THERE is a new question posed to our panel in the Economics by Invitation section:
Much of the recent increase in private-sector saving comes from businesses. What explains the rise in corporate thrift? How long will it last, and what policies might reduce it?
As an article in this week’s edition explains, the build-up of cash by the private sector can affect the recovery.
If cautious firms pile up more savings, the prospects for recovery are poor. Economies will be stuck in the current—and odd—configuration where corporate surpluses fund government deficits. If firms loosen their purse-strings to hire workers and to invest, that will allow governments to scale back their borrowing.
Economist Xavier Gabaix believes that the fear of another shock down the road is making firms cautious. Hal Varian thinks that firms are not investing because they see no signs of demand picking up anytime soon.
Firms are not investing because they don’t see much demand for their products now or in the near-term future. And, of course, we end up with a self-fulfilling prophecy. One possible strategy would be to offer a temporary investment tax credit or accelerated depreciation allowance.
They are hoarding cash be cause of uncertainty. Regime uncertainty. Economic Uncertainty. Even cultural uncertainty. There are so many layers of uncertainty that businesses don’t even know how to advertise. What products to bring to market. What trends can or might emerge if they help them.
Big businesses are starting to spend BECAUSE they have cash. But recessions and job recovery are led by SMALL BUSINESS and small business cannot get credit. Credit for small business is speculative. It’s all speculative. And small business owners have nothing to borrow against. Nothing. Any hard asset is now questionable in value.
To move the economy, consumers have to show that they’re spending. Companies have to show that they’re taking risks (investing). Any reference to demand is an antiquated method of looking at an economy. There isnt’ a demand problem unless there isn’t an uncertainty problem. Right now there is an uncertainty problem, so there isn’t room for a demand problem.
To eliminate uncertainty, and to create jobs, we have to loan to small business despite their weak balance sheets. That’s the problem. In a nutshell. That’s the problem.
Some of us are trying to figure out how to fund small businesses. But politically,, it seems impossible.