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Cash-Hoarding Companies Neither Spend Nor Lend, Fouling Economy Further

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WASHINGTON -- The job market is stagnant and the GOP has the federal government tied up in knots, so the country's short-term economic future is in the hands of America's titans of industry and finance.

But despite having an unprecedented amount of cash on hand with which to create jobs -- more than $3 trillion, nearly four times as much as the 2009 stimulus bill -- the corporations aren't spending and the banks aren't lending.

"They've been making money, and they haven't been spending it. So it sits there," said Jared Bernstein, a former economic adviser to President Barack Obama now at the non-partisan Center on Budget and Policy Priorities. "The economy has been growing since the second half of 2009, and the vast majority of households have seen very little of that. It's got to be going somewhere."

Think of it as corporate austerity.

"In a more normal economic recession, you would expect business reinvesting to grow," said Brandon Rees, deputy director of the office of investment at the AFL-CIO, the labor union federation. But instead, "that money just keeps piling up," he said. "The CEOs just can't figure out what to do with it all."

The latest report from the Federal Reserve shows that big banks' cash reserves peaked in the third quarter of 2011, but are still near their all-time high at just under $1.6 trillion -- an astonishing 80 times the $20 billion they held in reserve in 2007 (Table L108, line 28).

Large non-financial institutions' reserves are also near their all-time highs -- more than $1.7 trillion (Table L102, line 41) -- although that figure is a bit misleading as many of them also have massive short-term debt.

All that parked money translates directly to lost growth and missing jobs, said Robert Pollin, co-director of the Political Economy Research Institute at the University of Massachusetts Amherst. A recent study by Pollin's institute found that if America's largest banks and non-financial companies moved just some of that cash into productive investments instead, that would give the economy a huge boost, creating about 19 million jobs in the next three years and lowering the unemployment rate to under 5 percent.

So why are the big companies and big banks hoarding instead of investing? The most popular theory among economists is that in this lethargic economy, with little sign of growing demand, the corporate bigwigs just don't see the opportunities for profit.

"If you're looking to invest right now, you'd be looking at a consumer base that's super-strapped," said Heather Boushey, senior economist with the Center for American Progress, a pro-Democrat think tank. "I don't think there's a very good sense out there that you're going to see some sort of consumer boom in the absence of any policy action," she said. And by policy action, she meant some sort of government stimulus of the type Republicans have vowed to block.

"Companies invest where they see a return and they haven't seen much of a return in investments here because we've never really escaped the grip of the Great Recession," said Bernstein. "If you look at where they're profitable, it's in economies that are growing more quickly than ours," he said. "We're growing, but we're growing too slowly."

There are other, less mainstream theories about why companies are holding back. The U.S. Chamber of Commerce, which pursues an increasingly right-wing political agenda on behalf of its giant multinational funders, blames it on Obama and "regulatory uncertainty" -- an argument that is easily refuted.

But the notion that America's richest executives might be unwilling to create jobs until after Obama leaves office may have some truth to it -- just not exactly the way the chamber puts it.

Consider, for instance, how Miami Herald political cartoonist Jim Morin addressed the subject earlier this week. In his cartoon, one businessman says to another: "We're not hiring because we don't like the looks of this economy." The second asks: "What does this economy look like?"

In the next frame, the first businessman, now pointing at Obama, says: "Like this."

Pollin said he thinks some political motivation may indeed be at work. "There's probably some truth in it," he said, noting that "there's no way to get at that really analytically."

But, he pointed out, while companies may be correct that under a Mitt Romney administration the regulatory and tax burdens would be lighter, that doesn't mean the companies would actually be better off.

"The big thing I don't think enough business people recognize is the simple analytics of austerity," Pollin said. "Austerity is bad for business. Forget about whether it's bad for teachers, hospital workers, or the poor -- it's not good for business because it reduces demand. And when it reduces demand, it reduces opportunity for business to expand their business."

Boushey said she doesn't think the corporations are intentionally holding back their cash to hurt Obama's re-election chances. But she doesn't let them off the hook, either.

"I think the corporations are sabotaging the economy by not coming out in favor of policies that would help them make the investments that they want to make," Boushey said. "It seems Congress is not getting the message that big business in America would like to see more customers -- only the message that they want less taxes."

Pollin said he's especially frustrated with banking industry hoarding, and the resulting lack of credit for small businesses.

"The reality is that banks have essentially free access to as much money as they want from the Fed," Pollin said. "The whole purpose of that, in principal, is to move credit into the economy. But that is what this program is failing to do. The money is just stopping with the banks."

The banks argue that the risk of lending is too high -- and Pollin said he doesn't disagree. But, he said: "Then it's up to the policymakers to change the equation."

Pollin proposes a carrot and stick approach. The carrot: More federal guarantees for small business loans, so the banks won't face as much risk when they're lending money. The stick: a tax on excess reserves.

The AFL-CIO notes that some of the companies with big cash hoards have not just failed to hire -- they've actually shed workers.

"We think it does a disservice for our economy, workers, and the shareholders of those companies that those companies are not growing their businesses to create jobs," Rees said.