Must-Read: Investment has been weak because demand growth has been weak–and because the residential-investment credit channel broke in 2007, and neither Barack Obama nor Tim Geithner nor Jack Lew nor Ed de Marco nor Mel Watt nor any congressional coalition has taken any steps to fix it.
This is a very important channel for “hysteresis”–especially if, like me, you believe in powerful external benefits from investment, especially equipment investment:
Closing the Investment Gap: “BERKELEY – The weakness of private investment in the United States and other advanced economies is… worrisome… perplexing…:
…Through 2014, private investment declined by an average of 25% compared to pre-crisis trends.
The shortfall in investment has been deep and broad-based, affecting not only residential investment but also investment in equipment and structures. Business investment remains significantly below pre-2008 expectations, and has been hit hard again in the US during the last year by the collapse of energy-sector investment in response to the steep drop in oil prices….
The investment shortfall in the US coincides with a strong rebound in returns to capital. By one measure, returns to private capital are now at a higher point than any time in recent decades. But extensive empirical research confirms that at the macro level, business investment depends primarily on expected future demand and output growth, not on current returns or retained earnings. According to the IMF, this ‘accelerator’ theory of investment explains most of the weakness of business investment in the developed economies since the 2008 crisis. In accordance with this explanation, investment growth in the US has been in line with its usual historical relationship with output growth. In short, private investment growth has been weak primarily because the pace of recovery has been anemic….
As the accelerator theory of investment would predict, much R&D investment is occurring in technology-intensive sectors where current and future expected demand has been strong. There is also evidence that the distribution of returns to capital is becoming increasingly skewed toward these sectors…