In an op-ed in the Wall Street Journal Steven E. Rhoads returns to an argument that I do not think will ever be over. He argues in favor of what is called “trickle-down economics”:
President Biden in his State of the Union address encouraged Americans to imagine a future in which “the days of trickle-down economics are over” and the economy is built “from the middle out and the bottom up.” That expression, “middle-out” economics, has bounced around Democratic politics for at least a decade. But how would it work? No one says.
Politicians may scorn the trickle-down effect, but it is responsible for Americans’ economic well-being. Even some prominent 20th-century liberal economists, including Paul Samuelson and Alfred Kahn, agreed that the innovation and investment that lead to capital formation are crucial to economic growth. Kahn once wrote: “The most powerful engine of productivity advance is technological progress, generated in large measure by expenditures on research and development and embodied in improved capital goods and managerial techniques.” That process confers benefits on everyone, he added, “precisely by trickling down.”
When employees use better equipment and have better managers, they become more productive. This makes them more valuable to their companies and stirs competition in the labor market, causing their real incomes to rise.
I dearly want investment in facilities, better equipment, and better managers but it will take some convincing, which Mr. Rhoads does not even attempt to do, to persuade me that increased investment in facilities, equipment, or personnel is what has actually gone on during the past 40 years. As evidence I will submit the DJIA and GDP. In 1980 the DJIA closed just under 1,000. A few days ago it closed over 40,000 for the first time. That’s a 40 fold increase. In 1980 U. S. GDP was just under $3 trillion. Now it’s just over $25 trillion. That’s a slightly more than 8 fold increase. Over that same period CEO pay has increased 10 fold (relative to rank and file workers). Nominal private fixed investment has gone up about 10 fold as well:
Why the discrepancy? I would submit that it can all be explained by considering that the meaning of “investment” has changed over the years. It used to mean building new facilities, buying equipment, and hiring more and better employees. Now it means “speculating on financial instruments”.
Any “trickle-down” from that is limited to the relatively small amount that dribbles into the real economy.
Update
In the original post I included a graph of residential fixed private investment rather than non-residential fixed private investment. It was an error which I have corrected.
I think it also used to include some employee training.
Steve
Not any more.
… It used to mean building new facilities, buying equipment, and hiring more and better employees. Now it means “speculating on financial instruments”.
I agree, but I do not understand how “building new facilities and buying equipment” could or should be accomplished. Manufacturing tangible goods is mostly outlawed. Since trade requires both parties to have something to trade, imported goods need domestic goods for the exchange.
The Chinese are not stupid enough to accept Facebook accounts or Google searches in exchange for washing machines. They will accept dollar based financial instruments, and therefore, dollar based financial instruments have been created.
I do not like it, but that is the reality. The problem is not expensive labor. If China disappeared, manufacturing could not return to US soil. Expensive energy is a relative problem. It has a cascading effect which causes a compounding cost, and this results in a lower standard-of-living because fewer goods can be purchased.
Since few people understand energy, I rarely address it, but I will try this once. Cost is based upon energy usefulness, and usefulness is based upon energy density. Human and animal power may be cheaper than coal, but coal is more energy dense than slaves and mules. Coal is also more flexible.
While the sun and wind have no cost, they are far less energy dense and flexible. Almost all the others are dirty and/or dangerous.
In any case, financialization is real, and it must be. Since dollars are used to create dollars, people with dollars become richer, and again, it must be. It causes asset inflation, and people with more assets benefit more. This too must be. The poor do not “become poorer”. They just stagnate, as it must be.
The US has made these choices, and therefore, the US has chosen these consequences.
https://www.constructiondive.com/news/manufacturing-construction-boom-tracker-map/688140/#:~:text=Some%20major%20manufacturing%20projects%20added,manufacturing%20facility%20in%20Mesa%2C%20Arizona.
Steve
I’ve been busy, so just a quick first comment.
1. “Investment” has a strict meaning in economic accounting. I think adding things like “employee training,” while laudable, make the statistics just personal political hobby horses.
2. For the life of me I don‘t know why you did a FRED graphic of residential investment. “Investment” can mean many things to different people, but it’s not just residential. And you will not find “speculation in financial instruments” in any of them. Formally, that would include return of capital (stock buybacks), risk management, and financial investment.
Financial investment is of dubious utility (people can diversify on their own) but a way to park money. Risk management is crucial in today’s world. And as I’ve noted before, back when I was in business school those corporations who DIDN’T return capital were accused of “empire building.” It was the stuff of case studies. Shorter: silly bitching and moaning by corporate critics never goes out of style, even though the so-called rationale flows back and forth like a feather in the wind. But precious little real economic thought.
3. If we restrict “capital investment” to structures, production equipment, R&D, patent protection, and IT equipment – a fairly standard definition – as I will show when I can find a constant dollar reference, its been anything but replaced by financial speculation. Fairly steady. Quite remarkable when you consider the economy has shifted so much to service. Of note, the single category of the greatest decline in capex is……….wait for it………mining. Followed by the process industries (think steel, paper and oil and gas). But we can thank the enviro-nuts for that.
4. I certainly share the desire for re-industrialization. I’ve spent a career trying to practice it. But it’s best described as a holding action. And as for undercutting wage structures, that’s immigration. And we all know what party is hell bent on converting TX and AZ blue with immigration policy.
I have updated the graphic to show non-residential private investment. As you can see it has gone up roughly 9 fold. Using residential fixed investment was an error.
“As you can see it has gone up roughly 9 fold.”
Which comparison to (equity) capitalization I will come back to. Just as a hit and run, it ignores the denominator in DCF, risk adjusted return perceptions, the so called Buffet rule concept and the concentration of valuation premiums in a handful of stocks. Shorter: the index has problems and it’s probably a fairly bogus comparison.