The American growth engine is starving for fuel. Political support for further government pump-priming has drained away. Consumers are tapped out. And exports will never come close to providing the needed economic boost.
Only corporations have the money to sustain today's fragile economic recovery. By the end of this year, American businesses will have amassed half a trillion dollars in savings. But they are disinclined to spend it.
Getting corporate leaders to act like capitalists, not Scrooges -- to invest rather than save -- is the nation's most pressing economic challenge. If the country is to avoid looming economic stagnation, the government may need to use the threat of tax sticks and the enticement of investment carrots to get corporations to begin to take risks again and pledge their assets to America's future.
"The corporate reinvestment process has broken down," said Rob Parenteau, the head of a global financial advisory firm. "And when that happens, growth is short-circuited."
In 2009, corporate savings, less capital expenditures, totaled $300.8 billion. And this year, nonfinancial companies are on pace to save an additional $230.5 billion. That is the largest hoard of cash that U.S. corporations have accumulated in any two-year period since World War II.
"This capital is one of the only economic levers left," said Sherle Schwenninger, who directs the New America Foundation's economic growth program. "We need to unlock this money."
The problem is that "corporations don't see good investments out there," according to William Gale, co-director of the Tax Policy Center at the Brookings Institution. "They already have excess existing capacity, and they see relatively low demand for their stuff."
That logic will drive the economy into a death spiral. With inadequate growth in demand, businesses will fail to invest. Coupled with the reluctance of both government and consumers to spend, the result will be even weaker economic growth -- which will, in turn, lead to even less corporate investment.
The best way for the country to break this vicious cycle would be for Washington to continue to spend. But with Congress almost sure to be more fiscally conservative after the November elections, further government spending does not seem to be in the cards. So how can the Obama administration get corporations to lift the economy by betting on the future?
The most straightforward approach would be to tax corporate cash holdings, forcing treasurers to spend their savings rather than give the money to Uncle Sam. Parenteau has suggested a stiff tax on retained earnings that are not reinvested within two years or a "turnover tax" that would raise businesses' cost of investing their savings merely in safe short-term financial assets.
The government must be careful, however, not to push companies into squandering their savings on building economically inefficient capacity that they don't really need or into simply manipulating their accounts to hide earnings.
A better approach might be to use the tax code to encourage corporations to invest some of their retained earnings in rebuilding America's crumbling infrastructure, where some economists estimate the investment shortfall now exceeds $2 trillion.
"What if corporations received a tax credit if they devoted a portion of their reserves to purchasing Build America Bonds," Schwenninger suggested. "This would drive investment that would not otherwise take place, creating demand without adding to excess capacity, generating a more sustainable economic recovery."
The Build America Bond program, created by last year's stimulus package, subsidizes bond issuance for state and local governments. It has supported $116 billion in spending to date, but it is about to expire.
Sustaining the program with new sources of capital would help bolster the economy in an investment-friendly manner. Moreover, the jobs created would provide people with more disposable income, increasing consumer demand and fostering an economic climate that would finally encourage businesses to resume investing in their own productive capacity.
It is time to recognize that excess corporate savings have become the roadblock to economic recovery. To tap these retained earnings, Washington should offer business leaders a choice: They can watch government tax their savings away or they can invest in much-needed infrastructure. Continuing to hoard cash should not be an option.
This article appears in the July 17, 2010, edition of National Journal.