President Obama spoke to the Chamber of Commerce yesterday. What he said can be condensed easily. He will do what he can to cut unnecessary regulations and improve the corporate tax code. He probably will have to get much of this approved by Congress, which makes his pledge conditional.
Businesses must put more money into expansion and jobs. Businesses can do this without conditions. They only have to decide to take the risk.
Obama’s request of corporate America was based on a few simple premises. The most important is that the health of US company balance sheets would allow corporations to add hundreds of thousands of people.
“So if I’ve got one message, my message is now is the time to invest in America. Now is the time to invest in America. Today, American companies have nearly $2 trillion sitting on their balance sheets. And I know that many of you have told me that you’re waiting for demand to rise before you get off the sidelines and expand, and that with millions of Americans out of work, demand has risen more slowly than any of us would like.”
That comment means that businesses should part with cash and the federal government will help them make the move worthwhile.
Businesses will tend to ignore Obama’s suggestion. The first reason for this is easy to understand. Companies may have $2 trillion in cash and equivalents. But, a large portion of that money is held by several very large companies like Apple (NASDAQ: AAPL). All by itself Apple holds $50 billion. That, added to the next ten companies based on cash on hand totals close to $200 billion, a substantial part of the money Obama wants put into the economy.
Apple has never explained why it has held $50 billion in reserve. Some expect Apple will use the money to buy other firms. Apple has signaled it will not add a dividend or buy back shares. Stockholders do not need more reward than the company’s rising share price, Apple’s board may reason.
Other large companies have begun share buybacks. That helped investors, but adds few, if any, jobs. Boards and senior managements at most firms of significant size either want to retain cash as a hedge against another downturn, or they want it to be given to Wall St. as an incentive to placate stockholders.
The problem for smaller businesses is a greater challenge. Small firms do not have easy access to capital, making adding additional workers more difficult. The federal government has not made any meaningful moves to help small businesses to gain credit. Small businesses, as is often said, are the drivers of economic growth.
Obama has two nearly insurmountable hurdles as he asks American businesses to add jobs. Large firms have discovered they do not need more workers and small ones cannot afford them
Douglas A. McIntyre
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