Mark Carney’s comments on corporate cash holding have been interpreted to mean that corporations are investing less and holding on to cash more. This is a leap of logic that should not be made.
Take, for example, a company that takes out a loan for $5-million, uses $4-million for a plant expansion and holds the last million to insure against cost overruns and for future purchases of raw materials. This investment (with the associated loan) has, in fact, increased cash balances, not lowered them. Cash balances, by themselves, tell little about investment. We need to consider the entire corporate balance sheet, so it is a mistake to assume a direct trade-off.
Instead of simply considering increases in cash balances, David Olive of the Toronto Star and Dan Gardner of the Ottawa Citizen take the high corporate cash balances story a step further. They suggest that corporate Canada is holding onto too much cash, not by looking at the increase over time, but instead through a cross-country comparison between Canada and the United States. But the comparison is not a particularly relevant one.
The types of corporations we have in Canada are far different than those in the United States, as Canada is disproportionately heavy with resource companies. By assuming that Canadian corporations should have the same (per-capita) level of cash on hand as U.S. companies implicitly assumes that a mining company would want the same amount of cash on hand as a similarly sized software company. I see no reason why this would necessarily be the case. A raw comparison between the two countries is about as useful as a raw comparison of spending patterns between the sexes and concluding that women spend too much on brassieres.
Both Olive and Gardner go on to cite other statistics which are far more revealing, but also less damning. Gardner points out that Canadian investment per worker is below U.S. levels, but that it has risen 15 per cent in only two years. Such a rapid increase hardly fits the story of corporate Canada sitting on the sidelines.
Gardner and Olive are right to consider other indicators beyond corporate cash balances. There is simply no way to know if corporations are holding on to too much cash with the figures that are being cited. An increase in cash balances also tells us little, given that an increase in cash balances is a consequence of the reduction in price of holding cash. It is also quite possibly that corporations were holding too little cash five years ago and are rectifying past mistakes.
There is simply no justification for creating elaborate narratives out of data with such large limitations.