By Marshall Auerback

Deficit spending by the government is merely the counterpart of private sector saving. What government deficit spending does is to permit the private sector to achieve its level of desired saving. When the latter changes, government spending ought to be adjusting in the opposite direction to offset it (unless the current account balance happens to do the job).

But consider the implications of what happens if one the economy’s three major sectors – in this case, the corporate sector – retains savings above and beyond that required to reinvest and establish growth in the productive economy.

If one examines recent cases in which the corporate sector remained a net saver, both the Japanese and Canadian experiences spring to mind. Even today, Japan’s corporate sector remains the largest repository of non-government savings, yet employment growth is virtually non-existent. Similarly, during the 1990s, the Canadian household sector was a net lender in the 1980s and 1990s and the corporate sector was a net borrower.  So the biggest adjustment that came via Canada’s export boom was a huge increase in corporate savings during the years of Paul Martin’s fiscal austerity drive.  But these savings were not really deployed aggressively for reinvestment in the productive economy and, hence, job creation.

As Professor Mario Seccareccia of the University of Ottawa has noted in a recent paper, in Canada during the latter half of the 1990s and during the subsequent decade, the corporate sector began to act like Keynes’s economic rentiers (“The Role of Public Investment in a Coordinated “Exit Strategy” to Promote Long-Term Growth: The Keynes Legacy”). An implication to be drawn from this analysis is that even when corporations build up massive savings, as they are now doing in Japan (and as they did in Canada in the mid-1990s), one ought to pose the question: if those profits are not being reinvested to create further job growth, shouldn’t the government tax them, so that it can use the fiscal resources itself to move policy in that direction? 

As Seccareccia notes in the Canadian context, massive build ups of cash flow can and did facilitate all sorts of mischief – zaitech (i.e. financial engineering), accounting frauds, control fraud:   

“[T]his reversal of the net lending/borrowing position of the business and household sectors is of critical importance in understanding the evolution of financial capitalism over the last decade, with much of the speculative drive having been fueled by the growing savings of the corporate sector. It was the rentier behaviour of the corporate sector, with the latter finding it ever more lucrative to engage in financial acquisitions, which largely led to an abandoning of productive investment since the 1990s.”

In this context, the entire economy becomes financialised and therefore far less productive and more prone to fraud and higher rates of unemployment.  We see evidence of this in figure 1, which shows that recessions have been preceded by a build-up of corporate savings. But it serves the interests of the economic rentiers.  This is exactly what happened in Canada and has happened all over the world in the past decade.

It is true that taxing the savings of the corporate rentiers in itself will not necessarily lead to more spending in the economy. And from a Modern Monetary Theory (MMT) perspective, it is also the case that the government does not “need” the so-called fiscal resources to spend. The government is never revenue constrained per se and could easily do more regardless of its take on corporate tax receipts. 

In making this concession, my point was not that corporate tax receipts are required for the government to spend, but more that the threat of taxation might induce the corporate sector to do some of the government’s “heavy lifting” on the job creation front. There’s some political advantage here because, as we are witnessing today, there are profoundly strong forces currently mobilizing against government spending on the spurious grounds of “fiscal sustainability.” 

So let’s call their bluff.

There are additional social benefits to be derived from this proposal. If the government taxes excess corporate savings, it means there are fewer corresponding opportunities for corporate financial engineering, control frauds, etc., and therefore greater financial stability as you have an economy less prone to financialisation. That’s an unalloyed social good.

In effect, this becomes a tax aimed explicitly at the corporate rentiers who are not reinvesting their super profits in tangible capital equipment, except in tech/telecom bubbles, or in Chinese malinvestment schemes, etc. And it serves an ideological purpose of a) forcing nonfinancial capitalists to, well, be capitalists, not speculators, and b) ties the deficit reduction initiatives, which, as we have argued many times in the past, are insane and suicidal, but are nonetheless being carried out, to making the rentiers pay their “fair share.”  

The deficit hawks have gained significant policy traction, but we need to perform whatever jiu jitsu we can to point the finger at the real source of the so called “savings glut”, which is lack of corporate reinvestment in anything but zaitech, payouts, financial engineering, and other delights of casino capitalism. We have to demystify what it means to have the whole system geared to serve “shareholder value,” and we have to demonstrate that capitalists are failing to serve their role before a large consensus behind public and public/private investment initiatives can be rebuilt from the ashes of Austeria.

It appears that massive build ups of cash flow facilitate all sorts of mischief – zaitech (i.e. financial engineering), accounting frauds, control fraud, etc. And this would be about the time modern compensation systems began to change, tying, more and more, management bonuses to share price. So you see firms “investing” their earnings in massive buybacks of their own stocks.

In Canada, the reversal of the net lending/borrowing position of the business and household sectors is of critical importance in understanding the evolution of financial capitalism over the last decade, with much of the speculative drive having been fueled by the growing savings of the corporate sector. It was the rentier behaviour of the corporate sector, with the latter finding it ever more lucrative to engage in financial acquisitions, which largely led to an abandoning of productive investment since the 1990s.

When an economy becomes financialised and therefore far less productive, it becomes more prone to fraud, greater financial instability, and higher rates of unemployment.  But it serves the interests of the economic rentiers.   Minsky was right:  you need a “big government” to act as a stabilising bulwark against the financialisation of the economy.  Taxing retained corporate earnings is clearly another aspect of dealing with the ravages of money market capitalism.


  1. That is great.. but would it be possible to define what you mean by excess profits? The concept is a bit hazy to the lay reader.

  2. So basically you're saying the government shouldn't allow the corporate sector to net save.Then why should the government allow any sector to net save – including households?And with the private sector prohibited from net saving, MMT won’t have to worry anymore about the need for government to offset the desire for net savings.MMT is wonderful – eliminate government bonds, set risk free rates at zero, bulldoze the banking system into the ground, and crush anybody left with a financial asset.No agenda there.

  3. Wm Wilson asks …Is it a mirage to suspect that the elite caste which comprises top management in corporate America designs management function to facilitate financialization (and/or other gimmics) as a manuever to permit maintainence of power and position at top levels. The outlandish levels of compensation of top executives in most corporations seems to be a primary objective of that cast of characters. The whole concept of corporate America should be reconsidered IMHO; the idea that the top executives deserve such outlandish multiples of average corporate compensation seems obviously detrimental from many perspectives and yet it has been difficult to find an instance where a top executive has not taken advantage of every opportunity to take advantage of lax oversight and to screw the shareholders. Perhaps, acceptance of that sort of attitude on the part of the decision makers in the present administration is related to the decision-making which led to the very poor manner in which the Wall St bank bailouts were handeled.

  4. I published something similar to this back in February, ( but went even further. Such hoarding of capital could have been the cause of the debt bubble. When accumulated capital exceeds what is necessary to sustain GDP growth, the returns on capital drop, causing money managers to use leverage, derivatives, and stimulation of credit markets to sustain returns, resulting in the kind of bubbling and collapse we have observed.The only way to get out of this mess is to directly stimulate demand through federal projects that will put people back to work. This puts money in the pockets of consumer who will spend it to create the demand that is required to increase GDP growth. Inducing "the corporate sector to do some of the government's "heavy lifting" on the job creation front" is like pushing on rope. Corporations won't create jobs because there's a pot of money out there. Increased demand for their products is the only thing that will cause them to create jobs.Over the past several decades taxes on capital gains and high incomes have been reduced dramatically while the incomes of workers have stagnated. What is needed now is increased taxes of this capital hoard and reduced taxes on consumers until the accumulated capital is again in line with real capital needs.

  5. Hello,A convincing post. Using taxation to incentivise investment by corporations seems persuasive to me, as well as sufficiently large budget deficits to stimulate a self-sustaining economic expansion.My one question is this: with outsourcing and the inability of many businesses (particularly manufacturing) to compete with cheap Chinese imports, isn't some kind of trade and industrial policy necessary to make this investment profitable?I do know some supporters of MMT like Bill Mitchell think manufacturing is not that important.Do you have any concerns about the fall of manufacturing employment as a percentage of the labour force over the past 30 years in countries like the US, the UK and Canada?

  6. stock buybacks are indeed a typical example of corporate 'investment' nowadays — and notice the coincidence of these buybacks with executive stock-option exercises.

  7. Absolutely. The middle class is being destroyed the the kleptocracy.

  8. Marshall, Have you read Treval Powers book Leakage? Not to spoil the ending or anything, but he points out that undistributed corporate profits are a big source of economic leakage.I'd also note something Michael Boskin wrote about Bill Vickrey's tax proposals…Vickrey’s four urgent tax reform proposals are taxation of accrued capital gains, elimination of tax-exempt interest, taxation of life insurance buildup, and taxation of undistributed corporate profits, I'd point out that Vickrey's gross markups warrant proposal (adapted from Abba Lerner & David Collander's Market Anti-inflation Plan) would act as an effective tax on corporate rent seeking, since any company that wished to mark up its "value-added" prices more than the economy as a whole would have to pay for the right to do so (p. 13 of linked scribd doc)

  9. Lord Keynes, greetings from the other side… Economically, a trade deficit is a great deal, foreigners ship us real goods in exchange for our fiat money, so good times. Politically, however, hollowing out our non-defense manufacturing base is a bad deal for our working and middle class and bad too for those who want lower defense spending. In many rural areas, "the bomb plant" or "the army base" has been the main source of aggregate demand for the past 30 or 40 years. I think the most straightforward solution to the problem is Warren Buffett's Import Certificate proposal.Buffett's plan proposes creating a market for import certificates that would represent the right to import a certain dollar amount of goods into the United States from other countries. These certificates would be issued to US exporters in an amount equal to the dollar amount of the goods they export, and can be sold to importers, who must purchase them in order to legally import goods. Congress would do well to set up an IC market at the same time as a Vickrey gross markups market. Higher import costs, while offset by lower export costs, will certainly affect the inflation rate, so we might as well tackle the trade deficit (which is a big issue today) and inflation (which isn't an issue currently) at the same time. Don't wait till you're thirsty to dig a well and all that.Why not chock-full employment?

  10. …the threat of taxation might induce the corporate sector to do some of the government's "heavy lifting" on the job creation front…What if the threat of taxation were accompanied by the offer to alleviate the burden by hiring more people? Not sure whether I've missed something fundamental here, but it seems logical to me that retained profits and job creation should be brought together. If corporate earnings were measured and (progressively) taxed on a 'per employee' instead of a total basis, for example, there would an incentive to hire. The same could be done for wage differences within a corporation, I guess. Lower rate, the smaller the wage difference, and the more heads the profits are spread across, so that the marginal, well payed employee becomes favourable to other options. Maybe something to this extent could cause a gravitation towards more compact, labour intense structures and full employment? Are there already similar proposals out there? Or are my math skills playing tricks on me? Thanks, Oliver

  11. Hi Marshall,I agree wrt the effects of the corporate sector hoarding financial assets and the resultant lack of investment/employment and casino operations.The foreign sector has been a problem also, seems both of these sectors hoard to the detriment of the household.WRT the foreign sector, Back in the 80s, it was reported Reagan used to tell the Japanese to stop at 1M cars, thats it. He convinced them thru jawboning and personal appeal to import at this measured pace. The Japanese were no doubt hoarding US financial assets and seemed like they wanted to do more (Honda & Toyota were really taking off), but Reagan played the good cop to Congress' bad cop with this cold war ally. He told them if they went over the 1M quota, he could not promise that he would go to bat for them against protectionist legal measures that would certainly result.It seemed to work as I believe Reagan enjoyed the support of the major US labor unions for both of his elections, he took care of them, they took care of him.Agree that this type of thing is missing today. Some savvy pol should put a platform together that prioritizes the household. Perhaps "threaten/veiled threat" to both the corporate and foreign sector interests with some type of sanctions if they do not seek consideration for the household sector voluntarily.

  12. Ha! Got there before you! See my piece at haven't read it have you? :-)I'm planning a paper on this topic. And the 'savings precedes recession' thing definitely needs further investigation. Interested in collaborating?

  13. Stimulating demand cannot sustain or repair an economy in the long run. With the total productivity and productivity growth of the economy (relatively) inflexible, deficit spending by the government must be offset by higher productivity gains elsewhere (either lower employment and wages domestically or importing goods and services from abroad at cheaper prices).It is no coincidence that our trade deficit arose in lockstep with the rise of large, reoccurring and growing budget deficits in the 1980s. The resulting trade deficit has pushed low-skilled jobs offshore and likely contributes to the widespread exploitation of undocumented immigrants (who perform those low-wage jobs that cannot be outsourced or eliminated through technology-driven productivity gains).We need a more healthy mix of domestic savings and consumption; since budget deficits requires importing foreign capital (especially in the private sector) foreign lenders will have unfair advantages in attracting American jobs to their shores.The biggest question is: how the hell do we avoid a recession or depression during this adjustment. I believe this would involve heavily expanding the safety net while greatly encouraging "creative destruction" capitalism. The key question is how to expand the social safety net without damaging productivity; are direct transfer payments (e.g earned income tax credits) better then direct or indirect subsidies (e.g. energy subsidies)?Or we may simply be doomed to a long, painful economic adjustment. Personally, I'm a little sick of kicking things down the road only to make them worse later. Politically it may be a choice between austerity and recession now, or austerity and depression later.

  14. Beowulf,Thanks for bringing the import certificate proposal to my attention. It was the first I had heard of it.I asked Randy Cook, president of the National Organization for Raw Materials ( for his opionion on this:"1. it would privatize the very source of revenue that federal government depended upon (in varying degrees) from 1789 until circa 1914. This begs the question, "Is this compatible with the American vision of liberty and limited government of, by and FOR the people?"2. it mistakenly proceeds with a belief in "supply and demand" being useful/effective in setting prices in raw materials markets. This is false on its face unless market "signals" can proceed backward in time.3. it would encourage the continued concentration in private control of raw natural resources and the monopolistic tendencies such private control fosters. This would be a reduction in liberty, not an increase."

  15. To tell you honestly, your profits is kinda unclear for people who are not aware or should i say first time readers. I suggest you specify it for them to understand.

  16. It is pretty clear to me it should be done but I'm not sure about its political feasibility, which is most others problems with the near universal Job Guarantee / Employer of Last Resort program. On the surface at least, it doesn't appear to be politically feasible. I disagree with them on the JG/ELR not being feasible but I don't see how you could get a proposal like this through congress/parliament.