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The Piles of Cash That Never Existed

Companies in the United States were sitting on record piles of cash. That’s what we all thought. Then the data changed.

FiveThirtyEight on Monday introduced three simple rules for evaluating economic claims: Question the data; know what you’re measuring; and look for evidence beyond the numbers. Economic reports are full of traps: data revisions, meaningless volatility, spurious correlations. Following these rules might not always reveal the truth, but it will get you closer to it.

Most of the time.

One of the early narratives of the economic recovery was that companies were “hoarding” cash. The story line made sense: Companies, burned by the credit crisis and cautious amid economic and political uncertainty, were stockpiling money. The data backed up the story: The Federal Reserve in 2011 reported that American companies had more than $2 trillion stashed away in overflowing vaults (or, in most cases, bulging bank accounts). As a share of all assets, cash holdings were at their highest level in nearly half a century.

Then the Fed revised its data. New figures released in early 2012, based on more complete tax filings, showed that American companies actually had close to half a trillion dollars less cash than previously thought. Companies did hoard cash in the early months after the financial crisis, but only up to the point that they had rebuilt savings they’d had to spend during the credit crunch. After that, cash holdings as a share of assets leveled off and have remained pretty much flat since. The revision didn’t just change the numbers—it undermined the whole narrative.

So, could an appropriately skeptical reader have detected the flawed narrative at the time? Not easily. The Fed’s private-sector data is often revised, but usually not by hundreds of billions of dollars. The trend had been relatively steady, showing none of the wild gyrations that are often a hallmark of unreliable data. And there were plenty of real-world anecdotes to support the idea; companies such as Apple and Microsoft were sitting on huge cash reserves, and reporters—this one included—had no trouble finding corporate executives to talk about their decision to stockpile cash.

But at least one analyst did publicly question the prevailing narrative. James Bianco, an investor and sometime blogger, argued as early as 2011 that analysts were too focused on the short-term trend and missing the bigger picture. Bianco essentially argued that the data violated rule No. 2: The numbers might have been right, but they didn’t show what everyone else thought they showed.

Still, it’s understandable that so many experts bought into the “cash on the sidelines” narrative. What’s less understandable is that they’re still buying into it. Despite the big revision, the corporate-cash narrative remains very much alive.

Legend has it that when a critic accused John Maynard Keynes of reversing himself, he simply replied: “When the facts change, I change my mind. What do you do, sir?” There’s some question about whether Keynes said those famous words. But either way, they’d be a strong candidate for rule No. 4.

Ben Casselman was a senior editor and the chief economics writer for FiveThirtyEight.