Yves Smith and Rob Parenteau make an interesting argument on the op-ed pages of the New York Times today. If I’m understanding them correctly, they are pushing back on the prevailing view that deficit-cutting austerity programs are the path to economic growth — in other words, spending, not saving, is the key to solving our economic woes. This is not, obviously, an unfamiliar stance — except that Smith and Parenteau are talking about corporate spending (emphasis is mine):
A stream of disheartening economic news last week, including flagging consumer confidence and meager private-sector job growth, is leading experts to worry that the recession is coming back. At the same time, many policymakers, particularly in Europe, are slashing government budgets in an effort to lower debt levels and thereby restore investor confidence, reduce interest rates and promote growth.
There is an unrecognized problem with this approach: Reductions in deficits have implications for the private sector. Higher taxes draw cash from households and businesses, while lower government expenditures withhold money from the economy. Making matters worse, businesses are already plowing fewer profits back into their own enterprises.
Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on average ran a net financial surplus of 1.7 percent of the gross domestic product — a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P. More recent studies have indicated that companies in Europe, Japan and China are also running unprecedented surpluses.
The reason for all this saving in the United States is that public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on.
Rather than incur such expenses, companies increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in purely financial speculation. But this means they also short-circuit a major driver of economic growth.
Some may argue that businesses aren’t investing in growth because the prospects for success are so poor, but American corporate profits are nearly all the way back to their peak, right before the global financial crisis took hold.
Another problem for the economy is that, once the crisis began, families and individuals started tightening their belts, bolstering their bank accounts or trying to pay down borrowings (another form of saving).
If households and corporations are trying to save more of their income and spend less, then it is up to the other two sectors of the economy — the government and the import-export sector — to spend more and save less to keep the economy humming. In other words, there needs to be a large trade surplus, a large government deficit or some combination of the two. This isn’t a matter of economic theory; it’s based in simple accounting.
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