Dead Money

Kudos to Bank of Canada Governor Mark Carney for raising the profile of the over $500 billion Canadian corporations are holding in excess cash surpluses and not investing in the economy, which garnered front page coverage (and kudos to the CAW for inviting him to speak.)

It’s not the first time he’s raised this  concern.  Last year at the Empire Club he told assembled business leaders that their companies were in “rude health, have the means to act–and the incentives”, urging them to invest their surpluses.   After cutting corporate tax rates, Finance Ministers Flaherty and Duncan have also demonstrated frustration with Canadian businesses for not investing enough in the economy and urged them to invest more.

Contributors to this blog, including Jim Stanford, Erin Weir, Andrew Jackson and myself have raised concern about corporate Canada’s growing corporate cash hoards and surpluses for much longer.

It’s important to recognize that this half a trillion didn’t just fall from the sky into the corporate coffers.  As I pointed out on page 6 of this piece published in early 2007, the growing corporate surpluses ($300 billion at that time) represented an unprecedented shift in the balance between household and corporate sectors.


Prior to a dozen years ago, Canada’s household sector had traditionally run surpluses which were then lent to corporations to invest in the economy.   As a result of slow wage growth, high profits, corporate tax cuts, rising house prices, and slow rates of business capital investment that relationship completed changed around 2000–and it’s got much worse.  Above  is an updated version of the slide, which I’ve used in many presentations since.

The flip side of the growth of these  unprecedented corporate surpluses and the resulting growing cash hoards is of course record rates of household indebtedness–which is a major threat to our economy.  While there’s always alarmism about government sector deficits, one of the the underlying problems that helped cause the crisis and is a factor in our slow rates growth was this imbalance and the growing rates of household indebtedness.

It’s not just Canada, but similar trends occurred in the US and Europe.   And it’s a double-edged sword.  While CEOs may claim their surpluses and cash hoards are a buffer against economic uncertainty (as Matt Campbell did in the Globe this morning), much of the non-financial corporations surpluses ultimately went into the increased financial speculation that caused the financial and economic crisis.   In these ways, it’s not “dead money” any more than zombies are dead: it’s money that, while seeming to keep their hosts alive, has played havoc with the rest of us. Even the OECD and the IMF now seem to recognize to some degree that growing inequality of income (and between sectors of the economy, which is related) is bad for the economy.

Our Finance Ministers have used tax cuts, low interest rates, wage suppression, deregulation, etc. etc. ostensibly to get corporations to invest more of their profits and surpluses in the economy–but it hasn’t worked.  Now they (and Carney) are trying to use moral persuasion, but that’s unlikely to work either.

Capitalism, in its different forms, isn’t supposed to be swayed by any morals beyond its own: maximizing short-term profits.   If CEOs don’t see any potential reward  for making an investment  (whether through profits or personal reward through share buybacks and stock options), then they aren’t likely to do it.   And if there’s a lack of demand for their products, then they aren’t going to invest.

Returning excess cash to shareholders, as Carney urged them to do if they aren’t going to invest, isn’t going to help much either.   While pension funds could also benefit, much of this will go to the wealthiest in society.  This will not only lead to less economic stimulus (as they have a lower propensity to spend), but it will also increase inequality and economic instability — as even the IMF, OECD and Conference Board now recognize.  And if the wealthy are to invest it, where would they invest it: back into companies that aren’t investing in the economy, speculative financial investments, or into more real estate, blowing up that bubble even more?

There’s a simple and straightforward solution.  If corporations aren’t going to invest despite all that’s been provided to them, then governments should tax these surpluses back through various means and use the revenue to increase public investment in the economy and redistribute the wealth to reduce inequality including by expanding public services, which will go a long way to improving the precarious state of household finances.

(Of course, we’re not going to get much of this from most of our existing governments.  With the failure of supply-side economic policies in stimulating investment and the economy, I expect that Flaherty and co. will instead accelerate privatization and P3s in their coming budgets: essentially handing over public assets and investment opportunities at the public’s expense on a platter to private business who are failing to invest money into the private sector.)

Update:  A shortened version of this blog post was published by Toronto’s NOW magazine in their August 30 issue.  Media coverage of this issue has continued, with a number of papers writing editorials and other stories by journalists and columnists.   However, I haven’t seen any make the point about how this was the result of corporate tax cuts and that perhaps this excess cash should be taxed back, even by intelligent writers such as Thomas Walkom and Les Whittington of the Toronto Star — even though a lot of public comments on these stories have made that point.   Quite incredible: is mass media discussion of increasing taxes on corporations in Canada now strictly verboten?



  • Great post Toby. Love the graph. I hadn’t seen it presented like that and its quite the contrast!!

  • The corporations and their ‘bought and paid for’ politicians continue to steal the public treasure and the public commons. Canadians don’t seem to notice, or even care. Sad.

  • I’ve been thinking that low corporate taxes act as a disincentive to capital investment. After all, corporate taxes are taxes on profit–net profit. Capital investment is subtracted from profits. So if I’m a corporation and my tax is 40%, maybe 25% after loopholes, it could be well worth trying to make money by investing in the company, because that investment is made with pre-tax money. On the other hand, if my tax is 15% before loopholes, very little after, then I can just keep the cash and put it into financial industry shenanigans I see as maybe having a higher return (especially what with leverage and so on). There’s no incentive to turn that capital to investment in my company.

    Incidentally, has anyone else noticed that the basic frame for the right to talk about corporate taxes is to discuss them as if they were like income taxes for people, that is, as if they were taxes on gross revenue? Most conclusions you see right wing commentators draw only make sense if the corporate tax was a tax on revenue. For instance, they’re always talking as if corporate taxes can turn a profit into a loss and force companies out of business in hard times, which obviously they can’t. People buy it because the taxes they’re used to can work like that. It’s a frame that needs to be fought.

  • Re: Purple Library Guy.

    Very good points. I’ve tried to wrap my head around this, too, and rationalize this behaviour too, because basic micro economic theory is that lower corp tax rates should spur investment. Instead, we’ve seen the opposite.

    While this really justifies separate posts–one serious, another for the lame excuses I’ve heard from proponents–a few pet explanations have come to my mind.

    One is that corporate tax cuts may be making macro situation worse in terms of redistribution and thereby weakening demand.

    Another more micro pet explanation–based on my experience in government providing “industrial assistance”–is that many businesses are operated as profit satisficers rather than profit maximizers. Lower and lower corporate tax rates (and lower wage and material costs) provide an easy way to meet profit targets without doing much to increase investment and productivity.

    Of course, it may be that CIT rates are really fairly irrelevant compared to other factors and costs (such as demand, exchange rates, other financial investment opportunities) and lower investment rates are simply a consequence of those other factors. But the (contrary to expected) correlations are just so close, it’s hard not to think there is some connection!

    All worth more analysis–rather than the knee-jerk Econ 101 reactions and dated references we get from some.

  • Eric Hamilton-Smith

    Great post Toby. And I agree with your comment that the worsening macro situation and weakened demand are likely culprits for the trends we’re seeing.

    We’ve learned from several PEF authors that wages have stagnated against sharp increases to the prices of necessities, squeezing out any disposable household income that may have otherwise contributed to ‘healthy’ consumer demand. Quite intuitively, if people don’t earn enough to spend they cannot contribute significantly to demand.

    Since ‘trickle-down economics’ (i.e. knee-jerk Econ 101) has been so thoroughly disproved by empirical evidence over the past decade, why not try ‘trickle-up economics’ for a change? Focus on increasing wages, and watch demand take-off! Either way, the corporations will end up making significant profits, the only question is whether their short-term profits are worth sacrificing our economy’s long-term survival.

  • Re: Purple Library Guy (& Toby). That’s an interesting point. Higher effective corporate tax rates make the cost of holding cash higher, making investments in labour and capital relatively more attractive.

  • Great article Toby,

    As predicted the CEOs came out swinging after Carney in the several quite barbed retorts.

    Typical of this age of the war on information being led by Harper, they tried the old paint the qualitative frame of cases where some companies are investing, against this dark backdrop of the quantitative that states the opposite (and that is not a frame- it is the truth).

    Seems like the CEOs called in several favours today as the globe is filled with other defenders of sitting on cash as a good thing.

    Sadly these CEO’s missed the imperative aspect that you point out Toby, the only thing holding this economy together, in terms of demand, is the acceleration of credit indebtedness of the average family. As was the recent case in the USA, this model of economic foundation is not secure.

    Quite simply we get back to housing bubble, it can not inflate forever, and be used as a surrogate for growth in any economy for very long.

    WE NEED INVESTMENT- and my belief is the only way we will get investment from the business community through a massive strategic innovation policy by government based upon a smart growth in more social program spending in all those aspects that produce a more productive, knowledgeable, secure and happy workforce.

    The CEOs are not wrong in their article above, there are some small areas of growth and investment, but the data suggests that they are not the norm.

    On MIke Moffatts article, is he suggesting that Carney gets into the quantitative easing space? That would definitely help spring free that cash hoarding problem, as the price of security would rise dramatically?

    With regards to Toby’s point on lower CIT and the effect on investment, I would very much endorse your idea of profits satisfiers. Innovation is hard! And it does take more than just investment. So the easy fix is cuts to taxes.

    I do bet though that quantitative easing here in Canada will never happen, because that would actually make it quite costly for corporate Canada to sit on their hands or alternatively do the hard work of creating investment centers for productive capital.

    However, that could also create more incentive for increasing the motives for increasing the financializing of the economy. That is where capital went for the last 20 years and look where it got us and we all know that is the last thing we need right now is more speculative investment.

    Summer holidays are now over!

    And so too is my war against the City of Ottawa to save ash trees. We saved a few thousand but alas that work is never done, and it was definitely an eye opener in the machinations of city hall and the elected versus the administrators and the public. Wow what a spectacle.

  • Good post Toby. I’m less impressed by Carney’s comment though.

    His point on low investment is typical of what prominent elite spokespeople say when they occasionally do raise good, albeit obvious, points. Last year some think-tank raised inequality as an issue also, but none of the staightforward solutions – higher wages, more unionisation, labour regulation more favourable to workers, higher taxes on the well-to-do, etc, etc.

    It is really the solutions that matter, less the issues raised. Carney’s solution of increasing dividends will do what you say, further enrich the already rich, help some pension funds, but provide almost no economic stimulus. Hardly a brilliant outcome, although pension funds could certainly use the help.

    But he won’t come out directly and say we need more public services – health, senior care, daycare, transit, etc. We need more public investment in infrastructure. We also need programs to create jobs for everyone who wants to work, especially young people and low skill workers.

    Carney’s point is in the same family as those of other politicians who say we need more jobs, a good point, but then offer backward solutions like reducing wages, crushing unions, etc. Carney’s not that backward, but really, solving low investment by paying higher dividends to the rich, give me a break.

  • Very good article Toby. I like the idea of levying a small tax on retained earnings which would act sort of like an interest charge on undistributed profits. I wrote a short piece on that last year.

    Also, you are right on with respect to the ineffectual policies that have been put in place to try and encourage investment. I tend to thing only increased employment and greater effective demand would work.

  • I have suggested for 10 years now that we should have a business tax credit for profitsharing. Not the puny profitsharing we now have but 20% of net profits should be plowed back in to workers. Only substantial profitsharing should qualify a corporation for a tax credit. This expands household income, and with it, supply and demand. New jobs quickly follow.
    It is a decentralized distribution, and it is to the people who actually produce wealth at the bottom line. Everyone wins really, even business benfits with a growth cycle and a built-in stimulus plan. Best of all, it is politically neutral. It is the missing link of supply-side economics and the missing link of economic democracy. It dovetails both left and right. In my book, I propose to start it in one state first as an experimental demonstration of its effectiveness. What business would not want to re-invest in its own production and employees with money that would have gone in taxes?

  • Addditional comment re Carney:

    The positive aspect to Carney’s comment is that it does give credibility to the progressive point that corporations are not investing enough back into the economy. That allows us to propose that governments should do so (yet another time).

    I do take issue with the way you put something. You note corporate taxes should be raised and the revenue used to fund various worthwhile things. This may be required by the provinces, but the federal government could spend what is needed without rasing taxes so long as its spending does not outstrip available resources. I fear putting it the way you did could be used to get the feds off the hook. If you put as a prior requirement that the feds must tax before spending, it gives them the out that since they do not have the money to spend they cannot do so. This is not true for the issuer of our currency. It always has the money. Although it is true it must be careful not to spend beyond the availibility of real resources and cause undue inflation.

  • Hi Keith:

    Thanks for the comments and of course I agree with you about solutions. Increasing dividends is probably the least economically stimulative solution, but it may be that Carney and Flaherty juts made the statements as a set-up to make it look like they were doing something, knowing that banks were ready to increase their dividends (even though the cash surpluses are of non-financial corps.)

    You are right with your second point, but I also agree less with that as an approach. Yes, absolutely governments could certainly spend more money without raising taxes. However, I believe that distribution of income and capital and where money goes does matter, both for the economy and for political power. Large corporate surpluses and growing inequality fuelled speculation, crowded out productive investment and led to the financial and economic crisis that we’re now paying for. Growing corporate surpluses and too much wealth in the hands of a few have also distorted power relations. Fairer and more progressive taxes aren’t needed so much to generate revenue over the short-term, but to help fix a badly out of balance economic (and political) system.

    And to Circuit: you’ve got excellent posts and superb material on your website. (Why haven’t I seen that before?). Too numerous to mention the different interesting points, but I do appreciate the point you mention from Dean Baker, about the benefits of a financial transactions tax to reduce speculation — something I’ve also written a fair amount about.

  • Hi Toby,
    Certainly true about taxing to reduce inequality and inequality that puts our elites in a world completely disconnected from everyone else is a very toxic situation indeed. Nonetheless I mostly see government investment and provision of social programs as a separate issue from inequality. We could have the massive government investment we need in infrastructure (including high speed rail) and great improvements in government services without resolving inequality. I fear linking the two makes it more difficult to achieve the government actions. Hopefully I’m wrong and we can do it all in one go.

    It seems to me the US financial meltdown originated with deregulation and fraud rather than speculation. You might take a look at Bill Black’s work on this and see what you think. In any case Canada did not experience a meltdown of its financial sector thanks to proper regulation. Given enough time Canadian regulation might eventually have been weakened to US or European levels but the US system exploded first.

    With respect to excessively high house prices in Canada, the federal government has been trying to put a squeeze on them for a couple of years. As long as Canadian aggregate demand holds up we should be able to avoid a collapse. We’ll see.

    The basic problem the capitalist world faces today is too few outlets for profitable investment hence the large cash reserves. Failing some earth-shattering discoveries that could be exploited by private interests it is the government that will have to pump up aggregate demand through investment and social spending. It could also be done the US way – through outsized military spending but let’s hope we can keep that off the agenda. Of course this is obvious keynesianism. Perhaps what is most discouraging today is that Keynes’ insightful recommendations of 75-80 years ago are obviously what are required today yet government action in that direction in most countries is only taken in the face of catastrophe and even then reluctantly.

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