Wednesday, January 18, 2017

The Corporate Cash Fantasy

U.S. corporations are “sitting on a lot of cash”. This has been a common refrain for a couple of years now.

What is meant by this is that the balance sheets of corporations are composed of assets and liabilities, and that currently the proportion of those assets held as cash is relatively large.

People view this as a problem because cash isn’t much of an investment. Economic growth comes mostly from productivity improvements, those come from investments, and we’re not investing as much as we could or should. Or so the story goes.

The fantasy is in two parts.

Democrats assert that corporations are holding out until Republicans are voted into power at the national level. Basically, that Republicans are mean.

Republicans assert that corporations are holding cash because they dislike the actual policies of the Democrats, and are holding out until Republicans are voted into power at the national level. Basically, that Democrats are stupid (or more diplomatically, that they should know better than to make poor policy choices and then blame others).

When thinking about policy, you should learn that it's a red flag when opposing parties think their problems can be solved in different ways, but are unified in both blaming the same third party.



Do note that this is related to, but not quite the same as, concerns that American firms are holding a large proportions of their recent profits outside the country, and that these can be, will be, or should be, repatriated back into the U.S.

The reasons for that have a lot to do with tax systems requiring periodic reform, and the American tax system not having been updated as recently as many other countries. This has left us with both relatively higher corporate tax rates, and a bizarre system in which profits left overseas are taxed once, but taxed twice if they're brought back home.

But again, views on that commonly devolve to "Republicans are mean" and "Democrats are stupid".


These positions run into 2 problems when we look at the data.

The first problem is that the run up in corporate cash mostly occurred in 2000-4. Check it out:


(I could not position this chart properly. Not sure why).

Anyway, it's pretty clear from the blue line that corporate cash was lower in the 90's, went up by 2005, and then stayed there. We're not quite sure what the reasons for that are. What should be clear is that it isn't about Democrats and Republicans, or the performance of the economy over the last 8-10 years. The reasons have to do with corporate finance, and it's not required but if you want to learn more I drew this chart from Campello's "Corporate Liquidity Management" article.

There's an additional minor side point now that you've seen the graph. Both parties are attributing current weakness, in part, to corporate cash holdings. But then neither one can explain why things didn't start getting bad in 2000-4 when they were accumulating all that cash.

The second problem was noted by Summers in that article I quoted last week:

He also dismissed the idea that tax policy aimed at encouraging US companies to repatriate cash held overseas would provide a big boost to the economy. Trump had repeatedly championed this idea along the campaign trail.

"The vast majority of the companies who have large overseas cash also have substantial amounts of domestic cash," Summers said. "The reality is that cash that's brought home will be used to pay dividends, to pay back shareholders, to buy back shares, to engage in mergers and acquisitions, to rearrange the financial chessboard, not to invest in large amounts of new capital. It is a chimera to suppose that there will be large increases in capital investment as a consequence of that repatriation."†
Basically, firms could spend this cash on a lot of stuff, but what they're choosing to do is spend it on their own savings accounts. Can you imagine if both Democrats and Republicans went around saying that the problem with America was that people like you and I saved too much for a rainy day? We'd recognize that quickly as nonsense. But they point fingers at firms doing the same thing, and many people suspend any sense of reasonable suspicion.

The upshot of all this is that both Democrats and Republicans are likely to be disappointed with any plans that rely on changes in corporate cash holding. And, of course, politicians will probably blame the firms for this.

† You folks are bright, but relatively new to work at this level. How many of you know what chimera means in this context? How many of you looked it up as soon as you saw it? The internet is an incredible resource for making you smarter. Take advantage of it. I'll help you out this time around: chimera has multiple meanings, but in this context it's the fourth one down on this page.

Saturday, January 14, 2017

The Flow of International Trade

Excellent visualization of the scale of exports and imports around the world.

If you ever wondered why Latin America, sub-Saharan Africa, and south Asia are poor, now you know.

Via Cafe Hayek.

Friday, January 6, 2017

The Wide Macroeconomic Latitude for Success

The phrase “wide latitude” comes from the age of sail. It means that you are taking a passage between two land masses that’s wide enough that you can safely get through with low visibility. It’s the Drake Passage instead of the Straits of Magellan.

One lesson of macroeconomics is that there is a wide latitude of outcomes for a variety of policy inputs. This means there are a lot of situations in which good policies can turn out poorly, and bad policies can turn out well.


Just to be clear, I don’t like Trump. I liked Clinton less. And I wasn’t very fond of Obama and hmmm … McCain, Kerry, Gore, and so on. In retrospect, I wish I’d been more tolerant of Romney. Bush II struggled to be OK in my book. With BIll Clinton, well, it’s hard to argue with success, but I do think having a foil helped.


Peter Navarro is Trump’s top economic advisor. He is a not-so-famous business school professor, who’s pushed a variety of macroeconomically odd populist ideas over the last 25 years.

WIlbur Ross is Trump’s nominee for Secretary of Commerce. He’s an investor in the Gordon Gecko mold: he buys distressed assets, gambling that some of their poor performance is due to poor management, and therefore fixable. He is not an economist.

Larry Summers is a macroeconomist (and a medium-lister for a Nobel Prize in the future). He’s also a former cabinet secretary, and got chased out of the leadership at Harvard for being too conservative (even though he worked in both the Obama and Clinton White House’s). I have some personal reasons for not liking Summers much, but I am warming up to him in his position as a Democratic eminence grise. It helps me that he was a strong internal critic of the Obama stimulus package.


All of the above is a preamble.

Summers spoke out this week about Navarro and Ross’ view of the macroeconomy.

… The paper authored by Ross, the billionaire investor appointed as commerce secretary, and Navarro, the economist named as the head of Trump's newly formed White House National Trade Council, goes "beyond any set of doctrine that has been taken up by any administration in my lifetime."

… "The logic of it, the arguments made, are so far out of the mainstream of any kind of responsible economic thinking that they are the economic equivalent of creationism."

"So if this paper is to be a guide to US economic policy, and I'm not sure at all sure it will be ... but the kind of thinking that is implicit in that paper goes beyond any set of doctrine that has been taken up by any administration in my lifetime," he said.

I added the italic emphasis, and I think it’s important: a lot of people suspect that the Trump administration will not follow through on a lot of things they do to capture attention.

Even so, I think it’s clear this is a riduculously harsh opinion from someone with both expertise and experience.


The problem for you as a student in thinking about policy and macroeconomics is that we can’t do experiments very well on this stuff.

Trump and his people could be right.

But policy is kind of like a roll of the dice. Trump has gotten the opportunity to roll. If he rolls well, does that mean he has some particular insight to rolling dice better than others?

He might. But the way to figure that out is to look, over and over, and different situations in which similar choices were made. Scientifically, we can’t have a good sense of whether Trump’s peoples’ ideas are good or not until 20 or 30 years down the road when we can look back at a whole bunch of similar situations.

Summers, speaking from experience, is noting implicitly that there isn’t much past evidence that positions like Trump’s have worked out well, on average.

Sunday, January 1, 2017

Utah the Rich State or Utah the Poor State?

Rich States, Poor States* is a popular economic analysis in Utah. In large part, this is because Utah ranks very high in their analysis (# 1 in economic outlook for most of the last 10 years).

It’s difficult to deny that Utah is on a pretty good run. Macroeconomically, the state has been thriving since the resource extraction downturn of the late 1980’s.

The position of Rich States, Poor States is that this is due to economic policies pursued by Utah’s politicians. They rank Utah # 1 in 3 of 15 policy choices: having a flat income tax, having little or no estate tax, and having a low minimum wage. These are politically conservative policies (no surprise there in Utah), and clearly the publication is cheerleading for more of those.

The thing is, a measure of economic outlook ought to have predictive power for GSP (the state level version of GDP). EconBrowser reports a bunch of regressions and charts that show … pretty much no relationship at all. Here’s an example:


This shows last year’s ALEC ranking (lower is better), versus the differenced logs (approximate growth rates) of this year’s GSP. If ALEC is on to something with their rankings of policies, the red curve should be downward sloping. It isn’t.

None of this says that Utah’s policy choices are bad. But it does say that they are no better or worse than other states.

* The full cite is Laffer, A.B., Moore, S., and Williams J., Rich States, Poor States, 2016, 9th ed., American Legislative Exchange Council: Arlington, VA.

Friday, December 23, 2016

U.S. Urban-Centered Mega-Regions

National Geographic reports an excellent job with a new version of an idea I included in my text starting with version 2.0. This is that much of macroeconomics is about where you live.

So check out this article entitled “Four Million Commutes Reveal New U.S. ‘Megaregions’”. I do think they need a better editor: it’s not the megaregions that are new, but rather the use of four million commutes to map that out.

Anyway, they produced this map:


Each line on here is someone’s commute. The shading is chosen to indicate the hubs for commuting that have evolved because this is an emergent process. Those are based on an algorithm rather than personal preferences. Interestingly, it determined something that most Cedar City and St. George residents know, but that seems lost on SUU administrators and Utah state officials: we’re in the Las Vegas megaregion, not the Salt Lake City one. If SUU feels like an afterthought across the state, now you know why.

This is based on an academic article entitled “An Economic Geography of the United States: From Commutes to Megaregions” that appeared on PLOS|one. That’s not required, but even so it has lots of maps that even an uninterested reader might find interesting.

Tuesday, December 6, 2016

Why Is Macro So Hard? Voters Sometimes Get What They Want

The news this week is that President-Elect Donald Trump has convinced executives at Carrier to not move a production facility from Indiana to Mexico.

The backstory to this is that the business had bottom line reasons for wanting to move to Mexico, and government officials (with the explicit backing of the currently powerless Trump) bought them off with tax dollars.*

Here’s Larry Summers view:

Some of the worst abuses of power are not those that leaders inflict on their people. They are the acts that the people demand from their leaders.

This is similar to this H.L. Mencken quote from just over a century ago:

Democracy is the theory that the common people know what they want, and deserve to get it good and hard.

If that seems like a micro-offense, please recognize that those were different times.

Hat tip to Greg Mankiw for noting Summers’ turn of phrase, and to Don Boudreaux for repeating this Mencken quote many times through the years.

P.S. A couple of days after posting this, Tim Worstall posted a similar quote:

Populism: the unpardonable sin of offering the populace what they appear to want rather than what they ought to.

* On the negative side, in the short-run, we’re all investors in Carrier whether we want to be or not. In the long-run, this may solidify the dangerous precedent of corporate executives holding out for government handouts. On the positive side, it’s still early … perhaps Trump will just do this once to establish credibility that obviates it’s future need.

Sunday, December 4, 2016

An Example of Bizarro Journalism About Cuba

After I wrote this, Tim Worstall linked to a supportive article about Castro.

The only data charted in it is GDP of Cuba, versus two comparables: The Dominican Republic, and Jamaica.

The chart is used to support the position that Castro did OK.

Except the variables charted are not corrected for either inflation or population growth.

That's kind of like asserting that Castro was great because he taxed away nominal wealth (with an inflation tax) but let people have babies.