July 22, 2014
Neil Irwin argues the case that a rise in investment would provide a much needed boost to the economy. The point is well-taken, but there is little reason to expect a marked upturn any time soon.
The basic story is, while there is some room for investment to expand, it is not especially low by historical standards. Non-residential fixed investment was 12.2 percent of GDP in 2013. This compares to an average of 12.8 percent of GDP in the years from 1970 to 2007. Irwin reports a larger gap by just focusing on investment in equipment, citing Justin Lahart pointing to spending equal to 5.2 percent of GDP over the last five years compared to 6.5 percent of GDP over the prior 50 years.
There are a few reasons for questioning the significance of this comparison. First, the figure for 2013 was 5.6 percent of GDP, which is closer to the 50-year average. Second, there has been a huge increase in investment in intellectual property products. This spending was 3.8 percent of GDP in 2013 compared to an average of 2.6 percent from 1970 to 2007. To some extent investment in intellectual property products should be a substitute for investment in equipment.
Finally, much of the investment in equipment is occurring overseas as U.S. corporations continue to shift production to Mexico, China, and other sources of low-cost labor. Equipment investment in the last recovery (2002-2007) averaged just 6.0 percent of GDP.That would likely be a more appropriate comparison than the longer period since it was also a time when U.S. corporations were shifting production abroad on a large scale. This implies relatively little increase in investment spending from current levels.
Trade really is the underlying problem that economists do not want to discuss for some reason. The country has a trade deficit of more than $500 billion annually (3 percent of GDP). This translates into demand that is going overseas rather than the United States. There is no easy mechanism to replace this demand (other than verboten government budget deficits). This means that we will likely see an underemployed economy long into the future. Hopes for a surge in investment will prove to be in vain.
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