Monday, February 11, 2013

Why Aren’t Corporations Paying More in Dividends and Does It Matter to Aggregate Demand?

Tyler Cowen likely regrets writing this about Paul Krugman’s observation that corporations are hoarding a lot of cash:
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. Maybe you are less impressed if say Apple buys T-Bills, but still the funds are recirculated quickly to other investors. This may not end in a dazzling burst of growth, but there is no unique problem associated with the first round of where the funds come from. If there is a problem, it is because no one sees especially attractive investment opportunities in great quantity. (To the extent there is a real desire to invest, the Coase theorem will get the money there.) That’s a problem at varying levels of corporate profits and some call it The Great Stagnation. The same response holds if Apple puts the money into banks which earn IOR at the Fed and the money “simply sits there.” The corporations are not withholding this money from the loanable funds market but rather, to the extent there is a problem, the loanable funds market does not know how to invest it at a sufficiently high ROR.If anything, large corporations are more likely to diversify out of the U.S. dollar, which could boost our exports a bit, a plus for a Keynesian or liquidity trap story.
Paul and Peter Dorman suggest Tyler is committing Say’s Fallacy (also known as Say’s Law which basically ignores the possibility of insufficient aggregate demand). As Peter puts it:
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 was going to add my two cents with the first one being on why corporations would be hoarding cash – but then Noah Smith has done a fine job on that query. To throw in my other cent – let me temporarily don the hat of a Barro-Ricardian equivalence type. Suppose that shareholders were all very rational agents with no borrowing constraints and that they recognized that all this hoarded cash was their wealth. Whether the corporation issued dividends or not, their wealth is unaffected. So maybe these households would be consuming the profits be they hoarded in cash or issued out in dividends. Now I know this equivalence theorem does not necessarily hold up that well in the real world so we can talk about tax cuts stimulating consumption for at least households that do face borrowing constraints. We liberals therefore tend to argue that tax cuts for the working poor tend to have a larger direct effect on aggregate demand than tax cuts for the ultrarich. So if the shareholder were someone who was borrowing constrained, hoarding cash rather than paying dividends does depress consumption demand. Then again – we liberals also tend to argue that a lot of shareholder wealth is owned by very rich individuals as opposed to being owned by the working poor. Non-Ricardians are welcome to tell me where this line of thinking has gone terribly astray!


Unknown said...

You make a good point that a large portion of shareholder wealth (and financial assets for that matter) are held by wealthy individuals. Where I think your story may be overlooking a link is between corporate profits, interest income and inequality.

As I see it, rising household and nonfinancial business debt has transferred significant sums of interest income to wealthier households and financial institutions. At the same time, undistributed corporate profits have risen substantially (possibly in response to repatriation taxes), which reduces the potential income for labor. These effects have combined to heighten wealth and income inequality, which reduces spending capacity for the majority of households that were already borrowing constrained.

In tow recent posts I have highlighted these effects by disaggregating gross private saving ( and net interest payments/receipts (

Benjamin Cole said...

Interesting. Part of the answer may be that shareholders are a very weak form of ownership. They are disparate, and even worse, often mutual funds are shareholders, meaning they own hundreds of issues. They sell if they don't like management.

So, management likes to build up a hoard to play with, to build an empire, or to slice off to friends and family hired as consultants, vendors etc.

Stopping the double taxation of corporate income would help; maybe eliminate taxing dividends.