David Broder and Jim Cooper's Creative Economics

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Thursday, 17 June 2010 04:58

David Broder used his Washington Post column to tell President Obama to stop worrying about the Gulf oil spill. (Hey, who cares about the potential destruction of a whole ecosystem for generations to come?)

He instead repeated an assertion from Representative Jim Cooper and the Wall Street Journal that companies are currently hoarding $1.84 trillion in cash:

"The newspaper noted that the cash reserves had jumped 26 percent in one year, the largest increase since at least 1952. Cooper's point is that by stockpiling that vast amount against the possibility of a double-dip recession or another wave of bankruptcies, nervous executives are starving business of investments for expansion and freezing unemployment at a painfully high level.

'They were badly burned in the Great Recession,' Cooper said, 'and now they are nervous about government policy.' Uncertainties in Washington about energy policy, taxes, financial regulation -- to say nothing about bad-news bulletins from Afghanistan and other overseas datelines -- cloud the economic picture more than oil plumes pollute the gulf."

While there is little economic evidence that would support Representative Cooper's assertion as to why companies are hoarding cash, there is a more obvious explanation. Firms are seeing very weak demand growth in an economy that has near double digit unemployment. There is a large body of research that shows that demand growth is the primary determinant of investment. In the absence of strong demand growth, firms do not want to take big risks on expensive new investments.

The most obvious way to increase to demand growth would be through more stimulus from the government. Both Representative Cooper and Mr. Broder have actively opposed more stimulus. So, the best explanation for why companies are sitting on vast hoards of cash is that people like Representative Cooper and David Broder have blocked efforts at more effective government stimulus.