MAKING CORPORATE AMERICA HOLD CASH IS THE WRONG WAY TO PREPARE FOR CRISIS / THE WALL STREET JOURNAL

Making Corporate America Hold Cash Is the Wrong Way to Prepare for Crises

What might make sense for a single company—amassing a rainy-day fund—makes less sense at the level of a whole economy

By Mike Bird


Hoarding cash might make sense for individual firms, but it makes less sense for the economy.
Photo: jose luis gonzalez/Reuters .


As the economic impact of coronavirus lockdowns tears through business globally, the idea that companies should have held more cash to prepare for a rainy day is gaining currency.

For a single business, holding a buffer against unexpected slowdowns and other events outside its control might make sense. At the scale of a whole economy, it creates more problems than it solves.

For starters, despite the popular perception that American companies are overleveraged, U.S. nonfinancial corporations have been holding increasing amounts of cash in recent years. The value of checkable deposits and currency held by those firms has roughly quadrupled since the 2008 financial crisis, to over $1.2 trillion.

When imagining the impact of forcing or prodding companies to save more, it is worth remembering a simple macroeconomic accounting identity. If the private sector globally is lending on a net basis—meaning it’s accumulating assets, cash or otherwise—the world’s governments must be borrowing on a net basis. Without saying anything about the causality of the relationship, this is necessarily true in the most basic sense: One person’s asset is another person’s liability.

Of course, corporates could lend to other parts of the private sector—households, for example—but that would simply leave American families in a worse financial predicament during a shock. One country’s companies could lend overseas, but likewise that would simply shift the risk elsewhere.

If companies saved even more than they already do, demand for top-rated cash-like assets would rise. Governments could either issue more debt, or risk that corporations drift into superficially safe private assets as they did in the run-up to the financial crisis in 2008.

So the only solid path to higher corporate saving involves more government borrowing. Given that simple truth, there seems to be precious little difference between making companies pay taxes, and expecting the government to respond with fiscal policy in the result of an unpredictable emergency like a pandemic, and mandating that companies hold safe assets—typically in the form of government bonds—to cover themselves during emergencies.

Some might conclude from the current bailouts that corporations should pay more tax. That seems an easier fix than encouraging or even mandating gargantuan corporate cash hoards.

There are further arguments in favor of the existing arrangement. Holding cash depresses firms’ return on equity. That’s the reason why investors have spent decades pulling their hair out over the mountainous cash pile of Japan Inc. Cash holdings would also likely limit productive investment, as companies would save for a crisis that may take more than a decade to arrive.

The idea that corporations should set aside rainy-day funds to weather crises appeals to our sense of fairness and the understandable unpopularity of bailouts. But what makes sense for individual firms, as is often the case, makes less sense for the economy.