Corporate balance sheets healthy as economy languishes
TheStar.com – opinion/editorialopinion
January 22, 2013. By Carol Goar, Editorial Board
Corporate leaders reared up like wounded lions last August when Jim Flaherty and Mark Carney scolded them for hoarding their earnings.
The double dose of censure came out of the blue. The first rebuke came from the normally business-friendly finance minister. “There’s a lot of capital sitting out there that needs to get engaged,” he said “We need private action.”
The second, delivered in more colourful language, came from the governor of the Bank of Canada. He accused corporate executives of sitting on a huge pile of “dead money” while the economy languished. “Their job is to put money to work and if they can’t think of what to do it, they should give it back to their shareholders.”
Initially business leaders lashed back angrily, insisting the nation’s two top economic stewards didn’t know what they were talking about. Eventually, they calmed down and offered a more rational defence.
In the interlude, economists, pundits, union spokesmen and laid-off Canadians whose resumés had been spurned by private employers, piled on, accusing business executives of everything from greed to wrongdoing and calling for higher corporate taxes, penalties for failing to create jobs and invest in new products, and public shaming of the culprits.
Five months later, business investment has picked up and the cacophony has died down. But the underlying issue remains unresolved. Were Flaherty and Carney wrong to point out that $526 billion in retained corporate profits were a dead weight on the economy? Were business leaders wrong to bulk up in anticipation of economic turbulence? Were commentators wrong to ask why Ottawa waited so long — and so uncritically — to call on business to do its part in pushing the economy out of the doldrums?
Hoping to put the matter to rest, the C.D. Howe Institute has just issued an e-brief entitled Not Dead Yet: The Changing Role of Cash on Corporate Balance Sheets. The think-tank says its eight-page paper identifies the “real reasons” for the cash buildup in corporate coffers.
Author Finn Poschmann, the institute’s vice-president, does make a valuable contribution to the debate. But it is not — nor should it be — the last word.
“The critics’ outcry over corporate cash hoards, which has gone so far as to the accuse business of malfeasance, is mistaken,” he contends.
• First, it is based on the perception that the increase in corporate holdings is a knee-jerk reaction by business to the current economic uncertainty. In fact, Poschmann says, it is a decade-long trend. Thanks to technological advances — the shipping container revolution, better information-management systems and just-in-time delivery methods — businesses have been able to reduce their inventories and collect shipments faster. This has freed up money to keep in liquid cash-like assets.
• Second, it assumes this is a market failure that needs to be fixed. The evidence does not support that proposition, Poschmann argues. “Hence no policy response indicated.”
• Third, it fails to recognize that converting corporate assets to cash when the risk of a downturn is high is responsible business strategy. Ford took a precautionary approach before the 2008-2009 recession. Unlike General Motors and Chrysler, it survived without a government bailout.
Useful as this information is, it doesn’t address the problem Flaherty and Carney raised in the first place. They never said businesses should plow every cent they made back into the economy; they asked managers to use some retained earnings to create jobs and upgrade their technology. They never said businesses were wrong to cushion themselves against adversity; they said the buildup of idle money was excessive.
Moreover, the study raises questions of its own. How could Carney, who has a doctorate in economics from Oxford, and Flaherty, who has a department full of economists at his disposal, have misread business trends? What responsibility — if any — do profitable corporations have to stimulate a moribund economy?
Canadians still need answers. But they aren’t likely to come out of a think-tank funded primarily by big business.
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