Commentary / World

Investment bust following historic pattern

by Robert J. Samuelson

One of the great disappointments of the weak economic recovery has been the sluggish revival of business investment — spending on new buildings, factories, equipment and intellectual property (mainly research and development, and software). For the United States, this spending in 2014 was about 9 percent above its 2007 record high. Sounds good? It isn’t. The average annual gain is a bit more than 1 percent over the past seven years. It is only a small stretch to say that capital has gone on strike.

Why? Can anything be done about it?

We now have a new study from the International Monetary Fund that suggests some not very encouraging answers. For starters, it confirms that the investment bust is a global phenomenon. It’s not just the U.S. but also Europe, Japan and most advanced countries. As important, the main cause of the investment slump is clear-cut: Businesses aren’t expanding because they can already meet most demand with existing capacity.

Compared with what was expected, the shortfall is huge. The IMF looked at predictions in 2007 of future investment and then examined what had actually occurred. For advanced countries, the difference averaged about 20 percent from 2007 to 2013.

There was some difference between advanced countries that experienced banking crises (the U.S., the United Kingdom, Ireland and Spain, among others) and those that didn’t (including Japan, Canada and Australia). The crisis countries suffered a drop of investment spending, again, from earlier expectations, averaging 22 percent, while the decline for countries that avoided banking crises was 16 percent.

What’s more interesting is how much investment spending is behaving as it has in the past. Historically, such spending during recessions falls by two to three times the percentage of the economy’s overall decline, the IMF said. The pattern held in the Great Recession, but because the economic decline was so much greater, the effect on investment was also greater. In earlier slumps, investment fell 10 percent, about half the level this time.

“Business investment has deviated little, if at all, from what could be expected given the weakness in economic activity in recent years,” the IMF concluded.

Could we jolt business investment from its lethargy? The IMF suggests that more economic “stimulus” (bigger budget deficits) would boost business investment by shrinking excess capacity. Perhaps. But it’s also possible that temporary stimulus plans — as most are — wouldn’t generate much more private investment precisely because firms would see them as fleeting.

A more plausible prospect is that, if the recovery proceeds, surplus capacity will gradually shrink and convince many companies to grow. Stronger investment could give the worldwide economy a much-needed second wind. This is either a silver lining in a dark cloud — or wishful thinking.

Robert J. Samuelson writes a Washington Post column on economics-related issues. © 2015, The Washington Post Writers Group

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