The comic book character Scrooge McDuck, Donald Duck's tycoon uncle, keeps a huge money bin at his corporate headquarters where he amuses himself by swimming back and forth in it and pushing it around with a little bulldozer.
That amusing perception of vast corporate cash reserves is not far from today's reality. Our biggest corporations have been sitting on a lot of money for many years and it is not a transitory phenomenon. That fabled money bin just keeps growing. According to the Commerce Department, after tax corporate profits rose 4.8 percent in the fourth quarter of 2013 from the same period a year before and corporate profits as a share of GDP -- an economy-wide proxy for corporate margins -- hit 11 percent, a new record.
A reasonable person might ask what blue chip companies are doing with all that money and one obvious answer is rewarding their CEOs with unprecedented largesse. I do not know at what point executive compensation becomes excessive but I do believe we passed that point some time ago and it is no longer visible in the rear view mirror.
My concern is not that these (mostly) guys are making money but rather the way they are making it. Instead of launching new products and identifying new markets, they have become obsessed with controlling costs and financial transactions. In the aggregate this is not a bad thing, but the companies have become notoriously reluctant to hire and slow to raise compensation for those not in the front office. This is causing hardship for many people - inflation has outpaced wage gains for the past five years -- and is undermining the economy that these businesses depend upon for their big profits.
Also I also believe that corporate managers are also shortchanging capital investment and R&D. Aggregate capital spending for members of the broad S&P 1500 index has grown by just 0.8 percent annually for the past five years, while revenue and profits have soared.
It makes sense for business to take a hard-line on spending when times are tough, but when times are good it is merely prudent to make sound long-term investments for the future. If there was ever a time when our big companies should be upgrading equipment, refining their product lines, developing new ideas and experimenting with new concepts this is it.
I am aware that a corporation's primary obligation to its stockholders, and that is as it should be. But those same stockholders are concerned about the long-term. Many important companies do not even pay dividends but that fact doesn't discourage investors who are in for the long haul. What's missing from the corporate profit picture is the long-term perspective.
Many analysts expect profits for S&P 500 companies will grow by 7.4 percent this year as sales expand by just 3.8 percent. It is that second number that should concern CEOs and investors. Their obsession with near term profits is compromising the ability of companies to build for the future.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. You may quote from this with attribution. Let me know if you would like to speak with Jerry.