Results for “investment drought” 14 found
Jason Furman and the CEA on the investment drought
Here is a pdf of his remarks, with useful graphs, excerpt:
So in recent quarters, the investment story has been about oil. But drilling cannot explain the broader trends over the past five years. Since 2010, most of the step down in investment growth was attributable to reduced growth in equipment investment, as shown in Figure 6. At the same time, intellectual property products investment has been accelerating and over the last four quarters it grew 7.3 percent, the fastest pace since 2005. In fact, stronger growth in intellectual property products investment has partially offset the slower growth in equipment investment over the past two years. Intellectual property products consists of about 45 percent research and development (R&D) investment, 45 percent software investment, and 10 percent artistic originals.
Yet if you look to Figure 8 on p.7, you can see that the overall trajectory for fixed business investment is not entirely positive, even worse if Figure 11 on p.10 (alas I cannot get them to reproduce in this post). The bottom line is this:
…today’s gross investment is 2.3 percentage points lower than its historical average…Investment net of depreciation as a share of GDP was already lower than its historical average going into the recession and today remains well below its historical average…
You will find many (appropriate) caveats in the study itself, most of all that investment in software may be different, although this can cut either way. Software has been improving rapidly, but it is also not very durable as business investments go.
Addendum: Paul Krugman comments.
Disaggregating the investment drought
You can click twice to see this Excel file on investment.
That is from Spencer England of Spencer England’s Equity Review. He writes to me:
I think a major reason for the difference between net and gross investment is the growing share of Info Tech (IT) in business fixed investment. IT now accounts for over half of real business investment. But IT has a much shorter life span than traditional business equipment or investment in structures.
It is like going up a down escalator –you have to run harder just to stay even.
Here is a previous post on the investment drought, with another good picture. Karl Smith offers some related remarks, though I do not focus on transportation as he does, rather given his framing I would put more emphasis on our inability to replace industrialization with something comparably important.
Germany estimate of the day the core problem is the investment shortfall
From 2004 until 2010, the 30 leading German blue-chip DAX firms created more than 400,000 additional jobs abroad, according to a Handelsblatt analysis. During the same period, they cut over 200,000 jobs within Germany.
Here is the link, via David Wessel. And note that for all of its ostensible economic successes, real wages in Germany have barely risen since 2000.
I’ve long considered capital shortfall the “real problem,” rather than focusing on immigration or trade or for that matter consumer spending. Do note however that much of the investment flows out of the home country because the produced goods later can be traded back in, so in that sense trade is connected indirectly. Still, there is a big analytical difference between the notions of “capital shortfall at home” and “too many goods flowing in from abroad.”
By the way, here is a wee bit of good news:
Though the number of posts they’ve created overseas still far outweighs the total added within Germany, the imbalance is leveling out. Last year saw the net addition of more than 83,000 new posts abroad. Domestic positions grew by over 22,000 over the previous year.
I see overwhelming evidence for an “investment drought” in many of the countries with wage stagnation. As time passes, I find talk of a “global savings glut” to be increasingly misleading and ignoring the core fact of capital market segmentation.
I thank Edward Conard for a useful discussion related to this post, and I am looking forward to his next book.
What explains America’s economic anomalies?
Apart from low productivity growth, of course. That is the topic of my latest Bloomberg column. Wages have been sluggish throughout the recovery, profits on capital seem to be high, there is a domestic investment drought, and the onset of the internet and globalization make many of the “monopolization” charges less than plausible. Here is one possible route of inquiry:
Capital today can cross borders more easily than it could a few generations ago. That might keep real wages down in the U.S. If wages threaten to rise during an economic recovery, for instance, it is then profitable to invest more capital abroad, where wages usually are lower. The end result resembles what economists call a “Malthusian” equilibrium. That means there is an upper limit to returns to labor: They cannot exceed the cost of bringing more labor to market, for instance by investing abroad (or perhaps building robots). Even a long recovery won’t help wages rise above that limit.
This same hypothesis can help explain both the U.S. investment drought and supercharged growth in many emerging economies. If capital is flowing overseas, that will boost growth abroad and worsen a shortfall of investment at home. Too much foreign capital flowing into the U.S. is absorbed by Treasury securities, rather than the private sector.
What about the high rates of return measured for capital investment in the U.S.? It seems strange to have high profits but low investment. Why not invest more to earn more money, thereby leading to an investment glut until the profits are competed away?
One hypothesis is that investors now expect a higher rate of return for domestic investments, a possibility suggested by economists Loukas Karabarbounis and Brent Neiman in a recent paper. Let’s say that entrepreneurs used to be willing to make domestic investments for an expected 7 percent return but now they demand at least 10 percent.
Entrepreneurs will cut back on investment, but the remaining projects will have higher returns on average, more closely bunched around 10 percent than 7.
What accounts for this increased reluctance? Karabarbounis and Neiman consider factors such as greater risk aversion. A simpler alternative explanation, consistent with my capital mobility hypothesis, is that newly available rates of return in other countries are high, and that means competing investments in the U.S. will need to offer higher returns too.
Do read the whole thing, I also consider potential flaws in the argument, such as capital possibly not being mobile enough.
Saturday assorted links
1. Should they release wild elephants in Denmark? And sharks have distinct personalities.
2. A claim that neither assortative mating nor dysgenics have increased in genetic importance.
3. Who is the most famous athlete in the world?
4. New Charles Kenny book manuscript “The Plague Cycle.”
5. Goethe and the second price auction. And probabilistic grading for true-false exams.
Raghu Rajan polarizes with his essay
Greg Mankiw calls it wise, John Cochrane likes it, David Brooks likes it, and I liked it, but other people are upset or less impressed. Karl Smith flips out. Adam Ozimek points out one misunderstanding of the piece, not the only one I might add. The essay itself is here.
Ezra Klein argues that Rajan should not have presented long-term vs. short-term thinking as either/or (for more on the “false choices” view, read here). To be sure, some policies such as immigration reform help both the short and long-term problems. Still, any given dollar must be spent somehow and “the stimulus model” and “the long-term investment model” are indeed competing visions for the allocation of resources. Think of it as having to choose a rate of discount for evaluating expenditures. I say choose the low discount rate, which of course still may justify those forms of stimulus with long-term payoffs. Ezra also notes that long-term investments may require short-term sweeteners to pass, but I see that as an illustration of Rajan’s point, namely that we are not very interested in the long run for its own sake.
Once the problem is presented in sufficiently precise microeconomic language, we can see where the real choice has to be made, namely at the level of the discount rate.
Rajan wants to spend money as an investment model would suggest. There is an “investment drought,” including from our government, and the growth-inducing parts of discretionary spending are coming under increasing pressure. AD stimulus is/would be less effective with each passing day. Raghu’s case on this point is strong, maybe you don’t agree but I don’t see that the critics have grasped it with sufficient depth.
In the past, in other contexts, Karl Smith and Matt Yglesias have defended “muddle through” and short-term thinking in policy. I see the public choice literature — both theoretically and empirically — as suggesting political discount rates to be far too high. Climate change is Exhibit A, but other examples are numerous.
Krugman is upset at Rajan, but where to begin? He misunderstands Rajan on structural unemployment, for a start see Adam’s post of correction listed above. (In general Krugman has written and rewritten more or less the same post against structural unemployment at least a dozen times without responding to, or even presenting, a strong version of the argument. It’s an intellectual Turing test fail, and maybe I’ll cover this some other time.)
From Krugman, there is more:
Most important, as Karl Smith says, is the fact that Rajan’s injunction that we focus on long-run growth isn’t responsible — it’s deeply feckless. The truth is that we don’t know much about promoting long-run growth, whereas we know a lot about promoting short-run recovery — which is a very different problem. In practice, stroking your chin and talking about the long run is mainly an excuse for doing nothing.
I would find it more useful if Krugman simply stated his preferred discount rate, and whether he wishes to count highly uncertain results for nothing (I don’t think so).
In any case, Krugman gets it backwards. Any Martian visiting the economics blogosphere, or for that matter Krugman’s blog, could tell you that most of micro is a more or less manageable topic, whereas macro induces economists to start thinking of each other as idiots and fools.
More substantively, we know a fair amount about promoting growth, for instance read Alex’s The Innovation Renaissance, much of which has been endorsed by left-wing thinkers too. Read the new Acemoglu and Robinson book. Even Robin Wells thinks we know how to promote long-run growth.
One might try to draw a distinction between “once and for all” changes in output and permanent boosts to the rate of economic growth, a’la Solow. In this context, that won’t wash, even if it is otherwise a defensible distinction (debatable). If we could get many “one time” gains today, for five or ten years running, that would be excellent and would boost growth and create jobs, whether or not we would be boosting the rate of innovation twenty years out. Krugman in other contexts argues for such gains all the time and with great vehemence and certainty, not with the faux temporary agnosticism exhibited above.
Finally, Rajan is a case for testing Krugman’s oft-stated view that we should listen most seriously to those who have made good predictions in the past. Rajan was probably the best, more accurate, most serious, most detailed, and most non-Chicken Little predictor of the financial crisis. You might think that means he gets listened to today, or given the benefit of the doubt on interpretation, but apparently not.
Assorted links
1. What was the least important event of the year?
2. There is no great stagnation.
4. Flexible nominal wages create some new jobs. Monetary accommodation is better, but why is this a supposed disaster?
Wolf on the Global Economy
Brad Setser points to Martin Wolf’s extensive powerpoint slides on the global economy.
- The first set covers financial flows to emerging economies and the crises of the past few years.
- The second
covers emerging market (and central) financing of the US current
account deficit and the global savings glut/ investment drought. - The third covers Martin Wolf’s policy recommendations – his suggests for changing the international financial system.
Monday assorted links
2. The smartest person that Garett Jones has ever met (short video).
3. “Because increasing the capital-intensity of R&D accelerates the investments that make scientists and engineers more productive, our work suggests that AI-augmented R&D has the potential to speed up technological change and economic growth.” Link here.
4. Predictions from 1923 about 2023.
5. GPT takes the bar exam. And how well do GPTs write scientific abstracts?
6 “The fact that we failed to notice 99.999% of life on Earth until a few years ago is unsettling and has implications for Mars.” The article has other interesting points about the political economy of funding a Mars program. Recommended, and it will make you a space skeptic.
Mind both your p’s and your q’s
Here is a new and very clear Diane Coyle piece about whether gdp and CPI statistics are failing us. Perhaps we are overestimating the rate of inflation and thus underestimating real wage growth, as many of the economic optimists suggest. Yet I do not find that “the q’s” support this case made for “the p’s.” For instance the employment-population ratio remains quite low, though with some small recent upticks. If real wages were up so much, you might expect a larger adjustment from the q’s, namely the quantities of labor supplied.
Similarly, there is net Mexican migration out of the United States. You might not expect that if recent innovations were creating significant unmeasured real wage gains.
Investment performance, while hard to measure, also seems sluggish.
Again, a closer look at the q’s makes it harder to be very optimistic about the p’s.
Carl-Henri Prophète on Haitian economic growth
He writes to me:
…just to let you know that Haiti’s economy grew by 4.3% in 2013. This is the highest growth rate since the 1970s excluding post embargo and post earthquake years (1995 and 2011). Nothing spectacular, but worth noticing I think. Some people may question these numbers in a country where the National Statistics Institute regularly looses its best staff to NGOs where they can earn 3 times their previous salary. But there is a general feel that economic activity was definitely higher than usual in 2013.
This is partly due to luck: There were no hurricanes or major drought period during the year, so agriculture which accounts for around a 1/4 of the economy grew by 4.6%. The construction sector did also well (+9%) thanks to major infrastructure investment by the government funded by generous Venezuelan aid and some major private investments (in the hotel sector for instance). Exports also increased in real terms by 5%. By the way, there are two firms assembling low cost Android tablets in the country now, which may lead to a greater diversification in exports away from garments in the future. (see here http://bit.ly/1lnVVxjand here http://bit.ly/Jkit6v)
However, inequality is still very high and even more spatially visible as the relatively wealthy suburb of Petion Ville is booming and has became the de-facto capital since the earthquake. Also, there are questions about how long this Venezuelan aid will last and its impact on the country’s debt, corruption and government accountability. Furthermore, there should be elections for many parliament seats in 2014 which may fuel political instability.
The balance sheet recession and The Great Stagnation
Many people point out that we are in a balance sheet recession. I agree with this view but wish to push it one step deeper. The negative wealth and income effects on debtors are positive wealth and income effects for the creditors. If the creditors were keener to invest that money in useful, productive activities the economy would be much stronger. Balance sheet recessions are most problematic when the investment channel is for some reason broken or especially weak.
You might think “Ah, the weak investment channel is due to weak AD.” And in part it is. But, if I may quote the Austrians, production takes time and recoveries do not take forever. Investors are often keen to invest into the swoosh of a future, not too far away, post-recession boom. But this desire has been much weaker than in many times past. A lot of the weakness of AD comes from the investment side, and in fact it predated the recession.
Six Degrees
I learned from this new book. Most of all it shows how the earth likely will change as temperatures rise.
For instance Lima and the Andean parts of Ecuador and Boliva are heavily dependent on Andean glacial melting for their water. An earth warmer by two degrees would create very serious problems for them, once the glaciers disappear. Most of all I came away with a renewed sense of the importance of water issues and the need for greater investment in desalination technologies (yes I know it’s not easy and transporting the desalinized water is often a greater problem than getting the salt out.) Stopping the destruction of tropical forests is another partial remedy for warming and it seems more doable than shutting down all or most carbon emissions.
That said, parts of the book struck me as very weak. The discussions of biodiversity destruction did not convince me that the scope of pending losses is unacceptable. There’s a lot of handwaving and listing of lost species as if that ends the argument. We’re in a mass extinction anyway and I’d like a serious analysis of the marginal impact on global warming on this process. "It’s so bad anyway that further species loss must be unacceptable" doesn’t cut it for me.
It is also claimed (p.236) that an earth five degrees warmer would result in the culling of "billions." Of humans that is. There is little talk of substitution or technological adaptation. Nor do I buy the claim that carbon rationing would bring "a dramatic improvement in our quality of life" by getting us off the streets, out of the planes, and bringing us closer to the rest of the community.
Overall I found this the best, most accessible, and most vivid book for visualizing the actual problems from global warming. But the Cassandras of global warming need to be more responsible, and more wary of overstatement, if they wish to press home their very important arguments.
Jonathan Adler has a good recent round-up post on some global warming issues.
Use foreign aid to prevent catastrophe?
Our research find that a 5% drop in per capita income due to drought increases the likelihod of a civil conflict [in African countries] in the following year by nearly one half. That’s a very large effect.
…Currently, most foreign aid focuses on long-term investments in infrastructure of education but does little to deal with such short-term triggers of violence as drought or falling export commodity prices. But our research suggests a larger share of aid should aim to dampen the sharp falls in income that actually generate recruits for rebel movements.
That is from Edward Miguel, p.14 of Business Week, edition of 18 September. My main worry is that these are the societies where foreign aid is least likely to find its way into the hands of the poor. In fact the distribution of the aid might, at the margin, make the plum of political power all the more appealing to would-be rebels. Keep in mind that many of these civil wars are led by elites, not the starving poor. (So what is the mechanism linking drought and conflict? Focality?) Nonetheless I am sympathetic with the basic idea that simply preventing catastrophe is often the best that aid can do.
Here are links to the guy’s working papers and the data set for this paper.
Here is Bill Easterly on what the World Bank should be doing, namely focusing on modest and measurable projects, in the name of accountability. Michael Kremer argues the World Bank should support global public goods. Here are other views, courtesy of New Economist blog.