Austerity’s Vicious Cycle Spurs Record Cash Hoarding By U.S. Companies

Big corporations have been stockpiling cash rather than investing in expansions to their operations for years, but a report Thursday indicates that recovery-bridling behavior is worsening in 2013. Cash hoarding sped up in the first quarter of the year, and American companies are now holding a record $1.73 trillion on the sidelines. According to Bloomberg, the turnaround in corporate investment attitudes owes largely to political instability and congressionally-inflicted economic wounds. Businesses were slowing their cash buildup, but “That changed in last year’s second half, with the U.S. presidential election under way and Congress struggling to reach a compromise on the federal debt as automatic budget cuts loomed.”

Rather than encouraging greater private-sector spending, which Republicans insist is the natural consequence of cutting government spending, the shift to austerity in the U.S. has companies sitting on their hands. That slowdown in corporate investment could lock the economy into below-average growth, Bloomberg adds. In other words, corporate hoarding is both a symptom of shaky economic growth and a contributing factor to it.

As corporate America withholds investment, it’s also achieving record profits, paying record CEO salaries, shrinking the portion of the pie that goes to workers, and sending rock-bottom amounts to the Treasury in taxes. This chart from The Economist shows that while profits have vaulted back above their pre-recession highs, corporate tax payments haven’t:

 

There is some international momentum for revising the corporate tax code. But with conservatives continuing to demand further cuts in the United States, and European leaders unwilling to enact stimulus even as they acknowledge the failure of austerity, western policymakers do not seem prepared to take all the steps that corporate America’s actions suggest are necessary.