Tyler Cowen has a graph up at his place taken, in turn, from the PPI and using BEA data that quantifies and illustrates a point I’ve been making pretty frequently around here: that there has been a decline in investment (at least as a proportion of GDP), not just over the last five years but over the last twenty years. Rather than reproduce the graph here you can go over to Tyler’s place to look at it.
To my eyes it illustrates that starting in the late 1980s investment (again, as a proportion of GDP) fell off the end of the world. Domestic business investment perked up a bit but only temporarily during the dot-com bubble and household investment went up for a while during the housing bubble but now both have just collapsed.
I wouldn’t be at all surprised if the graph is to some extent a bit of sleight-of-hand. There may have been substantial business investment just not domestic business investment.
As Tyler points out that drought of investment can’t really be completely explained by an aggregate demand story: it has been going on far too long and isn’t just an artifact of the business cycle.
Investment is derived from savings, the rate of which declined beginning roughly in the mid-80’s.
http://research.stlouisfed.org/fred2/data/PSAVERT.txt
The link only references personal savings, but the trend of saving by firms was largely in line with what individuals were doing.
I think it illustrates a change in behavior, a change in preferences that extends to individuals, companies, and government. The change in personal behavior might be attributed in part to the Baby Boomers but, since the oldest Baby Boomers were in their mid-40s at the time and generally not in top management positions, clearly some of it can be attributed to “the greatest generation” as well.
While it would be interesting to speculate on what caused the change in behavior I don’t think there’s a great deal of question that it occurred.
When I looked at this, my big question was, “what happened in 1984?” Most of the business investment seems to follow economic trends, with a downwards bias.
Steve
I can only make a guess but I would say the changes to the tax on capital gains.
From 1942 to 1978 50% of the earnings on capital gains on assets held six months or more could be excluded from federal taxes on capital gains. In 1978 the exclusion was increased to 60% and the tax rate on capital gains was increased. In 1986 the exclusion was eliminated and the tax rate on capital gains increased to 28%.
Maybe. Why didnt this big drop in investment affect GDP? The capital gains drop to 20% in 1994 comes after you see investment start to rise in the 90s. Why no big response to the drop to 15% in the 2000s? Drew?
Steve
I see lots of possible explanations.
1. Wily Coyote moment
2. Two (maybe three) bubbles in quick succession made GDP look larger than it actually was.
3. Massive government borrowing (except for a few years in the late 1990s).
just to name three.
@steve
The automatic stabilizers built into federal budgets ramped up spending sufficiently to counter the negative consequences of declining investment spending. In the late 1990’s this dynamic reversed, with government depressing the private sector’s spending power by running consecutive surpluses.
Incidentally it appears the White House has finally caught on to what a balance sheet recession is, albeit four years too late.
http://www.whitehouse.gov/sites/default/files/microsites/ERP_2012_Complete.pdf