Tom Mulcair, Mark Carney and Getting Money “out of the economy”

NDP leader Tom Mulcair is in the headlines today for declaring he wants to raise corporate tax rate. As part of the justification for the move, he mentions the famous $800 billion of “dead money” on corporate balance sheets. The expression “dead money” was attributed to Finance Minister Jim Flaherty, but in fact it was Mark Carney who coined it. Carney was heading Bank of Canada at the time.

I do not have much to add to the renewed debate of whether or not it’s worthwhile to raise corporate tax rates, and what kind of effect, if any, it will have on jobs, business, and economy in general. The wide spectrum of opinions is well represented.

One thing is worth commenting on though, and that is the very concept of “getting money out of” or “returning money into” the economy. People on both sides of this argument (or “all” sides – as there are probably more than two) frequently note that “returning the money to the economy” will be good. From that point, some go on to argue – let’s go ahead and do it already, by taxing the corporations and spending the money (by the government). Others proceed to claim that there are good reasons behind these cash stashes, and we should probably just let the companies be.

I’d like to try and understand what that “getting money out of” economy even means. To examine that, let’s go to the basics.

And the basics are that there we, as the economy or the society, own, produce, consume, import and export all sorts of things. These things are our labour and skills, roads and farmlands, cars  and houses, factories and computers, food and office supplies. This is our wealth.

And there is another thing that helps us allocate the limited wealth that we have between our virtually unlimited wants and needs, by assigning values to most everything. That is money.

Money is not wealth. Money helps move wealth around and run production, to produce more wealth. But in itself, it has no value beyond numbers printed on paper. In a world where everyone is absolutely honest, “monopoly money” would do just as fine as dollars or gold, as long as everyone promises not to produce more of it.

So first thing to note about this “getting out of economy” thing is that even if the corporations take all their cash and set it on fire, no wealth will be destroyed. Sure, “money is taken out” of circulation, but the wealth it moves around remains. There is the same amount of cars, the same amount of roads. The corporations become poorer, because they can now purchase less things they might need. But everybody else becomes a little bit richer because the remaining money would become just a little bit more valuable.

Same argument applies if the businesses stash their cash into a mattress. Taken out of circulation, the cash is as good as gone. Since this money was not gifted to the corporations by anyone, but rather received in exchange for some product or service, this pretty much means that the corporations lend their product to the public in exchange for pieces of paper. These pieces of paper will be redeemed at a later stage to get something in return.

But companies would not usually do that. At the very least, the cash will be kept in a checking account of a bank. The bank will take the money, and lend it to the public or otherwise invest it. The money will enter circulation – or “return to the economy”. Again, no wealth increase there, but hey, if we are so concerned with more pieces of paper changing hands, here we go.

In other cases, companies will maintain some kind of conservative portfolios to earn slightly better return on their cash. The portfolios will contain some investment instruments like bonds or mutual find shares. Anything contained in an investment portfolio can be broken down and the money traced back “to the economy”. For example, if the company buys a bond, it lends money to the issuer of the bond to be invested in whatever it is the issuer is after.

So as we see, there is no easy way to “take money out of the economy”, besides stashing cash in a mattress or burning it. And even then, what is taken out of the economy are pieces of paper, and not real wealth.

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