Right Now Is A Critical Time For Companies To Invest In Job Growth
Are corporations just plain greedy?
It’s a loaded question, but it’s one a lot of people are asking these days. American corporations have a huge amount of cash lying around — $2.02 trillion at the end of 2015. That’s the equivalent of India’s entire economy — the ninth-largest in the world! And yet, corporations have stopped investing in things that can grow the U.S. economy and create jobs, such as new equipment and buildings.
In developed economies such as Europe, Japan, and the United States, corporate investment ground to a halt during the Great Recession, and it hasn’t fully revived since then, despite the fact that companies have plenty of money to spend. Since the recession, companies have invested heavily in buying their own shares, which tends to increase stock prices. They’ve alsoincreased dividend payments — the quarterly payouts people who own certain stocks get — to entice investors into purchasing their shares.
Why does it matter to the average American what companies spend their money on? Because when corporations invest in building a new production facility, they employ architects, engineers, electricians, and laborers to assist in the construction. When they buy equipment, they indirectly support workers in factories. Business investments boost economic growth and create jobs, setting off a chain reaction that helps keep Americans working.
Buying back shares and increasing dividends, on the other hand, doesn’t create any jobs and it only helps one group of people — those who own stocks. Depending which survey you believe, that’s somewhere between 48 percent and 55 percent of Americans — meaning that close tohalf of Americans see absolutely no benefit from the way companies are currently spending their cash.
“Significantly stronger investment levels are needed in most economies if potential growth — which represents the capacity to raise living standards, enhance diffusion of innovations and repay obligations — is to be increased in the medium term,” the Organization for Economic Cooperation & Development (OECD) said in its 2015 Economic Outlook.
Translation? Without more investment, things aren’t going to get better anytime soon.
So, why aren’t corporations investing in ways that would help the economy? Some people have argued that because many executives receive bonuses and other compensation based on how well their company’s stock performs, they take short-term steps such as share buybacks and dividend increases that inflate the stock price, rather than spending on new structures, which can help grow a business long-term, but hurt stock prices in the short term.
But after an extensive look at the investment problem, the OECD decided another motive was more likely: fear. The most important reason companies haven’t been investing, they argue, is that economic growth around the world has been sluggish since the financial crisis, and companies simply don’t have enough faith in the global economy to pour money into expansions.
As the economists who wrote the study put it, developed countries such as the U.S., Japan, and many European countries are “stuck” in a low-growth, low-investment world where unemployment is high, wages are stagnant, and ordinary people don’t buy as much as they might if times are better.
Why are developed countries so down in the dumps? For one thing, the OECD points out that after the housing bubble burst, many families have been focused on paying down their debts and saving money rather than on spending.
It also doesn’t help that wages are stagnant. U.S. wages plummeted during the recession as workers got laid off and employers found themselves with plenty of options. Suddenly, they didn’t have to offer higher salaries to land the best people. But even though official unemployment — the number of people looking for a job who can’t find one — has declined dramatically since the recession, wages have been slow to recover. Eight-and-a-half years after the recession began, wages are still growing much slower than they were before the recession.
In a world like that, it’s easy to understand why companies wouldn’t want to invest in the future! Would you build a fancy new house if you believed you would lose your job in the next few years? Probably not. In the same way, CEOs aren’t going to build new plants and buy shiny new equipment if they doubt that people will be able to afford their products in the future.
There’s evidence to support the theory. In a recent survey, 73 percent of corporations in developed-world countries said lackluster demand in their home markets was either an important or very important factor keeping them from investing more.
The fact that middle-class jobs are disappearing due to globalization and advanced technology will only keep pushing wages down and making life harder for consumers. Ditto for the looming retirement crisis and a growing mismatch between the skills employers need and the skills potential employees have. More anxious consumers means more companies keeping the purse strings sewed up tight.
This is a vicious circle — but if corporations, individuals, and governments pull together, it can be broken. The OECD suggests that governments could help by spending more money on infrastructure. Invest in a fantastic new state-of-the-art seaport, for example, and businesses may well invest money to build a facility close by. More spending on basic research might also nudge the private sector to experiment with commercial applications for useful discoveries.
Even if that were to happen, however, Americans must be better prepared to reap the benefits of higher growth and higher investment. They need the right skills and the right knowledge for the jobs of the future. That’s something worth investing in, too.