Monday, July 26, 2010
So Much Cash, So Little Investment You don't have to read the Wall Street Journal every day to know that the economy is barely struggling out of the Great Recession. Unemployment bumps along at just under 10 percent and some in the Congress debate whether extending benefits to the job seekers might actually encourage the out of work to stay on the sofa. In Idaho, the governor tells state employees that they best keep their expectations in check. Better times aren't around the corner anytime soon. Yet, somebody is making out in this rotten economy. The federal pay czar - yes, we have one - recently called the $2 billion the biggest of the big banks paid in bonuses in late 2008 and 2009 "ill-advised," but all he could do was hold a news conference and point that out. Reforming big bank incentives seems not to be in the cards. These same banks, most recipients of TARP funds we all provided, are still reluctant to lend significant money, but they seem to have no reluctance to make money, stack it up in the vault and hand it out in multi-million dollar bonuses. Meantime, its estimated that Fortune 500 companies are sitting on something north of $1.8 trillion in cash. As Bruce Stokes pointed out recently in a piece for the National Journal, only corporate America has the financial wherewithal to get the fragile economy moving, yet the money seems to be going under the mattress and into obscene bonuses rather than into jobs, R&D and acquisitions. Stokes suggests taxing excess corporate cash. I'll not hold my breath on that idea, but there is ample evidence the cash hoarding is hurting the recovery. Economic analysts Yves Smith and Rob Parenteau contend part of the reason for the corporate cash accumulation is the short-term nature of corporate thinking. CEO's and their boards have become obsessed with quarterly earnings reports and the fact that Wall Street analysts and big investors reward or punish those who hit or miss those every three month targets. "To show short-term profits," Smith and Parenteau wrote recently in a New York Times piece, "they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on." My thoughtful Montana friend, Pat Williams, the former Congressman who now teaches at the University of Montana, had a great piece last week that got me thinking about what only business can do in tough times like these. Pat, recalling a tough 1950's economic downturn when he was just a kid, remembered that his mother and dad actually made the decision to invest into a down economy on the main street of Butte, Montana. In a piece that appeared in a number of Montana papers, Pat wrote: "I remember Dad telling our customers and insisting to his fellow small business friends along Park Street, 'Now is the right time.' His logic was that building contractors needed work, Butte’s people wanted jobs, the appearance of downtown was important, and, he insisted, interest rates were only going up. He firmly believed that one invested in one’s self by investing in your customers and your city." It may be the toughest thing to do in a tough economy to make an investment decision. The safe path is to keep the cash in the bank, avoid risk and ride it out. History rewards the successful risk taker, but then again why risk it? The economy needs a positive jolt. It's time to start investing for the long-term. Its time for a glass half full attitude. Henry Ford, Bill Gates and Hewlett and Packard did not built empires by not investing in their customers and cities. When Pat Williams' folks invested in the remodel of their Butte restaurant back in the 1950's a curious thing happened. "Following the completion of that new, expensive store front," Williams wrote, "we had a significant increase in customers saying thanks by enjoying a steak dinner, buying a box of candy, or simply throwing a dime on the counter for an extra cup of coffee." Funny thing how the economy responds to the notion that things really can get better. Maybe it really is less about economic theory and more about human nature. It is time to take some measured risk. Goodness knows, there is a lot of room on the upside.