A quick note with more pictures than words.
–Investment, both private business investment and public investment (infrastructure), have been weak of late.
–In fact, as a share of GDP, business investment has consistently hit lower peaks over the last few business cycles.
–Yet we know corporate profitability is high and the cost of capital is rock-bottom cheap. If they’re not investing their retained earnings in future growth, what are firms doing with the money? A: Share buybacks.
–This hurts productivity and boosts inequality. It is, I believe, a source of the capital misallocation that’s in part responsible for one of our most significant economic problems: historically slow productivity growth.
–What to do? Republicans have an idea that’s showing up in all their tax plans: cut the cost of capital by allowing full expensing of new equipment purchases. But as stressed, the cost of capital isn’t the constraint. All full expensing will do is increase the budget deficit, making it increasingly difficult to take the obvious step:
–If pvt investment won’t step up, public investment must do so. As the first figure on the right above shows, the need is there. I agree that economists need to figure out why pvt inv has been so weak (I’d bet: weak demand, higher returns from financial “innovations,” and short-termism (buybacks)), but in the meantime, I’m hearing increasing agreement around the need for infrastructure investment. Economists and many in the biz community get this. Voters, OTOH, are disengaged on this point and that needs to change. There needs to be bottom up pressure–let’s start with not poisoning our kids with lead-infused water pipes.