Must-Read: David Lipton: The Key to Raising Business Investment: Keep Pushing the Accelerator
Must-Read: Yes, 130% of the shortfall in business investment in the Global North is due to slack demand and the accelerator. We can puzzle why exceptionally loose interest rate policy has not helped more to boost private investment. We can lament the shortage of risk-bearing capacity that has kept spreads elevated.
We can even demand reform of housing market finance in order to make people feel secure enough to be willing to move out of their sisters’ basements: homeownership rates continue to drop like a stone:
But none of these should distract our attention from the fact that weak economies, slack private investment, low capital formation, and retarded productivity growth are a self-reinforcing vicious circle:
: The Key to Raising Business Investment: Keep Pushing the Accelerator:
Why have businesses in advanced economies not been investing more in machinery, equipment and plants?…
Some believe that the key to more business investment is less uncertainty about fiscal policy, regulation, and structural reforms. Some believe that it is providing better financing…. The facts suggest a much simpler answer: Business investment has been weak because economic activity has been weak. Ensuring a recovery in sales and sales prospects is the key.
A study we published in the April 2015 World Economic Outlook suggests that virtually all of the weakness in business investment in advanced economies since the crisis can be explained by the weakness in the economic environment… in line with the ‘accelerator effect,’ where investment responds to changes in output and sales….
Now, as we leave the crisis behind, with faster growth in advanced economies, longer-term forces related to aging and lower productivity growth continue to cloud the horizon…. Long-term growth in advanced economies is now about ½ percentage point lower than it was before the crisis…. There is a risk that these longer-term forces come together and further reduce incentives to invest. So, even as we see faster growth, policymakers need to remain focused on ensuring a sustained rise in private investment. Here, while policy advice must be country specific, some general principles apply…. The case for more infrastructure investment remains…