michael.johnson’s blog

Christian E. Weller, Department of Public Policy and Public Affairs, University of Massachusetts Boston

There are few puzzles in economic policy. The trend in corporate cash holdings, though, has analysts scratching their heads. Cash has been rising by 29.2% from December 2008 to June 2010, continuing a growth trend since the early 1980s and pushing cash to its highest level since the early 1960s.

Why should policymakers care? Mainly, because it is a lot of money, $1.8 trillion to be exact. Some of it could be spend more productively than sitting in some account. Companies could spend the money either on hiring more people, on investing in new equipment and commercial construction, or on keeping stockowners happy by paying more dividends and by buying back their own shares and thus propping up share prices.

The problem is that policymakers would need a good explanation for this cash growth before they could design appropriate responses and get companies to spend the money on other, presumably more productive undertakings. There is no single explanation for corporations’ desire to hold more cash, though. Some pundits have speculated that political uncertainty over recently enacted legislation may have led corporations to hold more cash. But, cash holdings have been trending upward since the 1980s, coinciding with deregulation in a range of industries, more global trade and investment flows, increased global financial instability, but also more income inequality within countries and across countries—the rich getting richer and the poor staying largely in place. Corporations face more global challenges and less certain demand for their products, but they may also see more opportunities to enter new markets and invest in new ventures (other companies and new innovations).

Policy analysts, who care about strong job growth, faster investment, and more innovation, will need to engage in the current conversation over corporate cash, even if it may seem a little farfetched to our usual research. Do companies hold more cash to be ready for the vagaries of an increasingly globally integrated, deregulated, and less and less certain economy? Policymakers then could focus on increasing economic certainty and get companies to let go of some of their cash holdings. Or, do companies want to be ready when the opportunities arise? Policymakers could then help to foster those opportunities and get companies to spend the money sooner than they otherwise would. This will be a rich field of policy research for years to come.