We Need More Productive Investment

Financial FAQs

Consumers’ financial health has substantially improved in 2015, according to the Fed’s 2015 Q4 Flow of Funds report, plus, their real wages are rising because of lower inflation. And since consumer income drives aggregate demand—the overall demand for goods and services, and so Gross Domestic Product —it directly impacts economic growth.

This dearth of aggregate demand has happened at the same time as diminished corporate investment in more productive capacity, according to a recent Bank of America report. “Since the Great Recession, US business investment has grown at an average annual rate of 4.9 percent, compared with the 8.1 percent average for the corresponding period of all post-war recoveries. This shortfall is a much larger than the 1.8pp shortfall for household consumption, and the 2.0 pp for residential investment.”

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Graph: zerohedge.com

Why? The Great Recession occurred in 2008, and businesses and financial markets have been slow to recover. But a recent Economic Policy Institute report highlights a more serious reason for slower growth—wage inequality.

“The rise in wage inequality over the last three-and-a-half decades largely stems from intentional policy choices that have eroded ordinary workers’ leverage to secure higher pay (Bivens et al. 2014), said the EPI author Elise Gould. “These policy choices—made on behalf of those with the most economic power—include allowing the minimum wage to stagnate, eroding workers’ rights to bargain collectively, and (the Fed) prioritizing low inflation over low unemployment. Policies such as these have resulted in hourly pay for the vast majority of American workers stagnating despite growing economy-wide productivity, with economic gains highly concentrated at the top.”

And because wages and salaries of most Americans haven’t increased more than 2.2 percent since 2000, economic growth has also been stuck in the 2 percent range. This creates ever larger budget deficits, needless to say, and so endangers social security, Medicare, crimps investments that would increase productivity and boost our standard of living, and is the reason for our crumbling infrastructure of roads, bridges, resulting in even more productivity losses, for starters.

So raising the minimum wage floor is a start. In fact, states that have already raised the minimum wage have boosted wages of the bottom 10th percentile—as much as 5.2 percent for women in states where it was legislated, vs. states with no minimum wage increase.

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Graph: EPI

That makes it even more important for companies and governments to invest more in capital expenditures, i.e., the best way to spend the profits made from higher productivity. But it is hardly surprising that businesses lack confidence in any sustained upswing in demand that would justify taking the risks associated with large increases in investment, concludes the BofA report. For many listed companies, returning surplus cash to shareholders through dividends or share buybacks has seemed a safer strategy.

It is the old chicken and the egg puzzle. Which comes first, investing to expand business, or removing the barriers that depress household incomes in order to encourage businesses to use their cash for productive growth rather than stock buybacks that benefit the few?

We really do know how to boost aggregate demand. We have to create more jobs to fix our public infrastructure that hasn’t been upgraded in 75 years, build and upgrade our schools to educate a growing population, and spend more for the research and development of new, productivity-enhancing inventions.

These are really the functions of governments, when businesses lack confidence to do anything but buy back their own shares.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
This entry was posted in Consumers, Economy, housing market, Keynesian economics, Macro Economics, Weekly Financial News and tagged , , , , , . Bookmark the permalink.

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