The notion of dead money, the idea that Canadian corporations are hoarding wads of cash that would be better off invested in the economy, remains popular today. It’s also, writes Philip Cross, demonstrably false.
By Philip Cross, May 19, 2017
The concept of “dead money,” coined by then Bank of Canada governor Mark Carney in 2012, simply won’t go away. Not even after Carney himself in 2013 disavowed the idea that firms were hoarding cash instead of investing. Recently, Dominic Barton, the head of Prime Minister Justin Trudeau’s advisory group on economic growth, discussed the idea on CBC’s Sunday Edition as if it was self-evidently true, egged on by host Michael Enright’s farcical claim that firms “are sitting on trillions of dollars of cash” asking “how do we get them off their arses?” Never mind that Canada’s total GDP is only $2 trillion.
What is most discouraging is that the notion that firms are sitting on piles of cash persists long after its always-shaky statistical basis has been swept away. It was August 2012 when Carney chided Canadian firms for hoarding “excessive” savings, saying “Their job is to put money to work and if they can’t think of what to do with it, they should give it back to their shareholders.” As he spoke, net lending by firms, the conventional measure of “dead money,” amounted to $48.5 billion. Afterward, net lending by firms immediately nosedived to only $10 billion on average from 2012 to 2014, when it finally turned negative after oil prices collapsed.
What is most discouraging is that the notion that firms are sitting on piles of cash persists long after its always-shaky statistical basis has been swept away.
By 2015, firms were spending more money than they pulled in, the very opposite of “dead money.” Why anyone discusses this walking-dead notion seriously anymore is a frightening demonstration of the unwillingness of some pundits to challenge ideas that fit a certain narrative — in this case, that of miserly corporations requiring government supervision — but which are demonstrably wrong.
The fact that 2012’s unusually large corporate surplus began vanishing virtually the same moment that Carney drew attention to it recalls Goodhart’s Law. Named after a British economist, this holds that whatever feature of the economy central banks target for control will lose its relevance to the economy almost immediately. One example is the futility of central bank experiments with money-supply targets in the early 1980s.
Now, we have Carney’s Law: whatever variable a central banker says is the key to explaining away the failure of ultra-stimulative monetary policies, like those the Bank of Canada’s has fruitlessly pursued for nearly a decade, immediately becomes irrelevant. Business investment has fallen in each of the last three years not because firms are hoarding money, but because they don’t have enough.
While Carney clearly was the individual who unfortunately introduced dead money into our political lexicon, the Bank of Canada as an institution has some responsibility in helping refute it. As governor, Carney clearly put the bank’s reputation for accurate analysis on the line with his idle musings. He quickly tried to pull back the idea, lamely claiming in 2013 that capital is “dead no longer. Resurrected.” This disavowal was largely ignored, leaving the bank with a shared responsibility for the idea’s continuing currency. The bank regularly tries to explain why business investment remains a key missing piece from the recovery. In doing so, it should emphasize that “dead money” is not the reason investment is lagging. In fact, given the lack of corporate funds in the last three years, the wonder is that investment has not been weaker than it is.
Carney expressed surprise at the business community’s vociferous response to his accusations that they were smothering money supplies. His surprise that firms don’t like being told how to conduct their affairs shows that, while Carney possesses a politician’s tongue for speaking, he lacks a businessperson’s ear for listening. His libel persists today because it appeals to people who are suspicious of how the business world operates, and grateful to cite such a subversive idea given credibility by a central bank governor.
Instead of criticizing real or imagined corporate behaviour, governments should concentrate on creating an environment where firms have the confidence to spend when profitability returns.
It is prudent and far-sighted for some firms to build cash reserves when times are good. Five years ago, most cash reserves in Canada were held by firms in the technology and natural resource sectors. Given the cyclical nature of these industries, it is hard to criticize this decision. Blackberry and large Canadian oil companies are still operating today because they hoarded enough cash during the boom times to see them through their recent tough times. Bombardier in 2013 reacted to Carney’s criticism by boasting how much it was spending; perhaps if it had saved more, it would not have needed government bailouts afterward.
Instead of criticizing real or imagined corporate behaviour, governments should concentrate on creating an environment where firms have the confidence to spend when profitability returns. This is what Mitt Romney intended when he ran for U.S. president in 2012, planning co-ordinated shocks intended to galvanize investors, including cuts to public spending and jobs, lower tax rates, tougher rules for unions, and more free trade. Trump is considering many of these same policies, while lavishing praise on business leaders at White House photo-ops.
That is quite a different mindset than the one in Canada that created and sustains myths, like “dead money,” a persistent suspicion that businesses are at the root of so many problems. It’s enough to get investors off their arses and looking outside Canada, to countries where economic ideas voiced by national broadcasters and senior policy advisers are a little better informed.
Philip Cross is a Munk Senior Fellow at the Macdonald-Laurier Institute