In his Wall Street Journal column today Joseph Sternberg asks the question I have been asking for over a decade. Of the factors that produce growth the factor that is lagging is business investment. Where’s the business investment?

Net private fixed investment (expenditures on equipment, machinery or property minus depreciation) averaged around 8% of gross domestic product between 1947 and 1990, with significant spikes during booms—it hit 10% of GDP under Ronald Reagan. It has lagged since then, however. As of late 2018, amid another burst of GDP growth, net investment was barely half the Reagan level.

The low net-investment baseline Mr. Trump inherited (from Republican and Democratic predecessors alike) doesn’t fully explain today’s shortfall. Despite faster growth, investment has not accelerated under Mr. Trump as much as during past periods of economic strength. Net investment grew by 8% in 2006, 10.9% in 1998 and 16.7% in 1984—the peaks of those business cycles. Mr. Trump managed investment growth of only 6.9% in 2018 and the rate is drifting downward again, not least thanks to Mr. Trump’s antitrade policies.

There is a direct causal connection between low business investment and low productivity gains. Labor productivity increases when businesses invest. I had hoped that the reduction in corporate income taxes would have spurred an increase investment and for a while there that’s just what happened. But my hopes were dashed in the last quarter of 2018 and since. Once again business investment has not risen as it should.

I think the lesson is pretty clear. Executive compensation needs to be tied to earnings not to stock values and that’s especially true when we have a Federal Reserve that’s determined to subsidize the stock market. Over the last couple of decades stock prices have become unmoored from corporate earnings and we need to undo the Clinton Administration’s regulations on executive compensation. We shouldn’t care how high executive compensation increases as long as it’s based on things we care about, i.e. earnings not stock prices. If we want to regulate something it should be to limit the percentage of earnings that can be devoted to executive compensation rather than discouraging investment.

I mean if your compensation is rising anyway, why take the risk of investing?

There is another possibility and that is that we have lost the ability to measure business investment. If that’s the case we are also unable to measure gross domestic product. I don’t think that’s the case and if we had heretofore unmeasured Reagan era levels of business investment I think it would feel more like a business boom than it does but at least it should be mentioned.

It’s a little early, the first Democratic presidential candidate debates being a month away, but I thought I’d put down a marker. The following candidates will not get a majority of the primary votes in their home states:

• Michael Bennet
• Steve Bullock
• Pete Buttigieg
• Julián Castro
• Bill de Blasio
• John Delaney
• Tulsi Gabbard
• Mike Gravel
• Kamala Harris
• Jay Inslee
• Wayne Messam
• Seth Moulton
• Beto O’Rourke
• Tim Ryan
• Marianne Williamson
• Andrew Yang

Of the candidates not in the list above, some (e.g. Biden, Sanders, Warren) will probably win some states and some (e.g. Booker, Hickenlooper) I just can’t assess whether they have enough support to win their home states.

As to those in the list above, is it possible they could win states other than their home states? It’s possible but I wouldn’t count on it.

Today must be the day for comparing apples and oranges. In his latest Washington Post column Robert Samuelson wonders why wage growth is so weak despite the number of people getting jobs, something that must surely be obvious to anyone who isn’t writing from an office in Washington, DC or a house in Alexandria, VA:

After correcting for inflation, wage gains remain sluggish. In April, average weekly earnings for nonsupervisory workers were up 3 percent from a year earlier, to $785.55. Meanwhile, prices as measured by the consumer price index were up 2 percent. Considering that the economy has been expanding for nearly a full decade — a record if it continues through June — this is perplexing, even allowing that wages are growing faster at the top than in the middle.

Theories abound to explain wage behavior. Average workers (it’s said) still recall the ferocity of the 2007-09 recession and are more reluctant to chase higher wages by leaving their present jobs. For similar reasons, employers resist large wage gains. They want to remain competitive in another recession. Both are willing to trade stronger job security for slightly lower pay.

Other theories blame sluggish wage growth on changes in the labor market. The decline of unions — a phenomenon that stretches back to the 1960s — has weakened workers’ bargaining power. Globalization has had the same effect, because in many industries production can be moved abroad where wages are lower. China is an obvious example.

Weak productivity gains amplify the effect. In the long run, strong productivity improvements are the source of higher wages and salaries. From 2010 to 2017, annual productivity increases averaged only 0.5 percent, according to the Bureau of Labor Statistics. This compared with a post-World War II average of 2 percent. Slower productivity advances mean smaller increases in labor compensation for most workers.

We now have a new theory from the McKinsey Global Institute, the research arm of the McKinsey consulting company. It has long been known that the labor share of national income (GDP, for gross domestic product) has been shrinking. In 1947, the labor share was 65.4 percent of GDP; in 2016, it was 56.7 percent of GDP. These figures combined all forms of labor compensation: wages, salaries, fringe benefits.

Meanwhile, the capital share of income — income accruing to shareholders, business owners and other investors — rose roughly from 34.6 percent to 43.3 percent. Worryingly, three quarters of this shift has occurred since 2000. Again, these trends had been known. But McKinsey went a step further. It estimated how much of the slowdown in wages could be attributed to the rise in capital income’s share.

The answer is: about a quarter. That’s the impact of the shift from labor to capital income. The rest of the wage slowdown reflects poor productivity growth (general efficiency) and the tendency of high-income wages and salaries to grow faster than middle-income wages. If the distribution between labor and capital income had remained unchanged since 1998, the average American worker would have a whopping $4,000 in extra annual pay, according to McKinsey’s calculations.

Let me propose some explanations from the ground rather than 50,000 feet. There are several reasons. The first is fear. People are afraid to ask for a raise for fear of being replaced by someone from a temp firm or placement company who’ll work for lower pay and no benefits. Additionally, people find it hard to leave their present jobs to find better-paying ones. There are multiple reasons for that. Multiple-job households are one reason. I could also go into a diatribe on how resume-screening software provides an advantage to people who look good on paper but in practice are incapable of doing the job.

In a slight digression I heard recently from an excellent source that the IT operations of a major financial services company were shut down for a week due to malware, resulting in the loss of at least a week’s work. That would never have happened, say, twenty years ago. Their present operations are being run by temps and placements. There’s a different ethos at work.

Another prospective explanation is that the job reports aren’t telling the whole story. The jobs that are being created don’t pay better than the ones that are being lost. The jobs being created in health care aren’t jobs for physicians or the highest-paid technicians. They’re jobs for bedpan emptiers that pay minimum wage. People earning $25 an hour are still getting fired and the best jobs they can find pay $15 an hour. That depresses the wage figures.

I found this article by Ramesh Ponnuru at Bloomberg, “Millennials Really Are Suffering”, frustrating. Here’s its kernel:

So it’s refreshing to read a book by a right-of-center author who takes the side of the generation born from 1981 through 1996. The millennials aren’t whiners, Wall Street Journal editorialist Joseph Sternberg writes in “The Theft of a Decade”: They have legitimate complaints about economic trends that have hit them particularly hard.

People in the middle of that generation reached adulthood just as the economy fell into the most severe recession since the Great Depression. That recession was followed by a disappointingly slow recovery. Sternberg notes that the effects of entering the labor force in a weak economy are not transitory: Lifetime earnings are measurably lower.

I think that Mr. Sternberg is trying to draw conclusions that can’t be supported by the available data and the problem resides in the assumptions that are being made.

In 1970 measuring a young person’s income relative to those of their parents’ at their age by averaging the incomes of the young person and those in their age cohort, averaging the income of the parents and their age cohort, and comparing them was fairly reasonable. But circumstances have changed in such a way that is no longer reasonable. In 1970 4% of Baby Boomers were immigrants or the children of immigrants. Now it’s four times as many or even more. Comparing today’s Millennials with previous generations is comparing apples and oranges.

Let me say it another way. What policies would have made a difference for the Millennials? That’s a serious question. I don’t think that any policies other than immigration and trade policies would have made much difference.

The other disagreement I had is with Mr. Sternberg’s inclination to blame the Baby Boomers. Nancy Pelosi, Steny Hoyer, James Clyburn, and Mitch McConnell are all members of the Silent Generation not Baby Boomers. The Silent Generation has been running the country for 30 years and are extremely reluctant to let go. The Baby Boomers are just holding their coats.

In 2012 emissions of CFC-11, thought to be responsible for destroying the ozone layer and which had been declining or flat for years, began to increase again.

Without looking where has the source of the increased emissions been pinpointed?

Answer here.

At NBC News Evan Horowitz is worrying about this article at ScienceAlert that IQs are declining in the countries of Western Europe:

People are getting dumber. That’s not a judgment; it’s a global fact. In a host of leading nations, IQ scores have started to decline.

Though there are legitimate questions about the relationship between IQ and intelligence, and broad recognition that success depends as much on other virtues like grit, IQ tests in use throughout the world today really do seem to capture something meaningful and durable. Decades of research have shown that individual IQ scores predict things such as educational achievement and longevity. More broadly, the average IQ score of a country is linked to economic growth and scientific innovation.

Now, some will leap to the conclusion that the reason for the drop is that dumber people are having more children or the very large migration of people from countries with relatively lower average IQs to those with relatively higher average IQs. Those may be factors but they’re not the only factors as this quote from the second link makes clear:

In the new study, the researchers observed IQ drops occurring within actual families, between brothers and sons – meaning the effect likely isn’t due to shifting demographic factors as some have suggested, such as the dysgenic accumulation of disadvantageous genes across areas of society.

Instead, it suggests changes in lifestyle could be what’s behind these lower IQs, perhaps due to the way children are educated, the way they’re brought up, and the things they spend time doing more and less (the types of play they engage in, whether they read books, and so on).

I would like to propose that IQ tests measure specific cognitive skills related to reasoning and perception, those skills are cultivated by reading, and reading as the primary method for acquiring information has been declining in favor of video, graphics, and so on, the modality I have referred to here as “visualcy”. I have made a number of predictions about the likely implications of that and we seem to be realizing all of them.

As to what to do about it I think the changes are likely inevitable and irreversible. We could try dumping the screens and reading books instead but I doubt that’s likely to catch on.

I agree with a lot of what’s in Chris Schelling’s post at Institutional Investor but particularly this paragraph:

Rather than being the result of runaway capitalism, these problems [ed.: e.g. great discrepancies in wealth and income], I believe, have been caused by its disappearance. We don’t have too much capitalism; rather, we have far too little.

Most critics contend that this failure of capitalism is, perhaps ironically, the result of unchecked corporate profit maximization. Once again I agree. However, capitalism is not axiomatically about profit maximization; it’s not about corporations. In fact, true capitalism was originally agnostic on both of those subjects. Only in modern times has profit maximization become the broadly accepted definition of this economic model.

The great enemy is the accumulation and consolidation of power whether it is in the hands of rich individuals, companies, or governments at any level. Capitalism and liberal democracy can encompass diversity and dramaticly different approaches to the pursuit of happiness. Crony capitalism (which is what we have now) and state socialism cannot.

After her inauguration on Monday, Chicago’s new mayor, Lori Lightfoot, hit the ground running. Fran Spielman reports at the Sun-Times:

Mayor Lori Lightfoot spent her first day on the job focusing on Memorial Day weekend safety, a broader plan to combat the traditional summer surge of violence and delivering a message of collaboration to a cabinet that is not her own.

“It’s definitely a brand new experience walking into the fifth floor, seeing `Office of the Mayor’ and recognizing, that’s me,” she said.

The mayor arrived at City Hall shortly after 9 a.m. to find a phalanx of television cameras waiting for her in the lobby and a few more cameras outside her fifth-floor office.

There was a good reason for the late start.

“I saw my mom and family off before they took to the airport. … I’m still kind of in the after-glow of yesterday. And it was bittersweet to see my mom go back home today,” Lightfoot said.

The mayor was asked what 90-year-old Ann Lightfoot thought of the inauguration ceremony at Wintrust Arena that turned into a love-fest for the new mayor and her message that “reform is here.”

“She was, of course, proud. But, growing up [and] living most of her life in a small town, she was pretty overwhelmed by the response yesterday and proud of her daughter for sure,” Lightfoot said.

About an hour later, Lightfoot addressed dozens of staffers, including several prominent holdovers from Mayor Rahm Emanuel’s office, before they began two hours of training on two important subjects: ethics, and complying with the Freedom of Information Act.

Former Mayor Rahm Emanuel spent eight years fighting and stalling FOIA requests tooth-and-nail. Too often, that triggered legal battles like the one that culminated in the court-ordered release of the Laquan McDonald shooting video and Emanuel’s private emails.

Lightfoot has promised to promptly honor FOIA requests from the news media and everyday Chicagoans, which would be a welcome relief.

About an hour later, it was time for her first cabinet meeting. It’s a cabinet largely dominated by Emanuel administration holdovers.

“We had six weeks to do a heckuva lot. So what we focused primarily on was building out the mayor’s office. We’ll be placing some names before the City Council next week for nomination to different departments,” she said.

Some of the more than hourlong cabinet meeting was spent getting acquainted and telling stories about “why they got into public service,” the new mayor said.

Her first official action as mayor was to promulgate an executive order to all city departments ending “aldermanic privilege”, the near-total control of aldermen over just about everything that goes on in their wards. That’s a primary source of aldermanic power and is inevitably corrupt.

It only solves half the problem. The other half is that far too much power is consolidated in City Hall. Whether cityh departments will conform to the mayor’s executive order or whether Chicagoans are just trading one set of bonds and corruption for another remains to be seen.

I’m glad that Tom Friedman is finally coming around on China. Better late than never, I suppose. His latest New York Times column has a number of reasonable passages, e.g.:

Trump’s instinct that America needs to rebalance its trade relationship with Beijing — before China gets too big to compromise — is correct. And it took a human wrecking ball like Trump to get China’s attention. But now that we have it, both countries need to recognize just how pivotal this moment is.

and

China kept insisting it was still “a poor developing country” that needed extra protection long after it had become the world’s largest manufacturer by far. Nevertheless, the relationship worked for enough U.S. companies enough of the time that the world’s biggest incumbent superpower, America, accommodated and effectively facilitated the rise of the world’s next largest superpower, China. And together they made globalization more pervasive and the world more prosperous.

And then some changes too big to ignore set in. First, China under Xi announced a “Made in China 2025” modernization plan, promising subsidies to make China’s private and state-owned companies the world leaders in supercomputing, A.I., new materials, 3-D printing, facial-recognition software, robotics, electric cars, autonomous vehicles, 5G wireless and advanced microchips.

I’m glad he mentioned “Made in China 2025”. That was the shot across the bow. Not only did it reveal that China’s predisposition to autarky had never gone away it was an example of a well-known business tactic in which you force a competitor into an unprofitable niche by cutting off his growth plan.

He continues:

As a result, all China’s subsidies, protectionism, cheating on trade rules, forced technology transfers and stealing of intellectual property since the 1970s became a much greater threat. If the U.S. and Europe allowed China to continue operating by the same formula that it had used to grow from poverty to compete for all the industries of the future, we’d be crazy. Trump is right about that.

Where he is wrong is that trade is not like war. Unlike war, it can be a win-win proposition. Alibaba, UnionPay, Baidu and Tencent and Google, Amazon, Facebook and Visa can all win at the same time — and they have been. I’m not sure Trump understands that.

But I’m not sure Xi does, either. We have to let China win fair and square where its companies are better, but it has to be ready to lose fair and square, too. Who can say how much more prosperous Google and Amazon would be today if they had been able to operate as freely in China as Alibaba and Tencent can operate in America?

and

I repeat: Trade can be win-win, but the winning shares can be distorted when one side is working hard and cheating at the same time. We could look the other way when trade was just about toys and solar panels, but when it’s about F-35s and 5G telecommunications, that’s not smart.

and especially:

In the old days, when we were just buying China’s tennis shoes and solar panels and it our soybeans and Boeings, who cared if the Chinese were Communists, Maoists, socialists — or cheats? But when Huawei is competing on the next generation of 5G telecom with Qualcomm, AT&T and Verizon — and 5G will become the new backbone of digital commerce, communication, health care, transportation and education — values matter, differences in values matters, a modicum of trust matters and the rule of law matters. This is especially true when 5G technologies and standards, once embedded in a country, become very hard to displace.

The tragic part of that is that there’s barely a scintilla of that has not been true for 30 years and it’s what perceptive and knowledgeable people have been saying all along while Tom Friedman and his ilk keep making predictions that have never come to fruition.

Welcome back to the fight. This time I know our side will win.