The United States is on course to increase its net external liabilities to around 40 percent of GDP within the next few years-an unprecedented level of external debt for a large industrial country. This trend is likely to continue to put pressure on the U.S. dollar, particularly because the current account deficit increasingly reflects low saving rather than high investment.
--International Monetary Fund
The twin deficits are back. Their return from the 1980s and early 1990s is now unaccompanied by even a hint that curing the domestic fiscal deficit might well cure the trade deficit, too. The simultaneous expansion of the fiscal surpluses of the late 1990s with the trade deficit dashed that hope. While there is a significant amount of dissonant opinion, a large group of economists is persuaded that the nub of the chronic trade imbalance is the low U.S. saving rate. According to this view, domestic saving has been inadequate to fund current levels of investment. Consequently, offshore capital has moved in to fill the gap, keeping the dollar from falling to levels that would correct the ongoing trade imbalance.
The saving-investment imbalance explanation of the trade deficits can best be understood as a "default" explanation dependent on the failure of traditional trade theory to explain why exchange rate adjustments have been unable to correct the chronic trade imbalance. This is not to say that the textbook story is without a measure of explanatory power. While certain bilateral balances, most particularly the Japanese-USA balance, show positively perverse relationships between the exchange rate and the trade balance, the real weighted exchange rate of the dollar moves in rough inverse correspondence with trade imbalances expressed as a percentage of gross domestic production. (1) It is simply that such adjustments have not been sufficiently powerful. Paul Krugman has given us a partial explanation in suggesting that a lower dollar makes foreign acquisitions of U.S. corporations appear cheap, encouraging a continual inflow of foreign capital (1989, 32), and, indeed, recent cross-border merger and acquisition activity seems to substantiate the claim. (2) But such an explanation begs the question of why trade adjustments are not potent enough to offset such movements of capital. If textbook theory operated unimpeded, the dollar would fall sufficiently to expand exports and restrict imports so as to close the trade deficit and choke off the concomitant inflow of capital. The expansion of exports would generate sufficient domestic income to allow the expansion of sufficient domestic saving so as to equilibrate saving and investment at that higher level of income.
The case for the saving-investment imbalance thesis would be stronger if the dollar had exhibited a strong upper trend corresponding to the "pull" of the U.S. gap between saving and investment. No such trend is exhibited-quite the contrary. For the bulk of the post-Bretton Woods period the dollar has tended downward and, in certain outlier cases, particularly that of Japan, the decline has been spectacular. The proponents of the saving-investment thesis have, of course, recognized this apparent contradiction and have added addenda to their thesis, such as a relative decline of U.S. competitiveness (Krugman 1990, 1994, 118) or lags in the adjustment process relating to the trade balance (Lawrence 1990a, 85; Krugman 1989, 32).
This paper accomplishes two tasks. The first task is to briefly summarize some of the more important literature surrounding the institutional and historical aspects of U.S. multinational trade that have escaped the "clean room" of textbook economics. (3) The intractability of the trade balance after the fall of the dollar in 1985 gave rise to an extensive discussion starting in the late 1980s and early 1990s that was directed at explaining the long-term sluggish response of trade balances to exchange rate adjustments that could not be explained by short-term J-curve effects. I concentrate here on one aspect that has sometimes been noted but never adequately explored, namely, that exports from the United States compete, at least potentially, with sales from affiliates abroad. Currently, and for some time back, multinational sales abroad have been much larger than U.S. exports. The largest U.S. multinational firms tend also to be the largest exporters. Being on both sides of the fence, U.S. firms have had to adjust prices and sales arrangements so as not to compete on an intrafirm level. Consequently, exchange rate changes, even large ones, have not had the self-corrective properties associated with the textbook portrayal of the exchange rate adjustment mechanism.
In the first part of the paper, I place the above argument in a historical context. I argue that the multinational presence of the United States in world markets during the Bretton Woods period constituted a historical echo dating from the period after World War II. Unlike the corporations of Japan and Europe, whose presence in foreign markets depended critically on exports, the corporations of the United States depended primarily on multinational affiliate sales and an ancillary export trade. Such asymmetry resulted from the hegemonic power of the United States after World War II and the high dollar associated with the Bretton Woods system. The argument here is that much of the current intractability of the current account deficit can be traced to these historical and institutional roots.
The second task is to investigate the U.S. domestic saving-investment imbalance. The low-U.S.-saving thesis--while conceptually correct in terms of accounting identities-is misleading in its aggregation of the corporate sector and the world of noncorporate business, housing, and personal finance (hereafter the noncorporate sector). I show below that the saving-investment imbalance in the corporate sector is operative in the direction opposite that of the aggregate imbalance. This disaggregation is instructive for it puts a finer lens on the components of the saving-investment imbalance. In their published form, the NIPA accounts combine the investment totals of all business enterprise--corporate business (typically large business) and smaller partnerships and sole proprietorships. Present studies that use published NIPA data to examine the domestic balances of the business sector and personal sector have not disaggregated the data sufficiently to uncover the plenitude of corporate savings relative to new investment carried out by the corporate sector. (4) Disaggregating the components of business enterprise allows a closer look at the corporate sector taken alone. The other difficulty with the NIPA accounts is that they record some large portion of the total saving not at the point of corporate origin but rather at the level of personal income. Most particularly, dividends and net interest are monies originating at the corporate level but yet are understood as personal income from which personal saving is then abstracted. For measuring personal income, this makes sense. Yet both dividends and net interest are monies originating in the corporate sector and their payout suggests--as I will argue below--the existence of excess cash relative to corporate investment opportunities. At no time in the post-WWII period has corporate investment outpaced a broad measure of internally generated cash. On the contrary, in every year, and particularly during boom times when the export-import imbalance would be expected to show deficits and net a foreign inflow of capital, internally generated cash exceeded new corporate investment, often by wide amounts. Consequently, the aggregate current saving-investment imbalance must be traced to the noncorporate world.
On the basis of these findings, one might expect the corporate world to be awash in liquidity and the noncorporate sector, cash strapped and debt ridden. The latter is certainly in evidence--indeed, notoriously so--and I show below the magnitude of this deficit. But, in seeming contradiction to the ample amounts of internally generated saving, the corporate sector too shows increasing indebtedness. Paradoxically, one of the most important factors behind this corporate indebtedness is the excess saving imbalance itself (what Michael Jensen has called "free cash flow" ). This "free cash" has allowed down payments on mergers and acquisitions and stock repurchases. The full volume of these extra-investment purchases has required large amounts of debt, which, in turn, has tended to generate even more debt as the corporate world has become increasingly vulnerable in its use of leverage. The two debt piles--that of the corporate sector and that of the noncorporate sector--I call the "second set of twins." One of the twins grows as a result of too much money; the other twin grows as a result of too little.
In a final section, I propose higher taxes on "free cash" and a government redirection of this cash toward the noncorporate sector. To the extent that the current account deficit is determined by an aggregate saving-investment imbalance, such taxes and expenditures would help correct the ongoing current account problem.
The Breakup of Bretton Woods and the Coming of Floating Rates
The last three decades have witnessed an increasing cross-border integration of Europe and a cross-border escape of Japan's largest corporations into America, East Asia, and Europe. Against this backdrop, it is hard to fully remember the overwhelmingly predominant role of U.S. corporations in foreign direct investment and worldwide sales at the time of the collapse of Bretton Woods (1971-1973). In contrast to the approximate 25 percent share of outward FDI that U.S. corporations have had in recent years, U.S. firms had approximately 50 percent of the total thirty years ago. (5) A comparison of world sales by the world's largest firms shows the same relative predominance, with U.S. firms having some 63 percent of worldwide sales of the top 300 industrial firms in 1971 as compared with approximately 40 percent of the top 300 firms in recent years. (6) Such predominance, of course, was the legacy of the post-WWII order and the Bretton Woods system. The Bretton Woods system enshrined the dollar at the high levels corresponding to the U.S. position in world trade immediately after the Second War. In subsequent decades, the export orientation of Japan and the European economies dictated that their foreign central banks support the high value of the dollar. The reason was simple: any decline in the value of the dollar would damage the exporters that stood at the heart of their economies. Understanding this one central fact allows an understanding of how the Bretton Woods system and the high dollar associated with it could be maintained for almost thirty years, even in the face of a mounting U.S. balance of payments deficit begun in the late 1950s and an enormous military presence that spread dollars all around the globe. Other central banks, in support of their own large corporations, supported the dollar.
With foreign central banks supporting the dollar, U.S. firms leveraged this advantage to buy investments and corresponding markets around the world. This was particularly true in Europe. When the Common Market was formed in the late 1950s, the U.S. fear of a common tariff and other discriminatory barriers conjoined with Europe's easing of earlier repatriation laws that hindered repatriated profits flowing back to the United States. This was a potent combination of motivations to entice an increased presence of U.S. multinational capital in Europe. Direct investment expanded rapidly along with a corresponding European alarm. In a famous response, Jean-Jacques Servan-Schreiber described the extended U.S. presence as a "seizure of power" and an "assault on Europe" and fully recognized that no country on its own could oppose such an invasion (1969, 33-40). Direct confrontation would lead U.S. investments and managerial talent to turn elsewhere to the benefit of the recipient, even if such investment competed with domestic firms. The sheer size of the U.S. giants such as IBM, General Motors, DuPont de Nemours, and General Electric, together with an industrial-academic-U.S. government complex that sponsored the most advanced technological breakthroughs put European firms at an inherent disadvantage. As if able to see the future of repeated attempts at bringing Europe together, Servan-Schreiber maintained that only an increased integration of the European community could mount an effective response.
The mystery surrounding the breakup of Bretton Woods concerned not its breakup but how it could have maintained its standing for so long. Again, the export-based nature of rivals put Europe and Japan in a defensive position. To get off Bretton Woods was to lose export markets and, in the case of Europe, to maintain the Bretton Woods system was to allow U.S. capital to buy a large chunk of the world's markets on the cheap. Japan's repatriation laws, together with keiretsu interlocks into distribution channels, kept U.S. firms--oil companies apart--from entering Japan in any large measure. But the high dollar value associated with Bretton Woods allowed the United States to obtain Japanese war supplies cheaply for both the Korean War and the Vietnam War. In 1951, according to Chtoshi Yanaga, 72 percent of Japan's "productive capacity was directly engaged in the manufacture of weapons" (1968, 255). These dollars were undoubtedly welcome since Japan was in its first stages of renewed takeoff. But by the time of the Vietnam War, Japan was able to export manufactured products of the finest quality. The U.S. use of the printing press to command Japanese resources and labor put Japan in a position analogous to that of Europe. To make Japanese war materials expensive to the United States, the Japanese would have to get off the Bretton Woods standard. Such an upward movement of the yen would damage the large Japanese exporters and the Japanese economy.
When the dollar started to plunge after the Bretton Woods breakup, Europe and Japan were on the defensive trying to keep the dollar from plunging too fast. Their defense consisted of expanding their monetary base. The resulting inflation of the 1970s was the main result. And, at least for continental Europe, monetary integration had to be effected in order to coordinate exchange rates so as not to compete one against another. This monetary integration went hand in hand with increasing cross-border affiliations and direct investment that allowed European corporations "natural" hedges when monetary coordination failed. When the monetary snake arrangement came apart in the 1970s, a renewed attempt was established with the EMU and progress made along these lines eventually culminated in the establishment of the euro.
Multinational Sales and the U.S. Export Market
The growth of U.S. direct investment in Europe was the main component shifting the relative growth of multinational capital from resource centers (often located in the developing world, which produced petroleum products, tropical foodstuffs, and minerals or in Canada, which produced food products and paper) to the developed world of manufacturing and financial centers. In 1950, the Latin American republics and Canada had more than two-thirds of the total book value of direct foreign investment, with Canada actually having a larger chunk of manufacturing investments (32 percent) than western Europe (24 percent). By the time of the collapse of Bretton Woods, the share of total direct foreign investments in western Europe had climbed from 15 percent in 1950 to 31 percent and housed 48 percent of U.S. foreign manufacturing investments. (7) In 2001, Europe as a whole contained 58 percent of all the assets of nonbank foreign affiliates, with Canada having 8 percent, Latin America having 15 percent, and Asia having 16 percent. (8)
The rise of manufacturing investments abroad and the concomitant sales of the affiliates meant that foreigners could purchase U.S. manufactured products with foreign currency and that such production abroad competed, potentially or in actuality, with U.S. exports. To avoid such competition, U.S. firms would have to arrange pricing and sales arrangements so as to be relatively immune to exchange rate changes. The statistical story on multinational sales comes in late in 1957 and then only for certain broad categories in the manufacturing sector. But by this time multinational sales were much larger than exports in virtually every major category of manufacturing examined, with the sole exception of nonelectrical machinery, where multinational sales were 60 percent of exports. In the other categories, the respective percentages were as follows: rubber, 322 percent; chemicals, 175 percent; transportation equipment, 270 percent; electrical machinery, 253 percent; and paper and allied products, 270 percent. (9) This pattern of multinational sales dwarfing U.S. exports continues to this day. From the first compilation of a universe total of multinational sales in 1966 to 2001, multinational sales first rose from about 250 percent of exports of goods and services to more than 400 percent in 1977 and then sank back to more than 238 percent in 1993 and is now 278 percent. (10) Moreover, from the data available--beginning in 1982--multinational exports have predominated over the entire U.S. export trade in goods. Multinational-associated U.S. exports in merchandise--including intra-MNC trade and trade with others--has ranged from more than 75 percent of total U.S. exports in 1982 to about 58 percent in 2001. (11) Data on MNC exchange of services are not as detailed as those of intratrade in goods. But here, too, multinational trade predominates. By my calculations--admittedly crude-only about 18 percent of the total U.S. foreign sales effort in 2000 (multinational sales exclusive of U.S. foreign affiliates' imports into the United States plus the exports on current account net of double counting)--came from what I term "free exports," that is, exports from domestically located firms that were "free" from multinational involvement. (12)
Evidence of Trade Balance Insensitivity
There are three main pieces of evidentiary data that suggest that the current account is largely insensitive to exchange rate changes. The first concerns the overall composition of the trade balance. Capital goods and nonenergy industrial supplies are "closely associated with changes in business demand for investment goods ... [and] ... fluctuates with the business cycle. In contrast, the trade balance for consumer goods and autos has been persistently and increasingly negative, whereas that for services, persistently positive" (Mann 2002, 133-134). That is, the trade balance comprises components that have built-in institutional and structural factors that defy any simple pricing formulas. In autos, for example, a full discussion of the trade balance would have to entail an understanding of why U.S. auto manufacturers have lost out to foreign competition in terms of market shares. A discussion of the persistent trade imbalance on consumables would certainly have to involve a dialogue on the rapid growth of low-cost production facilities in Asia over the last thirty years and the United States' increasing trade with the area. The positive U.S. service account hosts a myriad of categories, but certainly the strong high tech posture of U.S. industry and its relationship to the capital goods industry would have to be included in any complete picture of the trade balance. These three examples, plucked from a myriad of possible items, remind us that the trade balance is a web of complexity and that any simplistic noninstitutional assessment is bound to come up short. They also remind us that a full account of the trade balance would have to be very long indeed.
The second piece of evidence surrounds the relative insensitivity of intrafirm exports to exchange rate changes. The evidence is incomplete in that data for a number of years were not collected. But for the bulk of the period from 1977 on, intrafirm exports in goods as a percentage of total U.S. exports of goods varied only by a few percentage points. (13) Some large part of the intrafirm trade consisted of parts and supplies that fed into gross production overseas and vice versa. Parts and supplies were part and parcel of not only traditional distribution channels whose interruption on the basis of short-term exchange rates could severely damage those channels but also of specialized capital goods that produce the parts. The emphasis on product differentiation in oligopolistic markets makes for specialty products and a corresponding differentiation in specialty production arrangements that include not only vast expenditures on differentiating the product and specialty capital costs but also servicing foreign outposts with patents, engineering expertise, and assorted information-based assets. This point is brought home by considering that an increasing share of trade has grown in tandem "even within very narrowly defined product categories: that is, an increasing share of trade is intraindustry rather than interindustry" (Economic Report of the President, February 1998, 218). The Council of Economic Advisors of 1998 told us that such specialization most likely derives from "fixed costs in production and consumer tastes for variety" but that such "variety" is most certainly encouraged by the prevailing oligopolistic form of industry that tends to avoid price competition at almost any cost. Moreover, outsourcing inputs has expanded over the last three decades (Economic Report of the President, January 2001, table 4-1, 153). Foreign suppliers, whether U.S. owned or not, have large sunk costs and would be remiss to lose markets were exchange rates to change. That some large part of Asia, Japan excluded, has traditionally tied its currencies to the dollar suggests the importance of this factor.
The third piece of evidentiary data--and in my view the most important--pertains to the virtually 100 percent pass-through on exports, a pass-through that contrasts mightily with economies that depend more on exports and less on multinational sales. (See figure 1, which compares the export price index to the wholesale price index). At first blush such a high correlation of foreign price changes to domestic prices would suggest a solid operative basis for the exchange rate mechanism to work. Yet, in light of the multinational context within which trade is carried out, such a pass-through signifies just the opposite. What evidence we have indicates that U.S. firms often "price to market," at least to final purchasers (Lawrence and Rangan 1993, 346). In light of the large amount of intrafirm trade, exports designated as parts and supplies coming from the parent or other in-house affiliates are netted out in a consolidated world income statement. That is, tax considerations aside, their in-house transfer prices don't really matter much for world profits. Subramanian Rangan and Robert Lawrence present evidence that the "higher the share accounted for by intrafirm trade, the more closely export price changes match domestic price changes" (348). Needless to say, "pricing to market" arrests the operative basis of the exchange rate mechanism. For some time, this phenomenon has been observed on the import side of things, particularly for Japanese and German firms. (14) Such stasis permits a continuation of high U.S. imports even when the dollar falls. The evidence cited above suggests a similar stasis for U.S. exports that are contained within a multinational context.
[FIGURE 1 OMITTED]
For exports to unaffiliated foreigners, there is evidence that such exports are more sensitive to exchange rate changes (Little 1986, 46-51), but, as noted above, such exports are a small portion of total U.S. trade and a mere fraction of overall multinational sales. The long period of U.S. multinational involvement would also indicate that U.S. firms would carve out and supply what local foreign markets generally require and want directly through multinational sales and to export an essentially noncompeting residual. This residual, precisely because it is noncompeting (i.e., lacks substitutes) suggests an inelastic demand. Consequently exporters need not adjust prices drastically to offset exchange rate changes. So while arms length exports may, indeed, be more responsive than intrafirm exports, in both cases export prices can essentially mirror wholesale prices without hurting profitability. In short, the 100 percent pass-through indicates a relative indifference to changing export prices in accordance with exchange rate changes, an indifference that reflects not shortsightedness but a certain historically bequeathed institutional and multinational framework.
The Second Set of Twins
The failure of the U.S. current account (as well as other current accounts such as the Japanese) to adjust to exchange rate changes has led economists to delegate traditional exchange rate mechanisms to a role ancillary to the macro saving-investment imbalance. According to Robert Lawrence, "In a world where exchange rates are determined by market forces, those exchange rates will alter the relative price of exports and imports to generate a current account consistent with domestic savings and investment" (1990b, 80; italics added). In a similar vein, Krugman has likened the exchange rate to the "drive shaft, with desired capital flows providing the motor power" (1994). These ascriptions of causality are, in fact, just that--ascriptions. The conceptual accounting identity between saving and investment and trade flows does not, by itself, reveal which part of the identity is the motor and which is the "drive shaft." The structural and historical factors dictating current trade imbalances and the lack of adjustment to exchange rate changes might well be the chief factors driving the saving-investment imbalance, rather than vice versa.
Indeed, it is not clear that any primary causal assessment can be made for the system is overdetermined in the sense that while it is true that any determination of a domestic saving-investment balance will dictate a given current account and vice versa, no one of the balances is immune to its own causal variables. Wynne Godley said it best when he noted that while the "balances are related to one another by a system of accounting identities, each has, to some extent, a life of its own" (2003, 3).
That said, the saving-investment imbalance is, nevertheless, a reality and demands a separate inquiry. This imbalance is ultimately bound up with the point of origin of the saving and investment in the corporate and noncorporate sectors. I will argue below that the saving-investment mismatches influence heavily the levels of domestic and international debt.
The Point of Origin
The importance of the point of origin can best be appreciated by hypothesizing an imaginary economy in which each economic unit "saves" the exact amount of its "investment." In such a hypothesized economy, one would say that the point of origin of saving was also the point of origin of investment. Planned saving and planned investment would be identical. There would be no need for any intermediary debt to connect saving with investment. In such a rarified thought experiment, no Keynesian income adjustment need be invoked to explain the equilibration of aggregate saving and investment as the aggregate level of each would simply be the summation of the equilibrated economic units. Debt might well be acquired to purchase assets or consumables or to iron out payment difficulties, but aggregate debt would be minimized due to the absence of disparities in planned saving and planned investment. Indeed, in such an economy, one word could describe either saving or investment as there could be no distinction between the two concepts.
In introducing the distinction between planned saving and planned investment, Keynes was able to show how income would adjust to equilibrate saving and investment in the aggregate. That is, there would be no disparity between ex post saving and investment. But in comprehending that ex ante planned saving was different from ex ante planned investment, Keynes also acknowledged the role of debt in funneling saving from savers to investors and-at least implicitly--acknowledged the role of the point of origin of saving and investment in comprehending the level of debt. As a general proposition, we should expect that the greater the mismatch between the economic units who save and the economic units who invest, the greater the level of debt. Since an aggregate equilibration of saving and investment can exist with any number of mismatches at the sectoral or economic unit level (saving-investment imbalances), an inquiry into the aggregate volume of debt must focus on the point of origin of the saving and investment. Existing economic theory recognizes this point. To note just a couple of examples: In discussing the "personal capitalism" of nineteenth century Britain, Alfred D. Chandler, Jr., stressed the self-financing of most of the firms, that is, he stressed that the point of origin of savings corresponded to the point of origin of investment. In such a context, debt was minimized as it "posed a threat to continuing family control" (1990, 390). In Jensen's "free cash flow" theory, noted above, mergers match up corporations with excess cash and limited investment possibilities with corporations with little cash relative to their investment opportunities. In a leveraged buyout scenario, debt is utilized to match investment opportunities with cash.
In an international context, consideration of the point of origin becomes somewhat more complicated. The Keynesian-Kaleckian proposition that investment creates an equivalent amount of ex post domestic savings presupposes a balance in the external current account. A country that invests heavily will undergo growth. But if that growth is concomitant with an ongoing current account deficit, the growth will not generate an equivalent amount of ex post domestic savings.
A rise in consumption demand--particularly one that aims at a high level of Imports--can dampen the saving rate to the point where foreign capital is pulled in to sponsor the investment.
A call for an increased domestic saving rate in the service of curing the current account imbalance is a call for a shift in the point of origin of the saving, rather than the familiar neoclassical call for more investment. Indeed, insofar as the reverse side of personal saving is consumption, an increase in the planned saving rate might well dampen investment. Only if the increased saving aimed at the consumption of imports would an increase in saving hold some assurance that the trade imbalance would be mitigated with a consequent reduction in the "pull" of foreign capital. In the United States such a call often accompanies a call for protectionist measures. Given the possibilities for retaliatory hazards and a multinational context where firms are imbedded in cross-border linkages that are furthered by " free trade," international trade experts more often call for an increased export effort by American corporations to help pay for the imports.
The Saving-Investment Imbalance of the Corporate Sector
Definition: Free Cash Flow
The term free cash flow--coined initially by Jensen to designate "cash flow in excess of that required to fund all projects that have positive net values when discounted at the relevant cost of capital" (1986, 323)--has taken on a variety of definitional forms. Eugene F. Brigham and Phillip R. Daves (2004), for example, have defined it as "cash flow actually available for distribution to investors after the company has made all the investments in fixed assets and working capital necessary to sustain ongoing operations" (205). If we narrow our conception of "projects" (Jensen) and "fixed assets" (Brigham and Daves) to new investment and provisionally assume a constant liquid asset and working capital reserve, our conception of "free cash" becomes amenable to measurement vis-a-vis the NIPA accounts and the corporate investment data provided by the Flow of Funds division of the Federal Reserve. The essence of the question before us is, Do corporations generate saving in excess of new investment expenditures? If so, then corporations generate "free cash flow" and there is a mismatch (imbalance) at the point of corporate origin.
Assuming a given stock of liquid assets and working capital, corporations can do four things with their cash: (1) invest internally, (2) pay dividends, (3) engage in mergers and acquisitions, and (4) repurchase stock.
Concern with the saving-investment balance and its relation to the current account dictates an exclusive focus on internal investment, option 1. The other options essentially involve the disgorging of cash that cannot be profitably utilized (dividends) or disgorging cash to effect possible synergies (mergers and acquisitions) or buy-backs that presumably increase the share price. That dividends constitute "free cash" is justified by economic theory. If a corporation has internal investment possibilities whose prospective returns exceed the cost of capital, and, if management acts in the interests of shareholders, it will utilize its cash for expansion. Paying out dividends would be irrational if investment opportunities equaled or exceeded internally generated cash. In comparing the much higher dividend rate in the 1990s with the earlier payout of the early 1950s through the mid 1970s, Doug Henwood succinctly made the point: "Presumably they [the corporations] saw no alluring opportunities for investing the cash in their own firms, at least at a profit rate that would satisfy shareholders" (1997, 3).
It might be objected that corporations whose cash is insufficient to fund current investment projects might still take on debt to pay out dividends. In such cases dividend payments could not be construed as free cash. Such cases, however, would be economically unjustifiable. Under the assumption that managers generally operate in the interest of shareholders, managers would realize that if stockholders wanted cash, they would be better off borrowing the cash themselves rather than receiving dividends sponsored by corporate debt. This would be true even if the interest rate at the corporate level were lower than the rate available to stockholders, for the tax burden on dividends greatly exceeds any possible interest rate differential. This is not to say that managers of any particular subset of corporations might not fall into habitual patterns of dividend payout and contradict the economic logic herein, particularly for short periods. It is simply to say that in general dividends should be understood as part of "free cash flow"--in other words, cash in excess of what corporations can profitably invest. (15)
The aggregate corporate sector is made up of thousands upon thousands of individual firms. So, theoretically, it is at least possible for net corporate indebtedness to go up even if cash generated in the aggregate exceeds new investment opportunities and even if corporations eschew mergers and stock buy-backs. Such a scenario would, of course, require a certain subset of firms deficient in cash to fund internal investment but yet somehow sufficiently creditworthy that capital markets would continue to fund an expanding level of indebtedness to these cash-poor firms. Absent such a unlikely scenario, a finding that in the aggregate corporations "save" more than they invest with an ever-expanding debt load would be a priori evidence that corporations were increasingly involved in mergers, acquisitions, and buy-backs. As shown below, this latter portrait summarizes the post-WWII story.
Figure 2 graphs three candidates for the definition of "free cash": (1) cash (profits after tax plus depreciation charges) minus new investment (fixed investment plus inventory change); (2) a broader definition where "cash" is amended to include net interest to debt holders; and (3) a narrower definition of "cash" where dividends are subtracted out.
[FIGURE 2 OMITTED]
"Free cash" in the sense of definition 1 gives a first starting point for discussion. Figures 2 and 3 show that, at no time, other than the deep downturns of 1974 and 1980, did new investment exceed the internal cash generated and then only by trivial amounts. And while figure 3 shows that such "free cash" has declined as a percentage of new investment through time, the absolute amounts of such free cash have risen in recent years into the $100-200 billion range. Only in the case of cash "after-dividends" did "free cash" become negative. But, as discussed above, such dividends represent funds that could not be rationally utilized for internal investment. The facts concerning "free cash" show clearly that the trade imbalance has not been generated by the saving-investment imbalance of the corporate world. Quite the contrary. If the whole United States were to exhibit analogous imbalances, it would be running a current account surplus. More exactly, the export surplus would have to materialize or the system would fall backward. If an export surplus did not develop, potential "saving" could not be realized and the system would collapse into a Keynesian-type slump.
Figure 2 and figure 3 also show the broader definition of "free cash," which includes "net interest." It might be objected that "net interest" ought not to be included in any "free cash" measure as "interest" is a committed obligation. For the portion of the corporate sector whose cash is inadequate to sponsor investment, such "interest" does, indeed, reflect the debt necessary to carry out the given investment expenditures. But since the corporate sector--taken as a consolidated whole--had enough profit and depreciation charges after taxes to fund internal investment, the net interest portion represents free cash on a consolidated basis. Figure 2 and figure 3 also show that the broad definition of free cash only really departs significantly from definition 1 from the late 1970s and 1980s to the present. The expanded net interest portion corresponds to a time of increased activity in mergers and acquisitions and stock repurchases. That such a period corresponds to an increasing amount of debt, both in absolute terms and relative to corporate product (figure 4) should, therefore, not be surprising. Although universal totals on aggregate stock repurchases are unavailable, studies from the Compustat tapes suggest that repurchases of stock in recent decades have been quite significant. (16) Amy K. Dittmar and Robert F. Dittmar compiled data on dividends and stock repurchases from Compustat data from 1984 to 2000 (2003). In the mid to late 1980s, repurchases of stock approximated 50 percent of dividend payouts. After falling to a low of around 20 percent in 1991, the ratio continued upward so that by 2000 repurchases were over 130 percent of dividends and totaled $157 billion (28). Although somewhat underreported, data on merger considerations are more complete. (17) The Mergerstat Review has data dating back to 1968. As figure 5 shows, mergers have eaten up the bulk of free cash (definition 1) for the period for which data are available. In the turn to the new millennium, merger considerations exceeded a trillion dollars and greatly exceeded free cash. The difference between merger considerations and free cash reached a crescendo in 1999 with merger considerations exceeding "free cash" by more than $600 billion.
[FIGURES 3-5 OMITTED]
Of course, much of this merger activity in the 1990s was financed through stock, particularly by the newcomers of the "new economy" who used their inflated equity values as currency for acquisitions. This expanded equity financing freed up debt capacity for more expansion. In the 1990s, corporate debt was therefore able to continue upward even compared with the heavy debt-laced merger period of the 1980s. According to Jensen, leveraged buy-outs and other forms of debt acquisition justified their existence not only by possible synergies generated in production but also by directing "free cash" outward from acquiring corporations that could not use it toward target corporations that could. The excess cash over new investment showed that the growing corporate debt pile was not to be explained by a lack of cash. Indeed, according to Jensen, "free cash" itself enticed an increasing amount of debt. Jensen theorized that managers, in taking on debt, communicated to the capital markets that "free cash" would not be wasted but paid out. Thus, interest on bonds substituted for dividends and represented "free cash" in the same sense as dividends but with the added advantage that interest could be subtracted from current revenues to reduce taxes (1986; Jensen and Ruback 1983).
By the broad measure of cash generated, "free cash" hit more than $300 billion a year beginning in the late 1990s and exceeded $400 billion in 2001 (figure 3). By this measure the excess of saving over investment reached more than 50 percent of new investment per year in the late 1980s before falling to a still substantial 40 percent by 2001.
The Noncorporate Sector
Fiscal Deficit + Current Account Deficit = S - I (1)
Or The Twin Deficits = S - I
If we disaggregate the saving-investment imbalance (S - I) in (1) we can write
The Twin Deficits = (S - I)corp + (S - I)noncorp (2)
Or Current Account Deficit = (S - I)corp + (S - I)noncorp - Fiscal Deficit
The disaggregated identity (2) breaks down the saving-investment imbalance at the point of origin of saving and investment. This disaggregation allows us insight into whether the saving can be utilized at the point of origin or whether the saving has to be recirculated in order to find investment outlets. The above discussion has argued that corporations have not, on a consolidated basis, been able to profitably invest the saving generated. Concerning aggregate totals, monies disgorged through mergers, dividends, stock repurchases, and net interest are "free cash" monies repatriated to the owners of capital. As personal income and capital gains, these monies are now available for consumption or available as savings for the noncorporate sector. I omit the corporate sector in this aggregate accounting of recirculation because "free cash" monies that flow back into stocks or debt instruments would simply be disgorged again. (18)
It is evident from the above discussion and identity (2) that the deficient saving imbalance is located in the noncorporate sector. Assuming the given twin deficits, we can calculate the saving-investment imbalance at the point of origin for the noncorporate sector by simple subtraction. For reasons discussed above, I use the "broad" conception of cash, that is, cash inclusive of net interest. Figure 6 shows a comparison of corporate "free cash" and the net deficiency of savings in the noncorporate sector. As shown, in the late 1990s and at the turn into the millennium, noncorporate imbalances were roughly double the generation of "free cash" and in the year 2000 came close to a trillion dollars. From identity (2) it is obvious that these two imbalances would exactly mirror each other if the twin deficits were both zero. That these imbalances do not mirror each other is simply because one or both of the twins were operative. Nevertheless, from 1971 to 2001, the aggregate free cash of 5.611 trillion dollars closely approximated the noncorporate imbalance of 5.775 trillion dollars. Expressed as a percentage, corporate free cash was approximately 97 percent of the noncorporate imbalance.
[FIGURE 6 OMITTED]
Five facts about noncorporate investment need to be noted: (1) The imbalance is not due to a relative expansion of noncorporate investment. Quite the contrary. Noncorporate investment has fallen dramatically relative to corporate investment over the course of the post-WW II period--from around 140 percent of corporate investment in the late 1940s to 66 percent in 2001. (2) Residential construction has been the main component of noncorporate investment, typically being above 160 percent of noncorporate, nonresidential business investment and rising in recent years to about 180 percent to 200 percent. (3) Housing costs constitute the main expense of the typical household budget. (19) (4) Housing costs have outpaced inflation by wide margins in the latter three and one-half decades with the median house price increasing at approximately 6.3 percent for an eightfold expansion (Talbott 2003, 8). (5) Mortgage debt is not only the largest component of personal debt but has also steadily risen as a percentage of personal income over the course of the post-WWII period, despite a relative decline in new residential construction. This is not to say that other types of personal debt have not risen along with it. Figure 7 shows total personal debt and its components of noncorporate business debt, consumer debt, and mortgage debt. The totality as a fraction of disposable income has moved up.
[FIGURE 7 OMITTED]
The saving side of the imbalance has involved a long-term decline in the saving-disposable ratio. While the last few years have witnessed an increase, in the 1970s and 1980s the ratio varied around the 8 percent to 10 percent range as compared with the present rate of a little more than 2 percent. This long-term decline is a particular mystery given the increasing split of the division of income favoring wealthier families who have a higher propensity to save (Wolff 2004). But taken collectively, the five facts noted above suggest that a portion of the noncorporate saving-investment imbalance might well be explained by the housing market, in particular, the rapid rise in housing wealth as measured by prices. This expansion of housing wealth was coincident with the notorious increase in equity prices of 260 percent in the 1990s so that increases in mean household net worth went up by 85 percent in the 1990s (Cashell and Makinen 2002, 25). Such expansion in net worth allowed the expanded borrowing portrayed in figure 7. Such borrowings not only furthered consumption but also could be recirculated in repeated rounds of speculative activity in stocks and housing. As long as net worth was expanding, families could live with decreases in personal saving. Interestingly, this willingness to substitute capital gains for saving influenced not only households but also some economists, who abandoned the notion of income as production. In writing for the New York Federal Reserve, Richard Peach and Charles Steindel maintained that "certainly one can argue that capital gains-either realized or unrealized-are an important form of household income. By excluding capital gains, the NIPA calculations may very well underestimate the real state of household income and, consequently, saving" (2000, 2).
The spending "deficit" coincident with the noncorporate imbalance has clearly compensated for the "free cash" not spent in the corporate sector. Indeed, by identity (2) the noncorporate saving-investment deficit operates analogously to the government deficit in stimulating the economy, with the important difference that the resulting private deficit is underpinned not by the taxing power of the state but by a hoped-for inflation in asset values. The fulfilled hopes of the 1980s and 1990s clearly contributed to the relatively high rates of growth experienced in the last couple of decades. The downside has been the buildup of debt relative to income flows and an increasing reliance on collateral whose capital valuations appear increasingly volatile. Recent events have made the dangers evident. When the stock bubble collapsed in the spring of 2000, some large chunk of "net worth" evaporated. Will a similar phenomenon follow in housing? The collapsing stock bubble also reaffirmed the wisdom of defining saving in terms of production--a definition that reflects the level of national income rather than the level of national speculation.
While there is some sanguinity concerning the ongoing trade imbalance and the buildup of foreign debt (Economic Report of the President, 2003, 61-62) and even some Panglossian optimism (Cooper 2001), the general prognosis of commentators on its meaning for future growth has been pessimistic. The buildup of foreign assets now hovers around $8 trillion. The CEA currently understands the outgoing interest and repatriated profits and fees to be manageable. But the problem lies in the self-feeding nature of the problem. Payments abroad further deteriorate the current account deficit, which leads to more influx of foreign capital which leads to more outward payments. The high income elasticity of U.S. imports suggests that any moderate future growth will generate an even higher percentage of net interest payments out of the country. Godley has estimated that if the U.S. economy grows over the next few years "to generate some reduction in unemployment" the primary balance could rise to more than 6 percent of U.S. GDP (2003, 2). He noted in 2003 that if the overall private balance between domestic savings and investment reverts back to its normal surplus, "it follows as a matter of accounting logic that the government would have to run a deficit at least as large as the balance of payments deficit-that is, the budget deficit would have to rise from some 3 percent of GDP ... to perhaps 9 to 10 percent of GDP in 2007-2008." Not able to accept the magnitude of this twin deficit scenario (particularly the political ramifications of such a rise in government deficits) and unable to see how the world would grow sufficiently to expand U.S. exports enough (in Godley's view the only "long term solution"), Godley projected as the most likely outcome "a long, depressing era of 'growth recession' with increasing unemployment and the ever present risk-with corporate and personal debt so high-of financial implosion." While noting the possibility of the "classic remedy" of dollar devaluation, he also noted the preference of surplus countries for dollars that has prevented "any natural rebalancing process from taking place" (7). That is, in contrast to the familiar "pull" argument surrounding the inadequate savings rate, Godley proposed a "push" argument that operates in the same direction. This "push" argument has also been advanced by the optimists, who see the influx of foreign capital as a "vote of confidence by the rest of the world in the United States, or at least in claims on Americans" (Cooper 2001, 219). Richard Cooper has acknowledged the problem of sustainability, particularly in light of a sharp decline in confidence, but he relies on the classic remedy of dollar devaluation as a corrective device (224).
Given the multinational context described in the first part of this paper, it is doubtful that even a dramatic devaluation of the dollar would operate to correct the ongoing problem. Why would the largest U.S. firms compete against themselves? The expanded multinational presence of others since the collapse of Bretton Woods has moved the context of trade and multinational sales toward an increasing symmetry between U.S. firms and others. But such symmetry is a symmetry of stasis rather than a symmetry leading to balance of payments adjustments. As others "catch up" in the multinational dimension, we should expect that their pass-through will more and more approximate the 100 percent pass-through of U.S. corporations discussed above. But as I have argued, this pass-through reflects a historically situated context within which U.S. corporations have been able to partition markets so as not to compete against themselves. In time, others can be expected to apply the same adaptive techniques as to pricing and sales arrangements to nullify exchange rate changes as well.
The Twin Deficits, Corporate Taxes, and a Partial Way Out
The twin deficit debate arose in the 1980s when the federal deficit expanded at the same time as the current account. Neoclassical economists who were convinced that saving drove investment were concerned that government fiscal deficits crowded out investment by cutting directly into the saving pool and/or indirectly by driving up the interest rate. In either case, they believed this "crowding out" provided the "pull" for a foreign capital influx that allowed investment to proceed ahead. Being the reverse side of a saving imbalance, the negative current account was understood as a mirror reflection of inadequate domestic saving that could be utilized for private investment. Economic policy was conservatively tailored to remedy the current account problem: reduce government deficits by reducing the government.
The proposition that government deficits "crowd out" investment rests on the questionable grounds that saving drives investment rather than the Keynesian-Kaleckian understanding that investment drives saving. Said differently, the crowding-out thesis rests on the questionable grounds that the monies borrowed by the government would have been put into new investment or, alternatively, that such borrowings increase interest rates and thus stymie investment. Such arguments give little or no credence to Keynesian multiplier effects, which, if operative, might well expand investment and saving over and above the levels that would have otherwise occurred. Most important, such arguments also blur the distinction between tax monies that would have been utilized for real investment and tax monies that would have otherwise gone into speculation. In examining the positive free cash flows of corporations, I have shown above the magnitude of the free cash that drives speculation, particularly in stocks. I have also shown the relative decline in new housing investment relative to corporate investment over time that most certainly has contributed to the recent speculative activity in housing. Stocks and homes constitute the bulk of most household wealth. It is not too much to say that the wealth bubbles of each have been influenced if not determined by free cash flow and a relative decline of home building. That is, the bubbles have been heavily influenced by a domestic mismatch of saving and investment.
To the extent that inadequate domestic saving is rooted in speculative activity, any policy prescriptions that would aim at dampening speculation would also raise the domestic saving rate. But, as mentioned above, raising the domestic saving rate can be counterproductive to the extent that investment depends upon consumption demand.
The key to maintaining an adequate level of aggregate demand while raising the domestic saving rate is for the government to spend monies that would have otherwise gone into speculation. A proposal: raise taxes to claim the "free cash" of corporations and redirect the cash toward the saving-investment gap of the noncorporate sector, say the housing sector, the small business sector, or an expanded mass transit program that would not only save energy but would also lower housing costs by allowing access to less expensive land. As noted above, over the last thirty or so years the excess cash of corporations approximates the negative saving gap in the noncorporate sector. Closing this gap through subsidies or direct building of housing or mass transit would help in the following ways: (1) By taxing monies that would have otherwise gone into mergers and acquisitions, share repurchases, or dividends (to stockholders), the "free cash" that leads to speculation would be redirected toward productive ends. Any dampening of speculative activity would tend to encourage a return to saving out of current income rather than a reliance on expanded "net worth" values dependent on volatile capital gains. (2) By making available an expanded supply of housing and transit, such a redirection of monies would provide productive employment as well as low-cost housing and help dampen speculation in housing. Such dampening through taxes on speculative monies would thus knock off the proverbial two birds. Moreover, lessening the housing and transportation costs of the family budget-costs that account for more than 50 percent of the median income budget (20)--would allow an expanded volume of personal saving. (3) Raising taxes on speculative monies would help close the fiscal deficit and its reliance on foreign funds. (4) Taxing speculative monies would also expand the Keynesian multiplier. The effectiveness of the multiplier depends critically on where the taxes come from. Taxing working families that have a high propensity to consume may change the composition of output (more guns, less butter), but little can be expected in terms of stimulation. This is because the tax monies would have been spent anyway. Taxing the upper reaches of the income spectrum where the saving propensity is high would not only dampen speculation but also expand the job-creating effectiveness of government spending.
Taxing the upper stratum, either directly through a higher tax on profits or a more progressive income tax or indirectly by creating taxes analogous to Tobin's proposed tax on foreign exchange speculation, would tend to mitigate the aggregate saving-investment imbalance. This is not the place to examine the various possibilities. But it should be noted that any movement in this direction would be a redirection of tax policy. Tax rates on wages (payrolls) have gone up for some time (Mitrusi and Poterba 2000), whereas tax rates on the upper stratum have gone down (Pechman 1990; Mitrusi and Poterba 2000). This is most apparent in examining the corporate income tax. Not only have rates fallen but the incessant rise in depreciation allowances has also dramatically lowered the tax on cash generated. Figure 8 shows the long post-WWII decline in the tax rate expressed as a percentage of cash flow (definition 1 before taxes)--from more than 40 percent of cash during the Korean War to about 15 percent in 2001. It also shows the corresponding long-term increase in government deficits expressed as a percentage of cash generated. That the two series move--the 1990s capital gain bubble aside--in opposite directions should not be surprising. As noted above, taxing working families does not do much good for stimulating the economy, and the last thirty years have witnessed a secular decline in real wages after taxes per production worker. (22) In short, it has always been less than efficacious to tax working people and now it is less possible to do so. So the choice has come down to either taxing the upper strata or borrowing from them. Given the upper strata's large say in the political process, the tendency to deficits has expanded inexorably. When aggregate domestic saving has come up short, U.S. capital markets have accessed foreign capital markets. To the extent that the saving-investment explanation of the trade deficit is correct, some part of the trade deficit problem can be directly traced to the alleviation of the tax burden on the wealthy.
[FIGURE 8 OMITTED]
It is hardly necessary to emphasize the political difficulties in moving toward the proposed reforms herein. Extending mass transit would come into direct competition with the largest corporations on the earth, the giant car and oil companies. For government to cheapen housing, one must mention the almost certain opposition not only of landlords but the 68 percent of America's families that "own" their own homes (22) and whose equity serves as collateral for existing debt. Sponsoring government home building directly through taxes would invite the hostility of the banking and lending community, which acts as the primary intermediary in translating saving into noncorporate investment. The mere thought that direct government employment would compete with the construction industry suggests opposition on this front as well, although such opposition might be minimized by awarding contracts to this sector. Taxing speculative activities and draining free cash away from mergers, acquisitions, and share repurchases would negatively impact the investment banking community and corporate management circles whose nominal, if not real, task is to serve shareholders. Taxing net interest capital gains and dividends at higher rates would be to tax the wealthy who have an inordinate say in the political process and begs the question of how such tax hikes could be politically achieved. Just mentioning the opposition to reform suggests that curing the trade deficit is not just an economic problem but a political one as well. Let the discussion begin.
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The epigraph comes from an abstract of an International Monetary Fund (IMF) Occasional Paper, "U.S. Fiscal Policies and Priorities for Long-Run Sustainability," released January 7, 2004.
(1.) Mann 2002.
(2.) The Council of Economic Advisors reports, "In developed countries for 1991 to 1997, cross-border majority mergers and acquisitions accounted for 62 percent of the total FDI inflows in OECD countries" (Economic Report of the President, January 2001, 151).
(3.) A sampling: Mann 1986; Baldwin and Krugman 1987; Krugman 1987a, b; Knetter 1989; Lawrence 1990a, b, 1993; Bonturi and Fukasaku 1993 ; McKinnon 2001; Mann 2002.
(4.) Readers who have tracked Wynne Godley's negative "corporate financial balance" conceived as "income (gross of capital consumption)" minus outflows will note that the balance normally shows a deficit (2003, 5). Godley's series is part of a general forecasting project and, for its purpose, the construction of the series may well be adequate. But conceptually, Godley's series is both flawed and misnamed. Any "corporate financial balance" would be expected to include just the investment of the corporate sector, but Godley has inexplicably included the investment of all nonresidential businesses in his "corporate financial balance" even though data on corporate fixed investment are available through the Department of Commerce and corporate inventory investment are available through the Flow of Funds division of the Federal Reserve System. In addition, he included in gross income not just the capital consumption allowances of corporations but also the capital consumption allowances of all nonresidential businesses. Both these inclusions would be understandable if Godley's intention were to show the "outlays" and "income" of all businesses, not just corporations. However, only the undistributed profit of corporations is included in the profit figure. A wider and consistent series that would show the income-outlays of all businesses would obviously require inclusion of an estimate of the after-tax income of unincorporated businesses as well as corporate business.
(5.) Figures for 2002 are given in the annex table B.4, page 262, of the World Investment Report 2003: FDI Policies for Development: National and International Perspectives, United Nations Conference on Trade and Development, United Nations, New York and Geneva, 2003. Percent ages of "total capital invested abroad" for 1971 and 1976 are given in A History of Capitalism, by Michel Beaud (2000, 226, table 6.7).
(6.) Figures for 2002 taken from Fortune, July 21, 2003; figures for 1971 from Fortune, August 1972.
(7.) Source: Historical Statistics of the U.S. Series U 41-462, U.S. Department of Commerce Bureau of the Census, 1975.
(8.) Survey of Current Business, November 2003, table 13, 99.
(9.) Source: Fred Cutler and Samuel Pizer, Foreign Operations of U.S. Industry: Capital Expenditures, Sales and Financing, Survey of Current Business, October 1963. table 9, 20.
(10.) Source: Survey of Current Business, various issues. There is a statistical gap in multinational sales from 1978 to 1981.
(11.) Source: Survey of Current Business, various issues. Typical example is table 2, "U.S. Trade in Goods Associated with Nonbank MCCs, Selected Years" in November 2003 issue, page 89.
(12.) To construct this estimate 1 added MNC affiliate sales plus MNC-"associated" exports of goods and services minus U.S. imports by affiliates minus intra-MNC goods and services to arrive at a figure concerning MNC-associated sales to foreigners. To obtain non-MNC U.S. exports of goods and services, I took total U.S. exports of goods and services (minus transfers under military agency sales plus U.S. government miscellaneous services) and subtracted MNC-associated exports of goods and services to arrive at my "free export" figure, 1 then expressed this figure as a percentage of the total MNC-associated sales to foreigners plus non-MNC-associated exports of goods and services. For total exports of goods and services see the Survey of Current Business (hereafter SCB), March 2003, table F.1; for multinational sales of nonbank foreign affiliates of U.S. companies and U.S. imports of goods shipped by affiliates, see SCB, March 2003, table G.3; for U.S. imports of services shipped by affiliates, SCB, table 1; for various forms of income associated with U.S. affiliates, see SCB, February 2003, table G.2; for royalties and license fees of both parent affiliates, see SCB, September 2002, table F.4.
(13.) Survey of Current Business, February 1997, table 1, page 25.
(14.) The "pricing to market" literature is extensive. In contrast to the 100 percent pass-through exhibited by U.S. exporters, the Japanese and Germans have considerably less pass-through. Given the much higher export dependency of the countries involved, this is understandable. For the German case, see Knetter 1989. For a comparison of the pass-through on U.S. exports and major categories of U.S. imports, see Mann 1986. Also see Hung et al. 1993.
(15.) The other two options--mergers and acquisitions and stock repurchases--do not necessarily indicate an excess of cash over investment possibilities for any particular firm. However, as 1 will argue below, in the aggregate and in the historical context of exhibited "free cash" monies, mergers and acquisitions and stock repurchases do, in fact, arise out of "free cash."
(16.) Doug Henwood wrote, "Given the wave of takeovers and buybacks in recent years, far more stock has been retired than issued; net new stock offering were--11 percent of capex between 1980 and 1996, making the stock market, surreally, a negative source of funds" (1997, 72).
(17.) The Mergerstat Review tabulates all considerations on mergers and acquisitions on announced transactions reporting a purchase price. Smaller mergers often are not recorded. Consequently the series is underreported. The series portrayed in figure 6 is net of divestitures and foreign acquisitions where it was possible to subtract out such contaminants (divestitures later than 1981) and foreign acquisitions later than 1975.
(18.) A qualifier: In pushing up the price of stocks and bonds, financing becomes cheaper and presumably would have some positive effects on investment.
(19.) Source: Consumer Expenditures in 2000, U.S. Bureau of Labor Statistics.
(20.) Source: Consumer Expenditures in 2000, U.S. Bureau of Labor Statistics; also Report on the American Workforce, U.S. Department of Labor, 1995, page 81.
(21.) Source: U.S. Department of Labor. Figures are constructed by taking the average annual weekly earnings of production workers and adjusting them by the CPI of urban workers.
(22.) Figure cited in William J. McDonough's "Opening Remarks" in Economic Policy Review (2003, 8).
The author is a Professor of Economics at Menlo College in Atherton, California.…