Growth and productivity are up, but investment is a soft spot, and neither right nor left has good answers.
Yet if many workers still feel not entirely secure, there’s a reason: investment. Several policy improvements of the Trump era have buoyed business investment compared with the recent past. But America is nowhere near reversing long-run declines in business investment that continue to stress many households notwithstanding the good economic times.
A suggestive exploration of the problem emerges in a recent report released by Mr. Trump’s erstwhile rival Sen. Marco Rubio. It describes an American economy that somehow has forgotten how to invest.
Net private fixed investment (expenditures on equipment, machinery or property minus depreciation) averaged around 8% of gross domestic product between 1947 and 1990, with significant spikes during booms—it hit 10% of GDP under Ronald Reagan. It has lagged since then, however. As of late 2018, amid another burst of GDP growth, net investment was barely half the Reagan level.
The cause of this is not a lack of cash in corporate America. Since 2000, nonfinancial firms have become net creditors in most years rather than net debtors. This is astounding. For most of our history the sole purpose of a nonbanking company was to receive capital from others so as to invest productively. Now on aggregate they distribute capital to others so that those guys can invest somewhere else. This phenomenon underlies the recent trend toward aggressive share buybacks.
This long-term downward trend in business investment raises a question about how well America will sustain its recent productivity gains. Absent sustained productivity growth, voters will be right to question the potential longevity of the current boom. Without parsing earnings press releases, employees can tell when their companies seem to have a plan to invest in long-term growth. A sense of directionless management can contribute to a gnawing unease about job security. This can produce unpredictable political consequences, whatever the GDP data say.
What to do about this is open to debate. The Rubio report’s ruminations about poor market incentives for longer-term investment are fine so far as they go, although its complaint about shareholder short-termism is partly belied by two of the corporate success stories it cites. Tesla and Amazon are conspicuous net debtors that continue to invest heavily back into their businesses. It can be done, and investors will tolerate it.
The 2017 tax reform and Mr. Trump’s mammoth deregulation drive are necessary conditions for an investment revival, as the recent investment uptick shows. But comparing recent trends with the historical norm, it’s clear these policies are not sufficient to restore the level of investment America needs. Can Mr. Trump figure out what is? Since he’s a longtime businessman you’d think so, except that his business experience lies exclusively in real estate and marketing—one of which features low productivity and the other low fixed-asset investment.
Nor do Democrats have any more of a clue. The common refrain from the left, with many melodic variations, is that if the private economy won’t invest in productivity enhancements, the government must.
Did these folks sleep through the past decade? With business not investing, government already has become the “investor of first resort” via its own deficit spending. The result has been a mix of social-welfare blowouts driven by political short-termism (indistinguishable, in productivity terms, from the worst charges laid against shareholders) and such crackerjack business plans as Solyndra.
Politicians continue casting about for productivity solutions. The danger is that 2020 becomes merely another contest to decide whom voters distrust the least to deliver one.