are unwilling to participate in social projects, they should be taken into public ownership and run under democratic workers’ control and management. This would provide a bridge towards a democratically planned economy, which would be run to meet the needs of the majority not merely to fill the cash coffers of the super-rich.
The limits of capitalism
The current hoarding of corporate profits and the dearth of investment are not just a response to the 2007-09 crisis. It is an expression of a deep-rooted crisis in capitalism. The hoarding of cash by manufacturing companies began long before the recent crisis. It was the counterpart of the financialisation of the economy that accompanied the spread of ultra-free-market, neoliberal policies after 1980.
During the post-war upswing, until the late 1960s, big business in the advanced capitalist countries and transnational companies reaped enormous profits from manufacturing. But through the contradictions inherent in capitalism, there was a decline in profitability – and the capitalists increasingly turned to speculative financial activity in search of super-profits. This enormously enriched the super-rich capitalist elite, but eroded the incomes of the working class and big sections of the middle class, as well as saddling them with a huge burden of debt.
Inevitably, this has restricted the market for capitalist goods which, in turn, restricts the scope for profitable investment in production. Moreover, since the financial crisis, big manufacturing companies are even afraid to risk their surplus cash in financial investments. Hence, the twin phenomena of idle corporate cash and millions of unemployed workers. Capitalism can no longer secure the social progress claimed by Cameron: it long ago reached its historical limits – and is over-ripe for system change.