The corporate savings glut and the economic possibilities of the future
For decades, non-financial corporations were net borrowers from the financial system. If they wanted to hire more workers, expand investment, or acquire another company, they’d have to borrow funds from savers elsewhere in the economy via the financial system. Since 2000, however, the corporate sector has moved from borrowing funds from the rest of the economy to being a net saver. This dramatic transformation, sometimes called the “corporate savings glut,” is something economists and policymakers are still getting a handle on. But if one interpretation of these events is correct, it’s a sign for concern about future economic growth.
In a column last week for The New York Times Magazine, Adam Davidson—also a co-founder of NPR’s “Planet Money”—wrote about the tremendous amount of savings U.S. corporations have these days. In total, U.S. corporations are sitting on $1.9 trillion worth of cash. And some of the largest and most-famous companies (Davidson highlights Google, Apple, and General Motors in particular) are holding on to colossal amounts of cash.
This immediately raises the question: “Why?” Davidson runs through a number of potential reasons—such as tax avoidance—and finds pretty much all of them lacking. But looking at specific industries that are rewarded by the stock market for holding onto cash, he finds an optimistic message. He thinks that companies are holding on to more cash as a precautionary measure in order to leap onto the next big idea.
There’s evidence, however, that exactly the opposite is happening. Think about the other side of the increase in net savings by corporations: the slowdown in investment growth. Since the turn of the century, investment has declined as a share of GDP across the advanced economies of the world. So as firms have held onto more cash, they’ve pulled back on investment.
In a working paper, economists Joseph W. Gruber and Steven B. Kamin of the Federal Reserve try to understand what caused this investment pullback. One interpretation of increased corporate savings is that companies are becoming more risk averse—they’re stocking up on cash because they want to strengthen their balance sheets in case a bad time hits. But Gruber and Kamin rule out that explanation: At the same time that firms were pulling back on investment, they were also increasing their payouts to shareholders in the form of share buybacks and dividends. Firms that are concerned about their balance sheets aren’t going to give money away.
Instead, the two economists think the corporate savings glut is a sign that companies are quite pessimistic about the future. They don’t see any feasible investment opportunities around, so they are passing money out to shareholders.
Of course, the increased payouts could also be part of the structure of a financial system that prioritizes immediate payouts over long-term investment. That’s the argument John Jay College economist J.W. Mason makes in his “disgorge the cash” paper. But that’s not an optimistic story either. Regardless of the amount of possible investment opportunities, corporations aren’t seizing them.
A third narrative, and one that doesn’t necessarily conflict with the last two, is that the increasing concentration of industries into oligopolies is increasing the amount of profits corporations can earn these days. Not only are companies sending more money to shareholders, but they are also increasingly using money for mergers and acquisitions. “M&A” activity is up 40 percent from its 2007 pre-recession level, according to analysis by Macquarie reported on by Bloomberg’s Luke Kawa.
So, unfortunately, the corporate savings glut in the United States and abroad may not be a positive sign for the future of the economy. Rather, it may be a sign of decreasing potential economic growth, a finance sector misallocating resources, or the rise of market power among a few corporations. Or some combination of the three. Not exactly a bright vision of the future.