The phrase “dead money” is one of Mark Carney’s parting gifts to the country. It was in a speech to the Canadian Auto Workers two years ago that the then-governor of the Bank of Canada famously took aim at corporate Canada, accusing it of hoarding billions of dollars in cash that could more profitably be invested.
How he knew this was as much a mystery as how the corporations themselves could have been so blind to their own self-interest. Still, the governor had no doubt. If corporations could not find useful ways to invest the funds, he said, “give it to shareholders and they’ll figure it out.”
Others have since taken his idea and run with it. A number of commentators have called for corporate cash holdings to be taxed, as an incentive to invest them. The Broadbent Institute, an NDP-affiliated think tank, recently issued a report calling for the appropriation of $670 million from corporate coffers to provide every person under the age of 25 with a “Youth Job Guarantee.” Never mind how any of this would work. As a new study from the C.D. Howe Institute (It’s Alive! Corporate Cash and Business Investment) makes clear, the whole underlying premise, of corporate cash as useless “dead money,” is an illusion.
There is no shortage of investment, for starters. Since 2011, it finds, investment “has been growing at roughly the same pace as the economy.” Indeed, as a share of output, it is slightly above the average of the last 30 years. Neither is the money “dead.” Corporations do not build cash holdings out of sheer inertia, but as a kind of insurance, protecting themselves from sudden cost increases or revenue declines. That’s entirely prudent, especially in the volatile resource sectors that make up so much of Canada’s economy. Indeed, when it comes to the banking sector, another prime “dead money” offender, it is government policy.
Corporations used to manage risk by maintaining large inventories. This tended, perversely, to amplify the business cycle: as inventories mounted in the early stages of a recession, corporations would shutter factories and lay off workers, rehiring them only after inventories had sufficiently fallen. Nowadays, there’s a greater tendency to hedge with cash, giving companies the flexibility they need to take advantage of globalized supply chains and just-in-time delivery, raising and lowering purchases as market conditions warrant.
The rise in cash holdings is not just happening in Canada, but around the world. It isn’t a reflection of some uniquely Canadian tendency to caution, but a response to changing circumstances. The uncertainties of the world economy, in the aftermath of the financial crisis, are an obvious contributing factor. And with interest rates near zero, the opportunity cost of holding cash is low.
Most of all, it has nothing to do with the level of investment. Believe it or not, corporations have other options when it comes to funding investment than cracking open the piggybank. They can borrow, issue stock or sell fixed assets. There is no simple relationship between the decision to hold cash and the decision to invest. Indeed, some of the biggest cash hoarders, such as energy and mining, are also some of the biggest investors.
As the C.D. Howe study’s author, Finn Poschmann, says, if governments are concerned that businesses are not investing as much as they might like, they should “attend to factors that encourage business investment, such as a stable fiscal environment, stable investment policy, and committing to reduce rather than increase taxes.”
As for Carney, it wasn’t long before he changed his mind. Dead money, he said the following spring, is “dead no longer. Resurrected.” If only he would pass the word to some of his acolytes.
