Must-read: Paul Krugman: “Robber Baron Recessions”
Must-Read: But… but… but…
Is this the wrong graph somehow?:
Yes, investment spending is weak relative to its past business-cycle peak values. But all of the relative weakness is in residential construction:
You can say that business investment should be even stronger–high profits, high profit margins, depressed wage costs mean that capital’s complement labor is cheap, very low financing costs (if you can borrow risk-free). But business investment is also a function of capacity utilization, and you would not expect it to be high in a low-pressure economy, especially one in which confidence is low that the trend growth of nominal GDP will be sustained.
Why is this the wrong graph?
: Robber Baron Recessions: “Profits are at near-record highs…
…thanks to a substantial decline in the percentage of G.D.P. going to workers. You might think that these high profits imply high rates of return to investment. But corporations themselves clearly don’t see it that way: their investment in plant, equipment, and technology (as opposed to mergers and acquisitions) hasn’t taken off, even though they can raise money, whether by issuing bonds or by selling stocks, more cheaply than ever before….
Suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power… [with] corporations… able to milk their businesses for cash, but with little reason to spend money on expanding capacity or improving service… an economy with high profits but low investment, even in the face of very low interest rates and high stock prices.
And such an economy wouldn’t just be one in which workers don’t share the benefits of rising productivity; it would also tend to have trouble achieving or sustaining full employment. Why? Because when investment is weak despite low interest rates, the Federal Reserve will too often find its efforts to fight recessions coming up short. So lack of competition can contribute to ‘secular stagnation’ — that awkwardly-named but serious condition…. If that sounds to you like the story of the U.S. economy since the 1990s, join the club.