Today’s Wall Street Journal piece about subpar levels of investment by U.S. corporations wasn’t mainly important for its update on this critical economic trend – which is surely connected with the subpar economic recovery the nation is experiencing. Instead, it was mainly important because it sheds new light on a major debate that’s been taking place about why such investment is lagging.
In particular, the article adds to the evidence that this humdrum investment performance is more a result than a cause of the lousy recovery. In other words, the sluggish economy goes farther toward explaining today’s investment levels than do factors such as financial regulatory policy changes that discourage productive uses of capital and encourage profit-and compensation-padding uses like stock buybacks and acquisitions. And that’s a case that I made most recently this past August.
The key is this chart, which tracks the growth of all forms of investment spending except for residential housing on the one hand, and the growth of consumer spending on the other. Moreover, it compares growth in these two areas as it unfolded during the last few economic recoveries, as well as the current version.
Just eyeballing the chart makes several trends clear. First, even though the growth of such business spending during this recovery has been nothing special by historical standards, its pace isn’t terribly different. Second, although the growth of such investment has been ordinary, it’s been faster than the growth of consumer spending during this recovery. Third, that’s typically been the case for recent recoveries – whether before or after 1980, when the new wave of productive-spending-crimping regulations is thought to have begun. And fourth, the most conspicuous outlier data line in this graphic is the growth of consumption during this recovery. It’s been substantially slower than during all of its recent predecessors.
I’m not saying that this chart clinches the argument for me. Some critics have argued that my decision to use inflation-adjusted data for measuring business spending is flawed. As mentioned in the post cited above, when I checked, I didn’t find a major difference. It is true, however, that the growth of business spending’s share of the economy in current dollars was faster before the 1980s than after.
Others say that the best evidence of the U.S. economy’s degeneration into a short-term- and finance-obsessed capitalist“casino” isn’t best illustrated by corporate spending on physical assets like new factories and machinery, or even on research and development. Instead, to quote one, “the problem is in training, retaining, and rewarding employees. That is what turns capex [capital expenditures] and R&D into productivity gains that get shared with workers.”
At the same time, this analyst (who wrote to me in a private capacity) allowed that this “is not to say that there one cannot learn a lot by diving into the data on capex and R&D. But there have been so many changes in the composition of industry (e.g., the rise of biotech), globalization of production, and accounting practices (often for tax purposes) since the 1970s that affect these macro indicators that the long-run trends should be just a starting point for serious discussions about what has gone on in the U.S. economy rather than a way to come to conclusions and end the discussion.”
I’m certainly in favor of being cautious about conclusions, and look forward to continue investigating this subject. At the same time, I think it’s fair to interpret the above position as an acknowledgment that the great financial deregulation wave that began around 35 years ago hasn’t notably soured Corporate America on spending more on physical assets and even intangibles like R&D. And that strikes me as pretty darned important when you consider the role that these assets have played in creating American prosperity – and the role they will need to play in restoring genuine economic health.