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Low Investments Pose Risk for Innovation

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With his American Competitiveness Initiative, President Bush has at least found one correct economic policy target. But strengthening the U.S.’s position in the global market will require more investments in research and development, education, and physical capital, such as computers and machinery. Here the trend is troubling. In recent years, businesses invested less than in the past to build up the country’s capital base. Increasingly, businesses are investing in things that lose their value very quickly, such as computers and software. At the same time overall investment is comparatively low, which means that actual new additions to the nation’s capital stock are the smallest of any business cycle. The net effect is that American businesses are not consistently contributing to our capital stock, one of the most important keys to the global competitiveness of the U.S.

A clear measure of U.S. competitiveness is to compare the value of high tech products sold by U.S. producers overseas with the value of high tech products bought from abroad by U.S. purchasers. By this count, the country is increasingly falling short. Since 2002, the U.S. has imported more high tech products, also called Advanced Technology Products (ATP), than it has exported. In 2005, the ATP deficit widened again to $44 billion.

The problems for the U.S. in high tech products are widespread. In two of the four largest areas of ATP trade – life sciences and information and communications technology – the U.S. had deficits in 2005; and in a third area – electronics – the U.S. had a shrinking surplus. Only aerospace trade saw a growing surplus, but not enough to compensate for the losses elsewhere.

To counter the loss of competitiveness, the country needs to invest more, in both its people, and in its physical capital base. Early in this business cycle, which started in March 2001, investment actually declined. In inflation adjusted terms, non-residential fixed, or business, investment declined for nine consecutive quarters – the longest losing streak since World War II. Consequently, the share of investment relative to gross domestic product (GDP) fell from a high of 12.6 percent to a low of 9.8 percent. This decline followed a substantial gain in investment in the 1990s. However, the rise in investment only managed to recover most of the ground lost in the 1980s (figure 1). Investment relative to GDP never exceeded the previous high mark of 12.7 percent, although it came very close with 12.6 percent. After the long slide in the initial stages of this business cycle, investment has again grown faster than GDP since March 2003. By the end of 2005, investment equaled 10.8 percent of GDP.

Dr. Christian Weller is a Senior Economist at the Center for American Progress, where he specializes in Social Security and retirement income, macroeconomics, the Federal Reserve, and international finance.

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