The conventional wisdom believes that the current sovereign debt crisis is the result of governments having been too profligate. But it is not that governments have been spending ‘too much’ that is the problem; it is that corporates have been spending ‘too little’. Moreover, because this corporate saving is the main counterpart to the government’s borrowing, until companies start to spend again, the burden of fiscal adjustment will have to fall on cutbacks in public services and higher personal taxation. It is time to shift the debate away from talking about the fiscal position, and focus instead on whether it is a shift in corporate behaviour that is responsible for the fiscal mess in the developed world.
It is very unusual for the corporate sectors to run sustained financial surpluses. Look back at the UK and the US for more than half a century and the corporate sector has tended to be a net borrower, not a net saver.
What has prompted the recent move into financial surplus has been the decision by companies to step away from investment. Investment-to-gross domestic product ratios in the developed world are now close to the lowest levels seen in 60 years. Corporates appear to have decided to run themselves for cash, and not for growth. It is this profound shift in corporate behaviour that policymakers and politicians have been slow to spot. Until this behaviour changes – or is changed – it will be very hard to improve the fiscal arithmetic.
Now this could be a simple cyclical issue. Corporates – like investors – were seduced into believing that the great moderation was the new normal… only to find themselves thrown into a world of unprecedented uncertainty by the credit crunch. Faced with such a loss of visibility and a shortage of external finance, chief executives had no option but to put fixed investment on hold, and de-lever in order to reduce their dependence on the banks. The hope is that as confidence returns, so will fixed investment and job creation, followed in turn by an improvement in public finances. Policymakers should be doing all they can to bring corporates back from a world dominated by uncertainty and into a world where investment plans can be made and risks managed.
But what if the shift in corporate behaviour is structural?
After all, it is rare to have a capital expenditure cycle without a credit cycle. And where is the next credit cycle going to come from if the banks are condemned to multi-year de-leveraging? Besides, if there is any capital expenditure to be done, it is most likely that this will take place in the emerging-market economies rather than in the developed world.
Against this backdrop, it must be tempting for company managements to run the company for cash, with an aggressive share buy-back programme that will help management’s stock options to vest, a growing dividend to keep equity-income fund managers happy, and a compensation committee that makes sure the right people are paid. The kerfuffle over executive pay and rising levels of inequality is not happening in a vacuum; it could be symptomatic of ‘rent-seeking’ behaviour by corporates.
If global business leaders feel there is a growing gulf between the business agenda and the political agenda, it is because corporates are in rude financial health while governments are under the cosh. With politicians at the limit of what they can impose on their electorate, do not be surprised if they turn to those that have the cash. Trailing earnings (in US dollars) of the global quoted corporates are now back to pre-crash levels, while capital expenditure, employment and tax receipts are not, leaving corporates on the defensive. As US presidential hopeful Mitt Romney put it: “Don’t attack the private sector. Don’t attack risk-takers. Don’t attack profit. Profit, by the way, is what allows businesses to hire people and grow.” Many are now questioning whether that is still the case.
In the Reagan-Thatcher era, politicians cut taxes so that companies would come to their country, invest, create jobs … so that those politicians could, in turn, be re-elected. It does not work like that anymore; globalisation has seen to that. The reality is that public services used by the ‘99 per cent’ are taking the strain, while attractive corporate tax regimes are protected. Just as the trade-union barons of the 70s failed to see the writing on the wall, so the global captains of industry may suffer a similar fate unless they put their cash to work in the countries in which they are domiciled.
Source: http://www.ft.com/intl/cms/s/0/bf2b5e92-50be-11e1-8cdb-00144feabdc0.html#axzz1mYi1Q0j0
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