By Christian E. Weller, Amanda Logan | December 2, 2008
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WASHINGTON, DC—With a new Congress and the Obama administration taking office in January, Americans are more than ready to see Washington swiftly enact policies to bring about an economic recovery that would ease the financial pain families are experiencing.
Such stimulus steps are necessary and proper, but policymakers and the American people must recognize that the economic mess we are in did not happen overnight, and that the path to strong and durable long-term growth will not be a short jaunt. Two critical aspects of the long-term structural weaknesses of the U.S. economy are low business investment and declining productivity growth. Business investment is one critical ingredient in faster productivity, and faster productivity growth is an important precondition to address some of the nation’s largest looming economic problems: low or even negative income growth, massive trade deficits, and demographic challenges. The current crisis is an opportunity to take stock of past policies that contributed to this growing business investment and productivity crisis and, more importantly, to design and implement economic policies that could help the U.S. economy turn the corner on business investment and productivity growth. The authors of the paper review the existing evidence and conclude the following:
- Labor productivity has slowed gradually since 2002.
- Business investment was low throughout the current business cycle.
- Investment in this business cycle rested largely on commercial construction while investment in equipment and software fell.
- Businesses have struggled to replace obsolete capital.
- Investments in information processing and software—essential for our knowledge-based economy—have declined since March 2001 after increasing during the 1990s.
- Businesses have used their profits for share repurchases and dividends instead of capital expenditures.
- Consumption growth did not provide sufficient incentives for businesses to invest during the current business cycle.
- Investment and productivity growth may be linked.
- Stronger business investment growth could give the economy new momentum as consumption growth slows.
This report examines the links between investment, productivity, income, and economic growth, as well as some worrying trends in all four of these interconnected arenas.
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