Readers may find it puzzling that I’m always harping on the low rate of business investment. Here’s a brief explanation from Investopedia:
Improved capital goods increase labor productivity. A simple example of this can be seen when a lumberjack upgrades from a standard axe to a chainsaw. Superior capital equipment directly makes individuals, businesses and countries more productively efficient. Increased productive efficiency leads to increased standards of living – the purpose of economic growth.
A business does not see an immediate increase in revenue when it develops capital goods. To make it economically viable to increase or improve the capital structure, a company must have a pool of saved funds to draw upon. This pool of funds needs to last until the new capital goods lead to additional revenue.
Increased capital investment allows for more research and development in the capital structure. This expanding capital structure raises the productive efficiency of labor. As labor becomes more efficient, more goods are produced (higher GDP) and the economy grows.
Now consider the graph at the top of the page, illustrating GDP growth by component of the economy. GDP has four components: personal consumption, business investment, government spending, and net exports. In real terms business investment has been flat for more than a decade, net exports are a drag on the economy, while personal consumption has soared. Since 2009 government spending has actually declined as a component of GDP in real terms.
My preferred solution for increasing wages, employment, and GDP is through increased business investment. The claim that businesses don’t see any opportunities rings hollow—there’s plenty of personal consumption. The alternatives are more government spending with the attendant deadweight loss or fewer imports. Every time you even mention fewer imports somebody starts screaming “Trade war!” So increased business investment is the best of the available alternatives.
A highly regulatory environment, which is the fodder for social progressive policies to exist and thrive, discourages business investment. Hence, what was promoted under Obama, and is being embedded in Democrat policies going forward, is not compatible in most efforts to grow our economy and thus raise the GDP.
CEO pay keeps climbing. What incentive do they have to invest? They are making tons of money already. Why change things?
http://time.com/money/4790237/ceo-pay-salary-compensation-increase/
What are the goals of businesses investment? Manufacturing has gone and is not coming back. I would think that investing in manufacturing would be stupid, but I am not that smart.
I think you’re getting to the root of the problem. Not everybody pursues the same goals. When your main goal is more money, that’s what you’ll pursue. If your main goal is building a company or building a product, those are what you’ll do.
For more than a generation we’ve been hiring managers whose main objective has been making money. We shouldn’t be surprised when they don’t care about building companies or products.