What’s Missing from the U. S. Economy

At Bloomberg View Mark Whitehouse jumps on my bandwagon:

The latest data on the U.S. economy underscore one of the greatest challenges facing the administration of President Donald Trump: getting businesses to invest like they used to. For all the progress that’s been made, there’s still a long way to go.

Last week’s report on U.S. gross domestic product suggested that the economy ended 2017 with good momentum. Although the overall annualized, inflation-adjusted growth rate was a slower-than-expected 2.6 percent in the three months through December, the details were encouraging. In particular, businesses boosted investment in the equipment, buildings and know-how needed to support future growth. Nonresidential fixed investment increased sharply for the fourth quarter in a row, putting it up 6.3 percent from a year earlier.

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Growth rates alone, though, don’t tell the whole story. Equipment deteriorates and technologies become obsolete. So it’s also important to understand whether the level of investment is enough to both offset this depreciation and expand the capital base.

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It’s not the prettiest picture. In the last quarter of 2017, net private business investment was $492 billion, or 2.5 percent of GDP. That’s a big improvement from the darkest days of the last recession, when it went negative for the first time on record, but still not much more than it was at the low points of several earlier recessions.

Business investment has been phlegmatic since the 90s. You can’t blame a lack of consumer spending for the change. 25 years ago and before businesses invested a lot more with lower consumer spending.

There are several possible explanations. Businesses may be investing—just not in the United States. Managers’ expectations may be unrealistic. They may have lost their appetites for risk.

But Mr. White house is right. The test of the tax cuts as economic policy will be businesses’ propensity to invest. I had wanted a somewhat more targeted tax cut for just that reason.

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