Make Corporations Invest in America

Naked Capitalism's Yves Smith, along with Rob Parenteau, wrote an op-ed in the New York Times. It brings to light corporations are sitting on profits and not reinvesting in their companies and America.

Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on average ran a net financial surplus of 1.7 percent of the gross domestic product — a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P.

They mention the obsession with quarterly profits as one reason corporations are sitting on wads of cash. Investors are also in part to blame. The minute a quarterly earnings miss or quarterly profits are not bigger than the last, investors pummel and punish a stock.

Also mentioned the reason corporations are sitting on profits and not reinvesting is to pay obscene executive compensation packages.

The point is to create corporate tax code changes to make corporations reinvest those profits back into their companies.

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.

At the same time, the federal government must continue to encourage investment in the economy — ideally by creating incentives for investments in national priorities, like new energy technologies.

Great idea and no doubt it will fall on deaf ears. Just like trying to change the corporate tax code so it's not profitable to offshore outsource your job. These changes were in the unemployment insurance bill Republicans refused to pass in the Senate. Yes, count on Republicans to make sure it pays well to offshore outsource American jobs.

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Possible problem with this

I'm all for reinvesting into the economy to get things going. But we need to keep two things in mind here. First a lot of corporations have stated that the primary reason for all the hoarding is because the outlook in their businesses aren't all that rosy. Capital goes where it can make the most money. If at present, capital allocation won't produce a proper return or a return at all, those folks at the top could face rancor from shareholders. Secondly, given the spinelessness of our political leadership, any law mandating redeployment of cash could very well entail new investments overseas. Do you really believe Congress wouldn't include loopholes in any such legislation to not allow this?

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Hi JV and response to problems

Considering we cannot get corporate tax code changes to stop making it more profitable to offshore outsource jobs and production overseas, I completely agree with you. There is no doubt they would pass something for even more incentives to invest and create jobs overseas. This government is too corrupt to actually change the law or make investment in the U.S. more favorable. But I think claiming businesses are not re-investing because the economic outlook isn't too rosy (which is very true) is ignoring the recent history of these corporations hording cash for quarterly earnings and executive compensation.

But yeah, we cannot get this government to pass anything that's a change, even with a financial Armageddon under their belt.

Haven't heard from you for while so very glad to see your comment!

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Business with Huge Cash, as Non-Bank Banks

Balance sheets of non-banks are flush with cash as quite never before. It is a bright spot. Any company with too much cash is under pressure from shareholders, and the tax law (punishes Holding Companies) to invest or distribute as dividends.

The question is why there are not more moves like Sam's Club which is reaching out to small businesses.
Business loans are more scarce than ever from banks. Why not more non-bank-banks? There has been some discussion of M3?

On outsourcing, most people are should-to-shoulder with Bob. The hierarchy typified by the WS
Journal, will fight for outsourcing, unemployment and offshoring, so much like the French Aristocracy of the 1780s. Their party goes on and on.

We are way overdue for a Revolution.

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