From last month: U.S. Firms Build Up Record Cash Piles,

U.S. companies are holding more cash in the bank than at any point on record, underscoring persistent worries about financial markets and about the sustainability of the economic recovery.

The Federal Reserve reported Thursday that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952.

The problem is reduced demand. Continuing unemployment means that the economy is not producing demand, so businesses are not willing to risk investing in meeting demand, which means they are not hiring, which means unemployment continues. Also employed workers are working longer hours, usually for no extra pay, reducing any need to add employees. Individual companies have every incentive to reduce workers, while the economy-at-large then suffers from the resulting loss of aggregate demand. Government is not stepping up to reverse the situation by directly creating jobs. (And is not enforcing labor rules that would alleviate some of this problem.)

Another part of the problem is that banks are not lending so businesses are not willing to part with cash. TARP was supposed to trigger lending, but it did not.

From the WSJ article,

Even now, banks continue to pull back on lending. The Fed reported Thursday that net lending by the financial sector—including banks, credit unions and other lenders—was down 5.4% in March from a year earlier.

Businesses and consumers pulled back, partly because they had run out of ability to spend. Programs like the stimulus were design in part to take up the demand slack. It was hoped this would trigger companies to use some of their their on-hand cash to begin hiring and stop the decline in the economy. While the decline has been halted, continuing unemployment has meant that a real recovery has not appeared.

Clearly the Republican argument that tax cuts will stimulate growth is nonsense. These companies are sitting on cash, and tax cuts will only cause the profitable companies (taxes are on profits) to sit on more cash. The solution is direct creation of jobs by government, enforcement of labor rules, and increasing taxes at the top to restructure the distribution of income and wealth.

Dave Johnson

Dave Johnson

Principal author at Seeing the Forest.