Where Has All the Business Investment Gone?
Although consumption makes up more than two-thirds of America's GDP Growth Driver equation, business investment historically has accounted for a little over 15% of U.S. economic growth. What business investment lacks in size, however, it more than makes up for in volatility.
The recessionary fact of the matter is that business executives can reduce capital investment rapidly and thereby trigger a downturn. In fact, this is precisely what happened leading into the March 2001 investment-led recession.
One reason why business investment is so volatile has to do with what Depression-era economist John Maynard Keynes once called the "animal spirits" of entrepreneurs and business executives. At the first hint of recessionary trouble, executives often cut back on business investment—ironically sometimes making a recession a self-fulfilling prophecy.
Today, business investment in America has a lot more than a mere psychological problem. Since the 2001 recession, American business executives have chronically underinvested not just in new plants, equipment, and production facilities, but also in basic research and development (R&D).
Part of America's business investment problem has to do with the 2007–2009 crash and its aftermath. Since that crash, many businesses have continued to face a severe credit and liquidity problem. The paradox is that even as the federal government has driven down interest rates to near-zero levels, and even as the Federal Reserve has created over $1 trillion in new money, credit remains constrained—particularly for small businesses. Meanwhile, many households are still unable to obtain sufficient credit to purchase big-ticket, interest-rate-sensitive items such as houses and cars.
Not just a credit and liquidity problem plagues American businesses. With its mishandling of issues ranging from "cap and trade," health care reform, and tax hikes, the Obama administration has created tremendous uncertainty within the American business community—and attendant risk and uncertainty. The particularly dangerous nature of these "Seeds of Destruction" is this: In the presence of so much uncertainty and risk, business executives have been unable to accurately calculate projected rates of return on new investment. As a result, many corporations have invested less than they otherwise would. Combine this cloud of risk and uncertainty with a lack of access to credit, and you wind up with the financial equivalent of a black hole that sucks the life out of domestic business investment.
It would be a big mistake, however, to assume that the lack of adequate business investment in America is simply a short-term problem driven by a lack of adequate credit and liquidity and rising uncertainty over regulatory and tax policies. This continued "sand and grit" in America's financial system certainly helps account for the short-term, cyclical downtrend in business investment during the 2007–2009 crash. However, the harsh reality we must also confront is that domestic business investment in new industrial capacity has been in a longer-term decline since at least 2001.
A big part of the problem, as evidenced by the falloff in industrial production and the loss of six million manufacturing jobs during the nought decade, is the phenomenon of offshoring. Over much of the past decade and continuing into this new decade, American business executives have increasingly chosen to transfer much of their production, along with much of their R&D and many of their other operations, to foreign countries.
Debates over offshoring and its possible negative effects on domestic investment and growth in America make it tempting to blame the rise of free trade and wave the bloody shirt of "cheap foreign labor." Such an explanation, however, is far too simplistic. As we will explain in the next chapter when we discuss our Ten Levers of Growth, free trade is an essential component of global economic growth and stability.
The real problem American business executives face is not free trade per se. Rather, it is that in today's global marketplace, American corporations often fight the free-trade wars with both hands tied behind their backs.
One hand is tied behind the backs of American business executives because of the greater regulatory and tax burdens that are imposed on American soil relative to the burdens competitors face in other countries.
The second hand which is tied behind the backs of American business executives relates to the tendency of several of our key trading partners to engage in both mercantilist and protectionist policies that make it almost impossible for American companies operating on American soil to compete freely and fairly.
Accordingly, increasing business investment again in America will require a comprehensive overhaul of three critical policy areas: regulation, tax, and trade.