Is the `Cash On The Sidelines' Argument A Myth?

Want further proof of the reluctance of companies to hire?  Well, here it is, or maybe not.

Data released yesterday from The Federal Reserve showed that U.S. nonfinancial companies held $1.93 trillion in cash and short-term assets at the end of the third quarter, its highest level in more than 50 years.  Instead of adding people to its payroll, companies are buying back stock or putting it away for a rainy day.

As fund manager John Hussman explained in August this argument has its flaws:

Put simply, there is a lot of apparent “cash on the sidelines” because the government and many corporations have issued enormous quantities of new debt, often with short maturities, while other corporations have purchased it. It is an equilibrium. The assets that are held in the right hand represent debt that is owed by the left. You cannot call that pile of short-term marketable securities an asset without calling it a liability. The cash on the sidelines is evidence of debt incurred to fund economic activity that is already in the past. It will remain “on the sidelines” until the debt is retired.

Though Hussman makes a persuasive case that the “cash” argument is a myth, many other pundits disagree.  This raises the question of what will get corporate America spending again.

Is it Tax Reform?  Fiscal conservatives often argue that the U.S. corporate tax rate of 35% is too high.  What they overlook is that many American companies pay lower effective tax rates thanks to loads of deductions the IRS allows them to take.  Of course, the tax code is ridiculously complicated and has been so for decades.  One of the challenges facing the new Congress is figuring out how to encourage growth without giving away the store through tax breaks.

Fear of costly lawsuits is another reason businesses say they don’t want to expand in the U.S.  One foundation estimates that frivolous lawsuits cost American businesses  more than $865 billion per year. Much of the anti-lawsuit rhetoric is pushed by business groups with a vested interest in keeping down legal costs.  While some of the stories about “jackpot justice” and greedy attorneys are true,  others are exaggerations.

Another idea backed by the U.S. Chamber of Commerce is “sensible regulation.”  Oftentimes this means regulation that they like.   While no one supports having unnecessarily burdening businesses,  leaving them entirely to their own devices does not work either.   Just consider what happened to Wall Street before the market imploded.

–Jonathan Berr