One fundamental reason why the American economy continues to limp along is that no one—at least, no one with major bucks—is investing in it. The Obama Administration countered the collapse of private sector investment in 2009 with its stimulus program, which, alas, was partially offset by all the cutbacks in state and local government spending. It’s not been able, however, to get any subsequent investment projects through the Republican House. The private sector—the corporate sector more particularly—returned not just to profitability but record profitability by the middle of 2010, but its profits have neither resulted from nor led to increased investment.
To the contrary, American corporations have never sat on so much unexpended cash. Right now, their cash piles total more than $1.5 trillion, and that’s not counting the assets of the banks. The cash is concentrated in the coffers of our largest corporations, many of them tech companies. Apple leads the list with $150 billion gathering dust, while Microsoft, Google, Oracle and Cisco Systems follow close behind.
To the extent that this flock of Scrooge McDucks has done anything with their cash, they’ve used it to buy back their own shares—which increases the value of the outstanding shares, to which CEO salaries and bonuses are happily linked—and increase dividend payments to shareholders. Last year, American corporations set a record for share buybacks—nearly 900 of them opted to purchase their own shares. The 30 companies that are listed in the Dow Jones Industrial Average spent more than $225 billion on such repurchases; the total for all U.S. corporations topped $750 billion. As Jia Lynn Yang reported in The Washington Post, this was more than three times the amount they spent on research and development.
While buybacks were soaring, neither investment nor employee pay was going anywhere. The capital expenditures of the S&P 500 rose by a measly 1.3 percent this year over last. Overall private-sector pay has declined by 0.5 percent since the recovery began in 2009. Cisco bought back shares as it was laying off 5 percent of its workers, and Boeing announced both a share buyback and a dividend increase as it was compelling its workers to surrender their defined benefit pensions for 401k’s.
Increasingly, the business model of our leading corporations is to raise profits by slashing labor costs and holding investment that requires upfront costs to a minimum. It’s a model with inherent drawbacks, to be sure: Holding down wages has meant that only sales to the wealthiest 5 percent of U.S. consumers have really rebounded. But economic historians are sure to regard the ability of our leading corporations to reap record profits in the absence of vibrant mass markets as an achievement of short-term genius—and long-term folly.
Corporate leaders frequently avow that they’ll return the cash they’ve stashed away in foreign banks to American soil when the U.S. lowers its corporate tax rate. What they haven’t said is that they’ll invest those funds productively if and when they return them. Nothing keeps our global corporations from investing those funds right now in lands with lower tax rates. Nothing in our tax laws keeps them from spending the billions they’re already doling out in dividends and buybacks on productive investments, R&D and higher wages for their employees. The government allowed a virtually tax-free repatriation of U.S. corporate cash in 2004, and, as economists William Gale and Benjamin Harris of the Brookings Institution have demonstrated, most of it was spent on—you guessed it—stock buybacks and higher shareholder dividends.
In sum, America’s leading corporations control a huge sum of money that they’re unlikely to spend on the machinery, wage increases and new ventures that might return the nation’s economy to something resembling health. Since these companies move their profits abroad to avoid U.S. taxes, a truly satisfactory resolution to this problem probably requires a higher level of transnational governmental coordination than is plausible—though the U.S. might consider stiffening and extending its sanctions on tax havens like the Cayman Islands to more mainstream tax havens like Ireland. It should certainly raise the taxes on capital—that is, on capital gains and dividends—to levels comparable to or, better yet, higher than those on labor, since capital income is soaring while labor income isn’t going anywhere. Our governments—both the federal and the states’—should set up investment banks to rebuild the nation’s infrastructure. Minimum wage hikes and labor law reform are essential to restoring the nation’s consumer markets to a level of activity that would entice our reluctant investor corporations to actually expand production.
The happiest solution would be for some brilliant latter-day amalgam of Willie Sutton and Robin Hood to loot these companies’ stashes and put them to work funding the rebuilding of the American economy. No jury would ever convict.