Rationalizing Corporate Canadaâ€™s Cash Stash
Statistics Canada figures indicate that private non-financial corporations held $471 billion of cash in the first quarter of 2011 ($322 billion of Canadian currency plus $149 billion worth of foreign currency).Â Including short-term paper would bring this total to half a trillion dollars, enough to pay off the national debt (i.e. accumulated deficit).
Cash hoarding is a critical point in the debate about corporate taxes. If incremental after-tax profits are being deposited (rather than reinvested or paid out), lower corporate tax rates likely just produce higher piles of cash.
If corporate Canada already has half a trillion dollars more than it wishes to invest in physical or financial assets, there is no reason to expect that corporate tax cuts will boost investment. On the contrary, if the government collected more of this money and invested it directly, Canada would have more investment in total.
Not surprisingly, advocates of corporate tax cuts are trying to rationalize corporate cash hoarding as a normal and positive activity. The Financial Postâ€™s Terry Corcoran recently wrote: â€œIn tough times, corporate Canada had resources to fall back on.â€
He suggests a kind of corporate Keynesianism, in which businesses build up reserves during booms and draw them down during recessions. (Accumulating cash during booms and then investing it when asset prices are depressed would be good for profits as well as economic stability.)
This story directly contradicts the Macdonald-Laurier Instituteâ€™s previous rationalization that companies build up cash reserves in tough times: â€œbusinesses respond to credit crunches by holding as much cash as they can to meet their financial obligations.â€ In fact, corporate cash hoarding has been more of a secular trend than a cyclical or countercyclical factor.
As I noted a year ago, businesses did withdraw some $30 billion from their Canadian-dollar reserves during the recessionâ€™s first two quarters, but then quickly rebuilt those reserves to record levels. So, a $268-billion cushion going into the financial crisis yielded $30 billion of possible stimulus followed by more anti-stimulative cash hoarding.
During those same two quarters, the value of corporate Canadaâ€™s foreign-currency reserves actually increased by $16 billion, mostly because the exchange rate fell but also because companies continued to accumulate foreign currency through the downturn. Combining domestic and foreign currency, corporate Canada only reduced its cash stash from $379 billion (2008Q3) to $365 billion (2009Q1) and has since enlarged it to $471 billion (2011Q1).
As Eric Pineault showed graphically and Statistics Canada shows numerically, corporate Canadaâ€™s overall approach for at least two decades has been to stockpile ever more cash through good times and bad (with only very rare and slight exceptions). Advocates of corporate tax cuts have not provided a consistent or convincing explanation of how accelerating this ongoing cash accumulation benefits the Canadian public.