Main menu:

History of RPE Thought

Posts by Tag

RSS New from the CCPA

  • Imagine a Winnipeg...2018 Alternative Municipal Budget June 18, 2018
    Climate change; stagnant global economic growth; political polarization; growing inequality.  Our city finds itself dealing with all these issues, and more at once. The 2018 Alternative Municipal Budget (AMB) is a community response that shows how the city can deal with all these issues and balance the budget.
    Canadian Centre for Policy Alternatives
  • Why would a boom town need charity? Inequities in Saskatchewan’s oil boom and bust May 23, 2018
    When we think of a “boomtown,” we often imagine a formerly sleepy rural town suddenly awash in wealth and economic expansion. It might surprise some to learn that for many municipalities in oil-producing regions in Saskatchewan, the costs of servicing the oil boom can outweigh the benefits. A Prairie Patchwork: Reliance on Oil Industry Philanthropy […]
    Canadian Centre for Policy Alternatives
  • CCPA's National Office has moved! May 11, 2018
      The week of May 1st, the Canadian Centre for Policy Alternatives' National Office moved to 141 Laurier Ave W, Suite 1000, Ottawa ON, K1P 5J2. Please note that our phone, fax and general e-mail will remain the same: Telephone: 613-563-1341 | Fax: 613-233-1458 | Email: ccpa@policyalternatives.ca  
    Canadian Centre for Policy Alternatives
  • What are Canada’s energy options in a carbon-constrained world? May 1, 2018
    Canada faces some very difficult choices in maintaining energy security while meeting emissions reduction targets.  A new study by veteran earth scientist David Hughes—published through the Corporate Mapping Project, the Canadian Centre for Policy Alternatives and the Parkland Institute—is a comprehensive assessment of Canada’s energy systems in light of the need to maintain energy security and […]
    Canadian Centre for Policy Alternatives
  • The 2018 Living Wage for Metro Vancouver April 25, 2018
    The cost of raising a family in British Columbia increased slightly from 2017 to 2018. A $20.91 hourly wage is needed to cover the costs of raising a family in Metro Vancouver, up from $20.61 per hour in 2017 due to soaring housing costs. This is the hourly wage that two working parents with two young children […]
    Canadian Centre for Policy Alternatives
Progressive Bloggers

Meta

Recent Blog Posts

Posts by Author

Recent Blog Comments

The Progressive Economics Forum

Corporate Canada’s Recovery: More Cash, Less Investment

There has been a persistent drumbeat in the American business press about corporations accumulating cash. The argument is that, while corporations are making solid profits now, they are not investing in the US for fear of anti-business policies in the future. Obama has allegedly spooked corporate America into hoarding cash rather than investing.

To test that story, I looked at the Canadian data. There is little threat of anti-business policy from our Conservative federal government. Our public deficit and debt are proportionally very low compared to the US. Our federal and provincial corporate tax rates have been slashed since 2000 and are legislated to fall further in the next few years.

But corporations are not investing here. Fixed investment by private non-financial corporations peaked in the third quarter of 2008 and has fallen since then. By the first quarter of this year, investment was one-third below the pre-crisis peak.

Corporate Canada is hoarding cash. The Canadian-dollar deposits of private non-financial corporations shrank during the first two quarters of the financial crisis, but then grew during the next four quarters, reaching an all-time record high in the first quarter of this year.

This trend becomes a little less clear if you include corporate Canada’s deposits of foreign currency. However, the Canadian-dollar value of these deposits reflects exchange-rate fluctuations as much as business decisions.

Private Non-Financial Corporations in Canada ($ billions)

 

Fixed I

C$ Deposits

Foreign Deposits

 2008Q3

 $46 

 $266  

 $110  

 2008Q4 

 $44  

 $262  

 $118  

 2009Q1 

 $35  

 $236  

 $126  

 2009Q2 

 $34  

 $249 

 $124  

 2009Q3

 $34 

 $259  

 $119  

 2009Q4 

 $34 

 $275  

 $123  

 2010Q1 

 $31  

 $276   

 $120  

Although we have a Conservative government, low deficits and tax cuts, corporations are hoarding cash rather than investing in Canada. So, maybe the Obama administration is not to blame for corporations behaving the same way in the US.

Four months ago, I suggested that low capacity utilization explains sluggish investment. If corporations already have a lot of idle capacity, why invest in adding more capacity? A week ago, Paul Krugman presented the same interpretation for the US.

Corporate tax cuts will be especially ineffective at promoting investment given the overhang of excess capacity. As I argued, it would be better for the government to retain the money and invest it directly.

Krugman recently made a similar point, although he advocated borrowing the idle cash from corporations rather than taxing it away from them. (Perhaps he is insufficiently radical.)

In economics textbooks, businesses issue stocks and bonds to finance investment in excess of current profits. A dollar of corporate tax cuts could arguably produce more than a dollar of additional investment. But in a world where corporations hoard cash instead of investing it, each dollar of corporate tax cuts likely just means an extra dollar sitting in corporate coffers.

A note on my numbers:

“Fixed I” is the flow of fixed investment whereas “Deposits” are accumulated balances. The investment figures in GDP generally include banks and government enterprises. Banks are expected to hold cash rather than make fixed investments. Government enterprises may invest for different reasons and generally do not pay corporate taxes.

To focus on private non-financial corporations, I used Statistics Canada’s Financial Flow Accounts and National Balance Sheet Accounts. Currently, the first quarter of 2010 is the most recent data in both series.

Enjoy and share:

Comments

Comment from Randy Robinson
Time: July 19, 2010, 10:10 am

Hi Erin,

Thanks for this. Very useful.

Cheers,

Randy

Write a comment





Related articles