Recently, I have seen two pieces that brought up the issue of corporate saving. Tyler Cowen cited Martin Wolf on the high corporate saving rate in Japan. John Mauldin reproduced an essay arguing that the ratio of corporate profits to GDP is currently above normal.
Consider some basic national income accounting, and simplify by ignoring international capital flows. We have
S + T = I + G
which means that
S – I = G – T
On the left, we have net private saving, which is private saving minus investment. On the right we have the government deficit.
We can separate private saving into saving by corporations and saving by individuals. Corporate saving consists of profits that are not invested (call this E). Call saving by individuals P. Then we have
S – I = E + P = G – T
So why is E so high? From a pure accounting standpoint, when the government runs a big deficit saving has to be high elsewhere. If individual savings flows do not rise, then the savings must flow to corporations.
Hyman Minsky viewed this as a causal model. Government dis-saving turns into corporate profits. He thought that this was how Keynesian deficit spending worked–it siphons profits into corporations. When they are in their conservative mode (“hedge finance”) they will only invest if their balance sheets are strong, so that is why you need deficits to recover from a financial crisis.
I think it is often misleading to treat accounting identities as causal models. But by the same token, when you propose a causal model you should work it through in terms of the identities. And I do not think that one should treat corporate profits as some sui generis phenomenon.
Both Japan and the U.S. have run soaring deficits. From an accounting perspective, there has to be an offsetting increase in saving somewhere in the private sector. Note that corporations are owned by people. So there is a sense in which the question you should be asking is, “Why are people choosing to do so much saving indirectly, via corporations, rather than in personal accounts?” Rather than attach great economic significance to this, as Cowen and Mauldin are inclined to do, I would guess that institutional habits and/or tax incentives are the story.
What about money supply? Where does creating lots of money to “finance” defecit spending show in such an identity?
Right you are. The motivations (and the factors that shape them) of Managers in our current phase of Managerial Capitalism “are the story.”
“Why are people choosing to do so much saving indirectly, via corporations, rather than in personal accounts?”
I would add financial repression as the most likely explanation. The corporation can provide more of a return than savings accounts.
Also, it is not so clear that corporations are saving that much. If you look at this chart http://globaleconomicanalysis.blogspot.com/2013/04/cash-cow-of-50-largest-us-companies-who.html
which also includes the debt of the corporate sector, there isn’t much net savings going on.
Similarly, if you look at this Factset quarterly report, you’ll see that corporations are in fact reinvesting most of their allegedly record high corporate profits, although it’s lumpy across sectors; interestingly, the main driver of such expansion has been fracking.
http://www.factset.com/websitefiles/PDFs/cashinvestment/cashinvestment_12.20.12
Finally, I think a lot of what is going on is (1) simply taking advantage of lower interest rates to raise money at what the CFO thinks is the bottom to fund multiple years of outlays, as opposed to taking the risk of higher rates in the future, and (2) leveraging up a bit to pay out dividends and buy in stock in a controlled manner to maximize the value of the C suite executives restricted stock or stock options.