If anybody tells you that corporate America needs lower taxes and more cash so that they will begin to hire more people, kick them hard in the groin and when they double over, kick ‘em again in the butt. As I pointed out in my July 28th Blog, Sittin’ on Cash, corporate America has effected lots of economies of scale by laying off people, cutting back on their expenditures generally, closing down inefficient operations and hording cash that has been generated from all of these improved operations. They have merged and acquired smaller competitors, absorbed small vendors with capacities that were good internal fits, and paid off higher interest debt, but the one thing they have not done is hired more workers. In fact, they have benefited by doing exactly the opposite, firing workers: "LAYOFFS LEAD TO NEAR-RECORD PROFITS: The Wall Street Journal says that U.S. companies will soon post their sixth-highest quarterly profit ever in large part because of the money they’ve saved by laying off workers and cutting other costs. 'Big companies are recovering from the downturn faster and more strongly than the overall economy,' the Journal says. Companies on the S&P 500 posted second-quarter profits of $189 billion, up 38 percent from 2009." LBN E-Alert (Levine Communications), October 4th.
It’s obvious that a senior corporate manager would instantly be labeled an unemployable fool for hiring workers to make products or provide services to a severely contracted consumer base that is so worried about the economic future that they will not spend money no matter what the price! There are no buyers to generate the demand that would provide the remotest motivation to take on more workers. But what is even more galling is that many corporate borrowers, able to access that near-zero Fed rate interest – at a time when consumers face some of the highest credit card rates in history – are borrowing money to horde, simply because they can.
The October 3rd New York Times: “Companies like Microsoft are raising billions of dollars by issuing bonds at ultra-low interest rates, but few of them are actually spending the money on new factories, equipment or jobs. Instead, they are stockpiling the cash until the economy improves… This situation underscores the limits of Washington policy makers’ power to stimulate the economy. The Federal Reserve has held official interest rates near zero for almost two years, which allows corporations to sell bonds with only slightly higher returns — even below 1 percent. But most companies are not doing what the easy monetary policy was intended to get them to do: invest and create jobs…
“The Fed’s low rates have in fact hurt many Americans, especially retirees whose incomes from savings have fallen substantially. Big companies like Johnson & Johnson, PepsiCo and I.B.M. seem to have been among the major beneficiaries… Corporations now sit atop a combined $1.6 trillion of cash, a figure equal to slightly more than 6 percent of their total assets. In the first quarter of this year it was 6.2 percent of assets, the highest level since 1964, when it was 6.4 percent.” Fear that the economy is a long way from recovering and may slip back into the full-on recession (a “double dip”), is driving many businesses to horde a cash cushion “just in case.” Since the carrying costs are at best marginal, even as small and mid-sized businesses have virtually no access to debt at any price, there is little motivation in these behemoths’ holding back.
Since the Fed’s low interest rates were intended to support this nation and encourage employment, government might want to consider addressing applying a surplus cash penalty tax on big corporations which have borrowed at what are effectively subsidized rates, even when it is based on a marketplace placement, because the pricing is in fact the result of Federal Reserve policies. If they’re not hiring and reaping unintended benefits at the expense of “the rest of us,” maybe it’s time for our elected representatives to address this “easy button” and help begin to reduce our deficit disaster without negatively impacting either growth or the average taxpayer.
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