Why Aren't Corporations Spending?

The well-being of the economy depends on it

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The country's dismal 9.5% unemployment rate has many economists debating a second federal stimulus. But government spending can't revive the economy by itself. What's needed, many argue, is increased spending by corporations, which continue to prefer to spend profits on dividends and bonuses rather than investing in their own businesses. What's holding them back and what policies, if any, will incentivize them to spend?

  • Because of Regulations, Corporations Are Afraid to Act, writes Fareed Zakaria at The Washington Post:
The key to a sustainable recovery and robust economic growth is to get companies investing in America. So why are they reluctant, despite having mounds of cash? I put this question to a series of business leaders...

Economic uncertainty was the primary cause of their caution. "We've just been through a tsunami and that produces caution," one told me. But in addition to economics, they kept talking about politics, about the uncertainty surrounding regulations and taxes... One CEO told me, "Almost every agency we deal with has announced some expansion of its authority, which naturally makes me concerned about what's in store for us for the future."

The economic crisis forced the government to expand its authority in dozens of areas, from finance to automobiles. But precisely because of these circumstances, Obama needs to outline a growth and competitiveness agenda that is compelling to the business community. This might sound like psychology more than economics, and the populist left will surely scream that the last thing we need to do is pander to business. But the first thing we need is for these people to start spending their money -- soon.
Over the past decade and a half, corporations have been saving more and investing less in their own businesses... Over the past decade and a half, corporations have been saving more and investing less in their own businesses...

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.

Instead of pursuing budget retrenchment, policymakers need to create incentives for corporations to reinvest their profits in business operations. One way to do this would be to impose an aggressive tax on retained earnings that are not reinvested within two years. Another approach would be a tax on the turnover of corporate financial investments that would raise the cost of speculating with profits, rather than putting them into the business."
  • Capital Markets Need Pro-Capital Policies, writes Ed Morrissey at Hot Air: "In order to unlock the capital in those ledgers, the US needs to set a fiscal course that demonstrates deficit reduction and elimination through substantial spending cuts rather than future tax hikes. That means an end to government interventions, especially those added or enhanced in the last few years that took the annual federal budget from $2.77 trillion to over $3.8 trillion in just three fiscal years. Capital markets need to see pro-capital policies, run by people who actually understand capital markets, and not by ivory-tower intellectuals whose closest experience to private-sector management was a case study published by the Harvard School of Business. And until Washington starts producing those kinds of policies, investors will continue to shield their capital -- or find other markets in which to invest it."
This article is from the archive of our partner The Wire.