Following Up: Behind the Business Investment Slowdown

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business investment, capex, capital spending, casino capitalism, finance, financial deregulation, recovery, The Wall Street Journal, {What's Left of) Our Economy

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.

Following Up: Casino Capitalism is Everywhere But in the Macroeconomic Data

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business investment, casino capitalism, expansions, Financial Crisis, financial deregulation, Following Up, GDP, Great Recession, growth, inflation adjustment, recoveries, stakeholder capitalism, stock buybacks, stock market, Wall Street reform

Over the last year I’ve published an op-ed and a book review that both challenged the widespread claim that the Wall Street deregulation dating from the late-1970s turned American business leaders in general from responsible stakeholders dedicated to creating real wealth for society into shortsighted casino capitalists. My evidence was government data on the macroeconomy showing the contribution to growth made by business investment both before and after that de-regulatory Big Bang. If the claims – most notably made by Democratic presidential contender Hillary Clinton in a ballyhooed speech – are right, I reasoned, then such investment (on factories and labs and warehouses and equipment and the like) should have made a much smaller contribution after the supposed Age of Short-term-ism began than before.

My article found just the opposite, but recently someone in the field whose work I respect expressed some skepticism, and suggested that if I had used different data, I’d get significantly different results. So that’s how I spent some of this afternoon, and just found out that the story remains the same. That is, when you look at the economy, as opposed to anecdotes about corporate greed, there are just no figures that point to a fundamental degeneration in the nature of American capitalism.

My challenger objected mainly to my use of inflation-adjusted data. My rationale was, and still is, that for all the difficulties of accurately measuring price changes, it’s better to use figures that try to distinguish between real economic output and its increase on the one hand, and the impact of rising prices on the other. But the pre-inflation data fails to turn up any noteworthy Big Bang effects, either.

My original article looked at long American expansions since the 1960s, since the 1950s economy was surprisingly choppy, and growth kept getting interrupted, and since comparing expansions (or recessions) is the best way to get apples-to-apples data. This exercise clearly showed that business spending played a smaller role in the post-deregulation 1980s recovery than during the pre-deregulation 1960s expansion (generating 10.75 percent and 9.78 percent of their growth, respectively).

But during the 1990s boom and the bubbly recovery of the previous decade, business spending’s contribution to growth was twice as great – even though business is thought to have become even more obsessed with crackpot financial engineering. And during the current recovery, such investment has been responsible for substantially more than than one quarter of the historically weak real growth that’s been recorded.

Remove the inflation adjustment and the numbers change only modestly – and not nearly enough to even begin supporting the casino capitalism thesis. During the 1960s expansion, business spending generated 13.80 percent of total growth. As with the post-inflation data, this share dropped during the 1980s recovery (to 10.41 percent). But thereafter it rose and stayed much higher than its level in the 1960s – to 17.33 percent during the 1990s expansion, 14.33 percent during the 2000s bubble, and 18.09 percent during the current recovery.

I’ve focused on business investment’s contribution to growth because I wanted data that wouldn’t “penalize” corporations when they were making these spending decisions at times when the economy was faltering for other reasons. Moreover, fueling growth is one of the main reasons we value business spending in the first place. But my challenger wanted to know whether it was correct to argue that business spending as a share of the economy on a static basis peaked in the 1970s – before the financial deregulatory wave was triggered. The answer? Yes, but not even these results show anything like a late-1970s watershed. And that’s even using pre-inflation figures, as I was asked to.

During that decade’s relatively short 1975-1980 recovery from its oil shock-induced miasma, business investment represented 12.92 percent of gross domestic product before factoring in inflation. During the 1980s expansion, that figure dropped off significantly (consistent with the growth contribution figures), to 11.02 percent. But that so-called Reagan boom represented the nadir. During the expansion of the Clinton years – marked by, among other developments, a huge telecommunications- and internet-led technology build-out – the figure bounced back to 12.66 percent.

Business as a share of the economy did fall during the bubble decade, when Wall Street shenanigans were peaking. But the falloff was minimal – to 12.48 percent. It’s been lower during the current recovery – currently averaging 12.12 percent. But that’s still higher than its level during the pre-deregulation 1960s expansion (11.11 percent).

Moreover, it’s crucial to remember that a crash in business investment was one of the main drivers of the Great Recession – when credit seized up all around the world and Armageddon fears were rife. It shouldn’t be any surprise that corporations didn’t reopen the spigots all at once. But reopen them they have, to a great extent. In fact, starting from a low of 11.08 percent of GDP in 2010, this business spending ratio hit 12.88 percent of GDP by 2014, and stood at 12.82 percent during the first half of this year – just marginally below those late-1970s levels. And although it’s true that Wall Street reform efforts have reduced financial engineering possibilities by American financiers, the role played by share buybacks in powering the stock market’s post-recessionary surge makes clear that they’re alive and well elsewhere in U.S. business ranks.

None of this is to say that business spending levels today are adequate, and that (as just mentioned), the financial regulatory regime doesn’t enable too much capital to be expended in too many unproductive ways. But anyone yearning for re-regulation to bring back a golden age of corporate stakeholder capitalism should keep in mind that the business spending data, at least, say that America never had one to begin with.

Making News: The Conventional Wisdom on Business Investment Looks Flat Wrong

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business spending, casino capitalism, financial deregulation, Making News, productive investment

“Everyone knows” that, starting in the late-1970s, waves of financial de-regulation destroyed most of American business’ incentives to invest their earnings productively, and instead hooked them on wasteful financial gimmickry, right?

My new article for Marketwatch.com, posted this morning, makes clear that in this case, what “everyone knows” is flat wrong — at least according to the most authoritative statistics. Click here to read all the surprising details – and their huge policy implications.