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Corporate Cash Hoarding Reflects Inadequate Demand

By Matthew Yglesias on September 19, 2011 at 9:20 am

"Corporate Cash Hoarding Reflects Inadequate Demand"

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The Wall Street Journal has a nice piece on the growing phenomenon of corporate cash hoarding as American firms pile up more highly liquid assets rather than investing in expanding business activities.

This hasn’t attracted nearly enough mainstream attention, and a lot of the not-so-mainstream attention I’ve seen focused on it has been a little bit conspiratorial in tone. This is, however, precisely what a basic demand-side explanation of the recession would predict. If demand for oranges drops, normally people buy apples instead and the economy reconfigures. Or maybe demand for Toshiba laptops drops and people buy Apples instead. But it’s possible instead for demand for everything to drop, in which case people buy cash and cash-like instruments instead. Here, instead of the economy reconfiguring itself to produce fewer oranges and Toshibas and more apples and Apples, the economy instead reconfigures to produce fewer goods and services overall. Hence vacant retail storefronts, idle workers, factories skipping shifts, construction equipment sitting by the side of the road, etc.

What policymakers need to do is recalibrate expectations of demand growth. People need to think that over the next couple of years the United States will be working to rapidly close the gap between potential and actual production. Then these cash indicators will drop to more normal levels, and that itself will increase real output and employment.

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