Earnings season is upon us again and the same old story is playing out. Most profitable corporations are accumulating their earnings in giant piles wherever they can be taxed at the lowest rate. This has been going on for 20 years in ever larger size for a variety of reasons:
- Profits are often earned offshore since most products are made (and sold) offshore so it follows that profits will accumulate over there.
- In a deflationary world there is just as much reason to accelerate investment into new production as there is to run out and buy a flat screen TV. As people defer purchases while prices fall so will corporations that manufacture those goods. Can you even imagine reading about a new plant being built by Dell or HP to make anything?
- Global nominal demand is barely moving so profits are earned by expanding margins, not volume. GE and Apple don’t need any new capacity. The new millennium business model is – push down costs as much as possible and sell goods with sticky prices. This was always the capitalist model of course but 3rd world labor and anti-union sentiment have facilitated an earnings/profit renaissance.
Commentators seem to drool over this cash like it could save the US economy if only these guys would spend it. They seem to think that corporations would spend it all if only Obamacare were cancelled or they could repatriate the foreign portion of the pile by virtue of a tax holiday. Really?
Let me use Apple as an example. It has a total cash hoard of $150 bn and $34 bn of it is inside the US as of the end of last year. So how much new plant and equipment did they invest in the US in 2013?-somewhere in the $100-$200 million area and that’s being generous. Would repatriating another (say) $100bn be some kind of tipping point? No chance. If Apple needs to make more iPads it will increase production at FoxConn where labor is 1/10th the US level.
The simple reason why US based multinationals are accumulating cash and NOT investing in US plant and equipment is because the price of US labor is far too high – relative to 3rd world alternatives. These are not US corporations; they are global parasites, driven to chisel costs down as much as possible in a no growth world. The assertions that they would love to invest their cash locally are utterly devoid of supporting testimony. I would love to hear the CEO of GE tell us that he is dying to spend billions on new US plant and equipment – if only he could get a tax holiday.
If anything their silence on this subject is deafening.