Sunday, February 10, 2013

The Difficulty of Thinking Macroeconomically, Exhibit C: Tyler Cowen and the Corporate Cash Hoard


Paul Krugman worries about the macro implications of corporations scarfing up unprecedented profits while sitting on a hoard of liquid assets.  Tyler Cowen doesn’t understand why:
I am confused by this argument.  I would understand it (though not quite accept it) if corporations were stashing currency in the cupboard.  Instead, it seems that large corporations invest the money as quickly as possible.  It can be put in the bank and then lent out.  It can purchase commercial paper, which boosts investment....If there is a problem, it is because no one sees especially attractive investment opportunities in great quantity.
Ah, but why are these investment opportunities lacking?  Could one of the reasons be that too high a fraction of national income is being funneled into corporate profits, rather than households inclined to spend it?  What Cowen has trouble with is seeing all the pieces simultaneously in true macro fashion.   The problem is not that corporate money can’t find its way to ultimate investment, but that too much corporate money itself reduces the pull of final demand on the level of investment.  The upshot isn’t that money disappears into cupboards, but that national income is lower than it would otherwise be.

I’m sympathetic with Cowen’s struggle: I see the same difficulties in my economics classes every year.  Students can usually see only one or two linkages at a time; it is really hard to see the whole thing as one simultaneous entity.  It doesn’t come easy even for professional economists, since writing a set of equations is one thing, but visualizing them on an intuitive level as an integrated system is another.

The fact is, there are a lot more Tyler Cowen’s in this world than Paul Krugman’s, which is one reason why it is so difficult to get a sensible discussion of macroeconomic policy.

15 comments:

Noah Smith said...

Dorman, you now do all the rebuttals and takedowns I used to do before I got a haircut and a real job. ;-)

...OK I'm lying, I didn't get a haircut.

ProGrowthLiberal said...

If a corporation with a hoard of cash doesn't have investment opportunities, then one has to wonder why they don't pay dividends. At least then the shareholders can figure out whether they want to consume their dividend income or not.

Peter Dorman said...

Noah, after you've been in your job a bit longer you'll be looking for chances to be ornery again.

hapa said...

"If a corporation with a hoard of cash doesn't have investment opportunities, then one has to wonder why they don't pay dividends"

sort of equivalent to a country holding foreign currency reserves in a volatile world?

Aditya said...

I apologise for being a pedant, but please could you remove the apostrophes from "Cowen's" and "Krugman's" in the last line?

You don't even need to publish my comment (or delete it when you see it), but they are quite disconcerting for some readers.

Thank you.

Oh, and I think Cowen might have used a weasel-word in his argument when he says "It can be put in the bank and then lent out."

The word "can", could be interpreted flexibly. It could be used as an argument to say that hoarding may not be a problem *under certain conditions*, without admitting that it *is* a problem today.

mattski said...

Isn't Cowen really arguing that fat people can't exist?

MG said...

Perhaps the great restaurant reviewer Cowen would understand it better if you presented the information using the example of sushi dishes:

"OK, the chef creates an array of dishes, but some people don't like the eel, so they don't eat it. The chef tries to sell the eel to other patrons, but they don't want it, either. So the chef ends up with a lot of leftover eel. Or else some very well-fed cats, and in the financial world, nobody gives away leftovers."

xixvek said...

Why not argue Tyler Cowen is wrong without claiming he's a fool who makes the same mistakes as beginning students? He's clearly a well-read and intelligent person who thinks extensively about these issues.

Shag from Brookline said...

Back in the late '70s, early '80s in a corporate/shareholder course I taught I had to address the accumulated earnings tax on corporation, which was of concern then in corporate tax planning. I'm basically retired now, but I rarely hear about this potential tax. Perhaps it is easy to overcome the complicated rules.

chrismealy said...

Cowen's schtick is to play dumb. He's basically a lobbyist for plutocrats, and playing dumb is his best move. If he acknowledged reality he'd be out of a job, and if he was a regular libertarian no one would pay attention to him and go out of their way to say how smart he is all the time (Ezra Klein, Matt Yglesias, etc). So it's easiest to just fake misunderstanding. (Krugman does this with the heterodox too). That way you stay in the cool kids club and get everybody making excuses for you.

Soccer Dad said...

So, after teaching macro for 70 or so years since JMK, you havn't come up with a simple intuitive way to explain linkages ?

Seems to me the onus is on your to get your pedagogical ducks in a a row.

I just don't buy this its complicated argument.

rosserjb@jmu.edu said...

A well known joke (actually fact) about Say's Law is that Say himself listed all kinds of exceptions to it. While one can find all kinds of quotes by him that appear to support it (he called it "the law of markets"), he also listed various ways and situations that people might hoard money, thereby taking it out of circulation and circumventing this "law of markets."

While I am at it, I shall also note that Say supported public works spending programs to overcome insufficient aggregate demand as for example in the wake of the end of the Napoleonic Wars. OTOH, there are historians of economic thought who continue to argue for the absolute verity of Say's Law in its absurdly classic form, notably Steven Kates and James Akhiapor, who mostly seem out to prove that Keynes was really awful and stupid and ignorant and sneaky and lying and...

Noah Smith said...

Well...I'm not actually naturally that ornery of a guy. I had a lot of frustration about macroeconomics after I made the mistake of studying it for three years, but that's over now. I want to focus more on building stuff. But I'll always be around to help out the ornery shock troops fighting the good fight! ;-)

iamironman said...

@xixvek

The thing is Cowen is a fool. So there's nothing wrong with speaking the truth. He's either: a.) a terrible economist, b.) a shill for the worst, most iniquitous economic policy or c.) Both.

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