Households have long been the prime savers in the global economy. In the early 1980s, households contributed some 60 percent of global saving, an amount equal to about 14 percent of global GDP.
Not anymore: research by Chicago Booth PhD candidate Peter Chen, University of Minnesota’s Loukas Karabarbounis, and Booth’s Brent Neiman finds that corporations, not households, are now the world’s prime savers. Nowadays, nearly 70 cents of every dollar of global investment spending is funded from corporate saving, with households and governments making up the remaining 30 cents. The growth of corporate saving was found in the majority of countries and industries, but was largest in Asian countries such as South Korea, China, and Japan.
Chen, Karabarbounis, and Neiman examined global corporate profits minus shareholder dividend payments, a measure known as “retained earnings.” They find that since 1980, these undistributed profits grew sufficiently to surpass the level of corporate investment, which means the corporate sector has gone from being a net borrower to a net saver.
Corporate saving is essentially the amount of profits each year not paid out as dividends. It’s distinct from cash holdings: corporate savings can be used to invest in equipment, intellectual property, and new facilities; retire debt; buy back shares; or buy financial assets, including cash.
Corporate savings have grown in most industries, including large industries such as manufacturing and wholesale/retail.
A number of changes in the global economy gave the corporate sector reason to increase its corporate saving. Lower real interest rates (nominal rates minus inflation), cuts in corporate tax rates, higher markups, and falling investment-goods prices all led companies to spend a smaller share of income on workers, leaving a higher share for corporate profits. The corporate sector didn’t increase its dividend payments at the same pace, resulting in growing corporate saving. Tax incentives encouraged companies to use their profits to buy back shares rather than pay out dividends, which added to the rise in saving.
Starting in the early 2000s, the amount of corporate savings not used to invest in new capital, called net lending, increasingly accumulated as cash, contributing to the large stockpiles of liquid assets currently held by many public companies. The use of net lending for stock repurchases slowed after the 2008 global financial crisis.