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Jul 08

Why companies aren't spending

Posted by Ron F in recoveryrecessionObama AdministrationObamajobsjoblessnessemploymenteconomyearningsdemandcash positioncash managementCashcapital expenditurescapex

Ron F

There's a political debate heating up about companies' hesitancy to invest the cash they're sitting on.

Essentially, the Democrats--or at least those in favor of further government stimulus measures such as a jobs program or at least extended unemployment benefits--argue that companies are wary of spending because of the lack of aggregate consumer demand.

The GOP--or those in the party who oppose stimulus in favor of austerity or at least tax cuts--prefer to explain the dearth of capital spending or M&A on the part of companies as a reflection of their fear of government spending (or Obama's "socialism," for short.)

Who's right? The evidence, apart from isolated quotes from the Business Roundtable, American Enterprise Institute, or other pro-GOP lobbying groups, suggests the Dems are. It comes in the form of a chart posted at Angry Bear.

In fact, companies' retained earnings are actually lower than they normally are in relation to potential GDP, which of course reflects aggregate demand. Yes, they have a lot of cash on hand, but not it relation to the economy's potential. The problem is they see a big gap between that and what it's currently producing. As the blogger at Angry Gear put it in a response to a comment he received, "Large corporate cash holding is a normal cyclical development that happens every cycle at this point." 

So no, it's not fear of government action to improve demand that companies fear, but rather the opposite.

When it comes to the federal budget deficit, the economy, jobs and Capitol Hill, watch what companies do, not what they, or their lobbyists, say.  

Except, that is, for Intel founder Andy Grove, who makes as good a case for government action as I've seen, and this from an executive's executive.

Yes, Forbes says he's wrong, but what do you expect?

Steve Forbes has always been a big supply side tax cutter and remains one even though we've seen less capex whenever the theory has been embraced since the early 1980s, not more.



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