I’ve finally read something that comports with my view of what ails the U. S. economy (hat tip: Commentary) Economist Peter Morici explains it here. The reasons he lists are:
- Poorly Enforced Trade Agreements
- Misguided Energy Policies
- Burdensome Government Regulations and Taxes
- Corruption and Monopolies
- Disincentives to Work, Poorly Run Universities and Immigration
To these I would add tax and other policies that reduce the incentives for American businesses to invest capital here in the United States. Our basic problem is not that consumers aren’t spending enough. It’s that we’re too highly dependent on consumer spending for economic growth—much more so than Europe or China.
I think you should add Public Miseducation to the list, not to mention other hopelessly inefficient or highly discriminatory public institutions like the USPS and the national parks and forests.
The bottom two paragraphs, IMO, of the Commentary article are equally correct:
Our basic problem is not that consumers aren’t spending enough. It’s that we’re too highly dependent on consumer spending for economic growth—much more so than Europe or China..
No other way to do it in a capitalist society. Economic growth and output are the same thing, so someone has to be there to purchase all those goods and services. Repeated economic slumps in the 19th Century due to overproduction were commonplace and a major incentive for european imperailism; they went out to conquer and establish new markets because their own populations couldn’t absorb it all. The consumer society was developed as a matter of policy to address this very problem.
Capitalism tends toward overproduction, always has.
Sure there is. GDP = P + B + G + (E – I) Business investment could increase. Thirty years ago, even as recently as 15 years ago business investment was a larger component of GDP than it is now. That suggests there’s at least some room for increasing that.
Businesses (particularly big businesses) have become accustomed to spending their money somewhere else.
Yes, investment is a component of growth but its purpose is to increase production. At the end of the day we have to have customers for all those new goods and services or we again arrive at a problem of overproduction. Referring to my earlier comment he only way to reduce consumer spending as a share of GDP long-term is to export, selling to someone else’s consumers. We can do that if we’re willing to end the dollar’s status as a reserve currency, something I think would be a good idea.
You need to consider “increase production” more broadly. It includes not only producing more of what you’re presently producing (possibly at lower costs) but producing new products. What has happened over the last 15 years or so is that U. S. companies have cut back on R&D in favor of wringing the last dollar out of their old investments. They are supported in that by tax, trade, and immigration policies.
People who subscribe to “the end of growth” worries are set piece players, without vision as to what investment in know how and equipment can yield.
In addition to the distortions Dave cites, we have the issue of siphoning off funds to finance regulatory burdens. That’s admittedly a value judgment but easily supported in my opinion. And we have suboptimal draw on private resources to favored, but not necessarily best use, enterprises. See: Solyndra, the GM bailout, Big Banks, Big Health Care, Big Education or Big Government.
Lastly, we have our friends at the Fed facilitating a significant recapitalization of corporate balance sheets. Cheap debt used to buy back equity. If you were a corporate CEO or Board would you increase ROE with a risky investment investment in a molecule that might rid us of diabetes…………or not, or a debt financed stock buy back? And no blather about the long term. In a period of relatively sluggish growth for reasons Dave cited, what I cited in the paragraph above, and an antagonistic “you didn’t build that” government what would you really do. There are Boards talking about this every day.
We should not look at this in an ahistorical context. Nothing that is happening now is new; the western world has seen repeated slumps due to overproduction/underconsumption with the Long Depression as poster-child. I am in no way suggesting that current policies do not play a significant role in lack of investment, particularly, as Guarneri points out, propping up corporate behemoths that suck all the oxygen out of the room.
If that is addressed we are still left with the reality that no business owner in their right-mind will invest to produce something they don’t think a customer exists for. To save on labor they may invest but that leads right back to the same cycle with fewer employed consumers buying the product. This happened in the 19th and 20th Centuries, well before such burdensome policcies were in place and the solution chosen was to cycle large streams of income through households for the purpose of expanding consumption.
“If that is addressed we are still left with the reality that no business owner in their right-mind will invest to produce something they don’t think a customer exists for.”
That’s almost tautological. Businesses do take risk every day in the hope that products and consumer demand will result. Corporate R&d and early stage venture capital are the poster children. And our firms very existence is mostly predicated on a higher risk tolerance than current business owners and superior execution to warrant taking those risks.
“To save on labor they may invest but that leads right back to the same cycle with fewer employed consumers buying the product. ”
No, it leads to the optimal use of employees time and skills, with the economist’s ” friction.” I’m unaware of legions of workers tilling the corn fields of IL.
The Long Depression recorded some of the greatest productivity gains in history while worsening unemployment and a general deflationary environment in which output exceeded sales capacity of domestic and developed markets.. Whether it involves an “optimal use of time” from the firm’s perspective is another way of saying the firm seeks to reduce labor costs, or reduce labor input, or increase capital intensity, or alter the capital/labor ratio etc. It’s different ways of saying the same thing.
We also have eighty years of data telling us that investment falls during economic slumps so I don’t think it’s reasonable to assume the appetite for risk is invariable in regard to consumption potential; the Fed eariler this year released a survey of executives asking about the factors in making investment decisions and found that business expecting declines in revenues are less likely to expend significant capital while businesses expecting revenue growth are more likely to invest in expanded capacity and new products.
Expectations matter.
http://www.federalreserve.gov/pubs/feds/2014/201402/201402pap.pdf