For an economy to grow, somebody has to be willing to spend money–be it consumers, the government, or the business sector.
Without money changing hands, the economy is not going to grow.
Framed in this way, it’s easy to see why the U.S. economy is facing lower potential growth than at anytime since the end of World War II. The U.S. government suffers from historically high debt-to-GDP ratios and unfunded liabilities to an aging populace. Though household debt levels have come down, that’s because they reached unsustainable highs during the real estate bubble, and since then consumer spending has been muted due to slow wage growth.
The latest concern comes from Corporate America. As the The Wall Street Journal outlined in an article Tuesday, the rate at which businesses have been investing in its future has fallen to disturbing lows:
Companies appear reluctant to step up spending on the basic building blocks of the economy, such as machines, computers and new buildings. The broadest measure of U.S. business investment advanced 2.2% from a year earlier in the third quarter, the Commerce Department said last week, marking one of the worse performances of the six-year-old economic expansion.
The Journal story posits the problem as one that developed in the wake of the recession:
During the most recent recession, the decline in business investment was far deeper than any experienced since the Depression. But the ensuing rebound was more tepid than other bounce backs. Capital expenditures, excluding aircraft and defense, grew at a better than 10% annual rate in the first two years of the expansion, but have eased significantly since.
But framing the problem of low corporate investment as simply another symptom of the post financial crisis hangover is an analytical mistake. That’s because corporate investment has been steadily on the decline for decades now, as you can see from the following chart:
Corporate investment in the basic building blocks of the economy has been declining for decades now, just as other important economic indicators like productivity and population growth. And these trends aren’t unrelated, either. Declining population growth can explain a lot of what’s going on in the economy, as fewer people mean fewer potential customers and justifies less investment in future capacity.
But there might be other explanations for the gradual decline in investment growth as well as potential economic growth. Former Treasury Secretary Larry Summers has been promoting his theory that the U.S. economy has entered a phase of secular stagnation in which the “natural” rate of interest has fallen below zero, leaving the economy with too much savings and not enough investment. His solution is for government to pick up the slack by borrowing at today’s very low rates to invest in things like infrastructure, basic research, and education.
Other economists, like Northwestern’s Robert Gordon, argue that falling investment and potential growth should be blamed on the fact that the the economic growth we saw for much of the 20th century was an historical anomaly driven by one-time technological advancements that cannot be repeated. The widespread adoption of things like indoor plumbing, electricity, and automobile ownership are events that will not be repeated, and so we shouldn’t expect the sort of economic growth that resulted from these events to continue.
And then there’s right-leaning economists like nobelist Edumnd Phelps, who argues that America’s lost economic power is the result of cultural and policy changes that have occurred over the past fifty years, in which America as a whole has begun to value safety and security over innovation and entrepreneurial values. This has resulted, Phelps argues, in increased government control over the economy and programs that make life more comfortable and Americans more risk averse.
Whatever your analysis of the situation, it’s important to realize that headwinds the U.S. economy faces, like falling productivity growth and corporate investment, have been gaining steam for decades, and therefore won’t be fixed quickly or easily by fiddling with the tax code or modifying a few regulations. They are large systemic problems that will require solutions of similar scale.
