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Home Publications Blogs Beat the Press That Boom In Investment: Waiting for Godot

That Boom In Investment: Waiting for Godot

Tuesday, 22 July 2014 04:44

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.

Comments (12)Add Comment
What's wrong with deficits?
written by Ralph Musgrave, July 22, 2014 6:23

All of which proves the sheer idiocy of "verbotening" a sufficiently large deficit. And contrary to the claims of the economic illiterates who infest the world's capital cities, deficits do not mean more debt: that is the state can simply print more money and spend it, and/or cut taxes. And as long as there is significant underemployment, that won't result in inflation.
Huge Hole in Aggregate Demand is Not a Problem of Moral Relativism
written by Last Mover, July 22, 2014 6:45

Dean Baker, moral relativist Keynesian, strikes again to curb the optimism of those desperate to find signs of economic hope somewhere, anywhere.

Have you no respect for green shoots at all sir, of any stripe? Why must voluntary investment made by free capitalists be made relative to anything to paint the economy as having a huge Keynesian hole in demand that cannot be filled by the private sector?

At best it's anti-American. At worst it's relative to ... oh wait ... never mind.
Holy Smoke Batman, It's the Joker!
written by Larry Signor, July 22, 2014 7:22
Perhaps Neil has not noticed how poorly capitalism works for those not in possession of capital. A Riddle; when is 5.2% equal to 6.5%?...the answer is easy.
written by watermelonpunch, July 22, 2014 7:53


Good one.
Econonmists will address it, though!
written by ifthethunderdontgetya™³²®©, July 22, 2014 10:03
Trade really is the underlying problem that economists do not want to discuss for some reason.

But they will encourage monstrosities like TPP and the TISA, Dean.

Because our plutocracy wants these horrible trade deals in their greedy, shortsighted pursuit of ever more money for themselves, right now.

And most of our economists (like other highly-trained professionals) must toe that line if they want to get paid.

economists are afraid to be truthful
written by dave, July 22, 2014 10:29
economists don't talk about it because it would be a career killer for many of them. there's lots of money to be made talking positively about trade, and very little to be made pointing out the problems.
written by urban legend, July 22, 2014 1:24
"It's the trade deficit, stupid!"
Trade is not the problem, domestic demand is.
written by Doug Rife, July 22, 2014 1:49
Real final sales to domestic purchasers includes all domestic demand including purchases of imports and its growth decline has followed very closely the growth decline in real final sales of domestic product which suffers when the trade deficit is getting worse. Here are both series plotted together as a yoy percentage change:


When the red line is above the blue line the trade deficit is getting worse on a yoy basis and when the red line is below the blue line the trade deficit is getting better.

The fact is that demand growth has been decelerating since peaking in 1999 no matter which series is considered. The reasons are extreme income inequality, fiscal austerity and stagnant real wages, all of which slow the growth in aggregate demand. This is also known as secular stagnation. Improving the balance of trade can only make a small dent in this long term trend.
Chart of trade deficit shows no drag in recovery
written by Doug Rife, July 22, 2014 1:56
Here is a chart of the trade deficit showing it has been very stable since the Great Recession ended officially. Therefore it cannot account for the very weak recovery.


Baker isn't saying that we have a growing trade deficit or that it's THE problem.
written by jaaaaayceeeee, July 22, 2014 2:40

Baker isn't saying that we have a growing trade deficit or that it's THE problem. He is pointing out why the difference between investment and investment in equipment matters, and why reporters shouldn't ignore the shift of production off shore. When news media cannot say the two words "trade deficit" (or monopoly or secular stagnation) we get economics reporters and prognosticators exploring a lot of dead ends instead of proven policies.

Just in the psst week alone we have had reporters claiming that consumers are saving too much money because they are afraid to spend it, when savings isn't elevated. We've had reporters constructing generations who don't believe in houses and families, instead of blaming our declining standard of living on insufficient work, pay and thus demand. WaPo still decries our deficit crowding out investment and lowering living standards, which isn't happening. We have had reporters miss the debt clock while ignoring the jobs we've lost to deficit obsession and sequestration, and continuing to ignore our need for fiscal policies to recover from the recession. We've had reporters deem President Obama's proposal for $300 billion over 4 years (.4 percent GDP and 1.8 of projected spending) "vast" infrastructure spending.
Eliminating the trade deficit would add $750 billion (@4.5 percent ) to GDP
written by Dean, July 22, 2014 3:07

I think you may have confused yourself with your charts. If we had balanced trade (just a reference point, not a magic position), it would have the same impact on GDP as a $500 billion increase in government spending. With the multiplier effect (roughly 1.5), it would raise GDP by $750 billion. This corresponds to around 6 million more jobs.

This is all pretty much straight national income accounting that you can find in any intro econ textbook.
I'm not confused, Dean
written by Doug Rife, July 22, 2014 5:02

I appreciate your reply. You are correct but that $500 billion would not stop the longer term decline in demand growth shown in my chart. It would indeed help but only for a while. I would also note that the US needs far more than $500 billion in new infrastructure spending in the next decade according to the Society of Civil Engineers.

Here is a chart of direct government spending on consumption and gross investment (federal + state + local) showing how much austerity we've had to suffer since Obama took office. Red state budgets cuts and GOP obstruction explain much of the recent decline, which is unprecedented:


It's a wonder the economy has recovered at all!

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.