From the most recent Fed Flow of Funds:
Here are several links about the problems with this.
Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on average ran a net financial surplus of 1.7 percent of the gross domestic product — a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P. More recent studies have indicated that companies in Europe, Japan and China are also running unprecedented surpluses.
The reason for all this saving in the United States is that public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on.
Rather than incur such expenses, companies increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in purely financial speculation. But this means they also short-circuit a major driver of economic growth.
I’m really fascinated by this dynamic for the ‘financialization’ of the real economy, the way real economy businesses added finance lines in order to make sure they could manipulate their quarterly earnings numbers to clock in just above the whisper numbers (or keep them low for a bit, and then higher for a quarter where they knock it out of the park). This has impacts on the policy end for “end-user exemptions” for derivatives especially. But ultimately I’m interested in it for actual growth and employment.
Brad Delong has several posts worth checking out on the current Keynesian debate.
What is the “macroeconomic tail risk” which, Gabaix claims, it is individually rational for businesses to fear, and hence makes it collectively and socially rational for businesses to save and refuse to invest?…
The macroeconomic tail risk that businesses today fear is not a Great Forgetting of technology and organisation or a Great Vacation on the part of the North Atlantic labour force. The macroeconomic tail risk that businesses fear is another breakdown of the credit channel: a situation in which banks dare not lend because they cannot themselves raise funds, and they cannot themselves raise funds because every possible source fears that the bank itself is underwater—has no skin in the game of intermediating the flow of funds and every incentive to gamble for resurrection by playing a game of “heads I profit, tails you pay” with its creditors. Asset price declines that impair the capital of financial intermediaries greatly magnify the principal-agent problems of finance, and it is that magnification of principal-agent problems and consequent cutoff of their own access to additional funding when they need it that underpin business desires to boost their holdings of safe, high-quality financial assets at the expense of their ownership of real physical capital.
If this is a “macroeconomic tail risk fever” phenomenon it’s tough to tell why households got it in early 2008 and firms in early 2009. It really just looks like the household balance sheet is deeply underwater, and firms are sitting around the zero line from uncertainty about demand.
Cramdown as Stimulus?
Is there room for cramdown in this pitch? We discussed it before, but cramdown would increase labor mobility (decreasing unemployment), the writing down of debt in a way that doesn’t reward speculators, shares the losses on both parts but limits the homeowner’s upside to be fair to the bank, and would help reduce the uncertainty of the assets on the bank’s books. Alternative forms of bankruptcy or expedited short-sales could also help. Giving extra aid for home buyers is not the stimulus we need, and that appears to be all the relief that is on the way. Have people written about cramdown as stimulative measure?