Corporations: how rich are they?
Published 10:33 am Wednesday, August 31, 2011
If the economy is so bad, then why are so many American corporations flush with cash?
According to Moody’s, 1,600 of the companies it rates hold cash in the amount of $1.2 trillion.
American corporations have not had this much cash in their coffers since, hmm, well, never. (From 1980 to 2004, cash-to-asset ratios went from10.5 – 24 percent, and have risen another 33 percent since per Dow Jones data.)
Many pundits think that the economy is not growing because consumers are cautious with their spending. The other side of the argument is the reason the economy is so weak is that American businesses are hoarding their cash, not hiring or investing.
Surely, you know the age-old philosophical question about “Which came first, the chicken or the egg?”
If you’re like me, I now understand why America no longer leads. It’s the same reason that a “star quarterback” in college becomes the worst ball player on the team in his senior year. No guts. He has risen to the level where a mistake or injury can end his professional career before it begins.
Similarly, the “back room boys” on Wall Street will punish and try to end the career of any CEO that takes a risk on America just as they have for the last 30 years.
So, what is really wrong?
I think that there are at least four things that are contributing to our “economic quagmire.”
Politics: We definitely have a problem on the political side of the equation. There are too many people with polarized ideologies or “idiotologies” in this case. Pragmatic statesmanship is extinct because it looks like liberalism to one side and wing nuts to the other.
The recent political and economic “fiasco” related to increasing the debt ceiling is the “case in point.” We should show no mercy to the “my way or the highway” crowd come election time.
We cannot stand the damage they cause. They should save their breath trying to justify it and just apologize to the American people. What we need are problem solvers, not boisterous blow hards.
Business leadership: What we have is a situation where true business leadership and just a bit of patriotism are needed. It seems that all we get are excuses for 30 years of leadership failures. Wall Street is always whining about how it’s the government’s fault. Yeah, right.
The lack of government regulation caused this economic meltdown and then we had to bail their behinds out. The only companies that appear to invest in America are foreign companies. Thyssein Krupp’s major steel making facility outside Mobile, Ala., and the BMW auto plant in Greer, S.C. are just two examples. Why is it that these companies can make such huge investments on American turf while American-owned companies just sit on their piles of cash? This is not a “government” issue; it is a business leadership issue.
American people: Personally, I’ve grown a bit tired of hearing some “quack” complain about American workers. American workers are the most productive in the world: Period. And labor costs represent only about 15 percent (various sources including the BLS) of the cost of manufacturing in the United States. I’m even more tired of hearing quacks complain about teachers and government workers.
I have extensive experience in industry and government and what I know is that the proportion of good-to-poor performers is about the same whether it’s industry or government. We just hide it better in the private sector.
Consumerism: To create value, you have to make something that people will buy. It can be your local pottery, restaurant, textile mill, chemical company or your local farm. Value is not created by your financial advisor, your lawyer, insurance agent, government agency, banker or consultant. These types of activities are parasitic to the value-creating side of economy.
The value-creating part of our economy went from approximately 50 percent of our economy in 1980 to less than 7 percent in 2008 (BLS statistics). With it went good paying jobs for the average worker. So, why would anybody think that consumers could lead us out of this mess?
Bottom line: The only way out of this “chicken and egg” dilemma is for American businesses to start investing their cash in America. The hoarding of cash by wealthy individuals and corporations is the primary reason for our economic quagmire.
First, you have corporations with more cash un-invested than in any time in modern history. Second, in the last 30 years we have the top one percent of Americans with income growth of 176 percent versus 19 percent for middle class households (The Great Divergence 2010 – Noah). This has resulted in a huge shift in wealth to upper incomes and a correspondingly huge decline in the strength of the United States economy.
If ever there was solid proof that “trickle-down economics” is “Voo Doo economics,” this is it (thank you, President George Bush Sr., for your wisdom).
Good governance and good business leadership would not have let this shift become so dramatic. But we haven’t had good leadership since Eisenhower and I have no faith at all in the new crop of business or political leaders.