It's Alive! Corporate Cash and Business Investment

Abstract

Fears of "dead money" lying idle on corporate balance sheets have spurred some policymakers and observers to push for heavier taxation of private activity or greater public-sector investment. Yet such concerns seem misplaced. Business sector investment Canada-wide is growing at roughly the same pace as the economy, and the investment share of output is just above its 30-year average, as is typical of an economic recovery period. Meanwhile, the run-up in cash holdings after the last recession reflects long-term changes in business practices, and uncertainty about the future. Concerns over business investment, if any, would better be handled through improvements to market certainty and the investment environment through, for example, stable fiscal planning aimed at building investor confidence. Concerns continue to arise, in Canada and elsewhere, over a perceived slow pace of business investment growth, and rising holdings of corporate cash (Isfeld 2014), and possible connections between the two phenomena. Concern over these issues seems misplaced, and is worrisome. The "dead money" view is routinely used to build the case, as in Ontario, for heavier taxation of private activity, and for potentially unaffordable and unproductive public-sector investment (Spiteri 2014). Yet the view is mostly wrong, as I discuss in what follows. The author thanks colleagues of the C.D. Howe Institute, Phil Cross, Andrew Sharpe, and anonymous reviewers of early drafts. The errors that remain are mine.