"Boost Private Investment to Boost the Economy"

Hal Varian:

Boost Private Investment to Boost the Economy, by Hal Varian, Commentary, WSJ: These days it seems like it is our patriotic duty to consume more. And if we don't choose to spend more money ourselves, the government will do it for us.

But wait a minute. Isn't it excessive spending that got us into this mess in the first place? ... Despite this apparent paradox, there is some logic to providing a dose of economic stimulus. ...

In the ... U.S. economy..., consumers ... sensibly ... want to consume less and save more. In an ideal world, an increase in savings would automatically lead to an increase in investment. ...

Unfortunately, savings are currently not getting translated into investment... The net result is that money is piling up in ultrasafe assets like Treasury bills, without being invested in ways that would build a more productive economy. ...

The Obama administration now wants to ... provide direct stimulus of demand. But which component: consumption, investment, government expenditures or exports?

Increasing exports would be great, but it's not going to happen. The rest of the world is having its own problems...

Direct stimulus of consumption is tricky. In this economic climate,... tax cuts would probably be saved, and rightly so... Rather than relying entirely on direct stimulus of consumption, it is better to put a floor under consumption by making sure that unemployment benefits and food stamps are adequately funded.

That brings us to government expenditure... The danger with this form of stimulus is twofold: First, it takes too long for the government spending to kick in, and second, spending may easily focus on pork-barrel projects that have little inherent value.

There are worthwhile public infrastructure projects; the trick is to find them and fund them promptly. One possible plan is to set up an independent commission to prioritize public investment projects, and then subject the plan to a single up-or-down vote in Congress.

One further warning about government stimulus: It makes little sense for the federal government to spend more if the states are forced to spend less. A significant part of the ... spending should be transfers to the ... state and local level.

That brings us to private investment, which hasn't been getting nearly as much attention as it deserves. This is unfortunate, since private investment is what makes possible future increases in production and consumption. Investment tax credits or other subsidies for private-sector investment are not as politically appealing as tax cuts for consumers or increases in government expenditure. But if private investment doesn't increase, where will the extra consumption come from in the future?

Ultimately, we want to end up with a significantly higher savings rate in the U.S. than we have seen recently. That means some other component of demand must increase to compensate for the reduced consumption. And the most attractive candidate by far is private investment.

To the extent that it's possible to stimulate private investment in a timely fashion through tax changes, and to the extent that doing so does not displace public goods and services with higher social value either now or in the future, we should do so. But I wouldn't want to rely on tax changes intended to induce higher levels of private investment as the main thrust of an economic recovery program, and the other ideas above such as enhancing unemployment benefits and food stamps, increasing government spending, and giving aid to state and local government are, perhaps, getting more attention right now for good reason. In the long-run, a higher level of both saving and investment is a worthy goal, but in the short-run the first priority is stabilizing the economy, and tax inducements may not generate anywhere near enough new investment (or consumption) to turn the economy around.

Update: David Altig weighs in on the question of whether tax changes can stimulate private investment in a recession:

Will tax stimulus stimulate investment?, macroblog: ...This graph provides some interesting perspective... Relative to net worth (of nonfarm nonfinancial corporate businesses), private fixed investment has been in consistent decline since the second quarter of 2006. (The level of fixed investment has declined in each quarter, save one.) In fact, the investment/net worth ratio is currently at a postwar low.

Why? A couple of hypotheses come to mind. (1) Firms are extremely pessimistic about the outlook and see relatively few worthwhile projects in which to commit funds. (2) Credit markets are so impaired that the net worth of firms—a critical variable in mainstream models of the so-called “credit channel” of monetary policy—is supporting increasingly smaller levels of lending. (3) Nonfinancial firms, like financial firms, are deleveraging and hence not expanding.

Of course, even if one of these hypotheses is true, it need not be the case that marginal dollars sent in the direction of businesses will go uninvested. But it makes you wonder.

Comments

[Bruce Wilder]

Subsidies for private investment are likely to encourage inefficient private investment. Are we so bound and determined to make government transfers to private investors that we have to subsidize private investment, on top of the billions already devoted to bailing out failed private investments?

[Bruce Wilder]

If Hal Varian wants Social Security for Private Investors, he should advocate it.

[Bruce Wilder]

I have a brilliant idea. To prevent subsidies to private investment from resulting in silly private investments in water slides and museums and houses where no one wants to live and shopping malls where no one wants to shop, we establish an "independent commission" to prioritize private investments. The ones that only make lots of money for our rich friends get top priority. Just below that, we prioritize the ones that only make moderate amounts of money for rich friends.

In fact, let's subsidize investment in manufacturing in China. Investing in manufacturing in the U.S. wouldn't be as profitable. But, manufacturing jobs in China will still "generate" service jobs in the U.S. selling the stuff and marketing the stuff, so we can still rationalize the subsidies.

[Patrick]

I don't have data to back this up, but my suspicion is that consumption has fallen of a cliff NOT because consumers are consuming less and saving more (saving as in putting the money in a bank or brokerage account). Rather, I suspect that it's a combination of unemployment, and paying down debt.

However, even if one grants his premise about savings, and grants that the financial system could effective do anything at all, then it isn't clear to me that lower taxes would do much to stimulate investment. Taxes in the US are already very low compared to most of the developed world. And I doubt that taxes are the deal breakers for potential investors looking at deploying capital.

What is a deal breaker is high unemployment and consumption falling off a cliff. In a nutshell: Why build a new factory when all the existing ones are closing or scaling back and unemployment is high, so nobody is buying what your making anyway? It's a vicious circle: investment is down because consumption is down because employment is down because investment is down ...

So the thing to do is to break the cycle and fill the gap in aggregate demand with government spending. This will increase employment, and provide an environment where private investment can hope to succeed because people with jobs will spend money. As private investment gets back to normal, government can ease off on the fiscal stimulus.

[mmckinl]

The problem we have now is over investment in production. This solution is just rediculous.

To stimulate spending you need two things. The money to spend and the confidence to spend. Medicare for All acomplishes both these and can be structured to save jobs as well.

Medicare for All would subsidize all workers, governments and business so that the expenditures would happen from the bottom up, not the top down. Medicare for All would save millions of jobs thereby saving hundreds of billions of sales. Governments would be mandated to use the savings to stop lay offs and any extra funds could be mandated for unemployment or pension trust funds. Private companies would be mandated to shorten working hours to employ more people using the health care savings to pay the difference.

Medicare for All boosts peoples confidence in their position in the economy by relieving them of the fear of the loss of healthcare, helping pay for deductibles and copays. For those with no insurance this relieves them of the fear of bankruptcy ... same for the underinsured. For those paying for their own health insurance Medicare for All is found money. It has been shown in studies that having guaranteed health care increases the propensity to spend.

[reason]

Commentary in WSJ? Comedy page.

[save_the_rustbelt]

I think private investment is tied up and will not be untied for at least a year.

Good long term strategy, bad short term strategy.

[bakho]

"Isn't it excessive spending that got us into this mess in the first place?"

NO!!!!!! If you don't recognize the problem how can you solve it?
Lying? Ignorant? Shilling for the wealthy patrons? You decide.

The 3 problems that got us into this mess:
1. Gross misallocation of resources on a massive scale by the private sector.
2. Economic rules that lead to not enough money going to the people at the bottom.
3. Gross misallocation of investment in public goods and services by a corrupt crony administration.

1. Nothing can be done about past misallocation other than work through the housing glut over time and make better decisions going forward. Those that made major misallocations should not control allocation decisions going forward. They need to fail and do something else where they won't cause damage.

2. Change the revenue collection, increase minimum wage and give workers better wage bargaining rights so more of the wealth will be paid to the bottom.

3. Restructure federal spending to allow defense spending to decline over time and increase domestic spending on health care, education and other domestic priorities.

[Organic George]

As I've said before, the biggest obstacle to economic recovery are the people who got us into this mess. They will not admit their ideas, papers, models or actions are based on flawed assumptions.

Careers, reputations and future employment are all based their ability to convince anyone who will listen that it was external circumstances that caused this financial calamity.

The fiercest fighting is always before the end of a war. Expect these people to wage a vigorous rear guard action against Keynesianism.

[paine]

"..let's subsidize investment in manufacturing in China"
as you obviously know bruce w

effectively uncle is already doing just that
by allowing the great east asian dollar forex fiddle
to continue ...into its 6 th decade

"...insting in manufacturing in the U.S. wouldn't be as profitable. But, manufacturing jobs in China will still "generate" service jobs in the U.S. selling the stuff and marketing the stuff, so we can still rationalize the subsidies. "

ya manu jobs in hanville are complimentary
to jobs at foreign parts wholesalers
not to mention
Wallmart uber alles

[Markel]

There were 29 IPOs in 2008. That means, only 29 public companies in which investor equity capital could conceivably have gone into building any production capabilities. Yet our most urgent task is to grant favorable tax status to shorts, day traders, and hedge funds managing portfolios of derivatives?

[evagrius]

Increasing food stamps eligibility and benefits is a good idea considering the present income limits and benefits.

http://www.cbpp.org/11-18-08fa.htm

[ken melvin]

Bruce, Patrick, - bon dit. They couldn't give the damned stuff away in 2002 except to build McMansions in the desert, on flood plains or hurricane alleys, and high rise $million dollar condos, which, as the good professor says is what brung us here. Noted: The good professor offered no suggestions for productive investments. Guess he hasn't access to Google.

[paine]

patrick's hat trick

"consumption has fallen of a cliff NOT because consumers are consuming less and saving more ..."

just slowing their credit expansion
is increasing household... net saving

zillions of warm blooded american households
are still
"just butting up against their credit constraints "

"Why build a new factory when all the existing ones are closing .."

exactly today's fun
is all about burial
of
existing norte americano production capacity
not building more for god's sake

varian just wants the big trans nats to get a tax brake
to build up their .....liquid reserves

"Investment tax credits or other subsidies for private-sector investment.."
won't work
the bastards aren't paying much now in corporate taxes
anyway
so they need cash back for past taxes

[paine]

"provide an environment where private investment can hope to succeed because people with jobs will spend money"

the old accelerator

hat trick completed

[baileyman]

I guess I have to expect this from the WSJ.

Mr. Varian seems to think that a capital asset's ownership determines whether it has productivity effects or not.

Silly.

[robertdfeinman]

My "stimulation" idea - paid volunteerism.

Here's how it works, those who are unemployed or underemployed get income support through existing insurance programs. Then instead of sitting around or pretending to look for work they use their time to volunteer.

There are many areas where extra hands could help. For example, teaching reading or helping kids with their homework in public libraries in the afternoons and weekends.

Or monitoring after school activities that give kids a place to go while their parents are working. The gym, library and auditorium are there, it just needs some adults to supervise or create activities.

How about driving people to doctors appointments or job interviews or the like. Even visiting the home-bound just for companionship is a good idea.

If you want to get more ambitious, those with the appropriate skills could volunteer to help people fix up their homes with improved insulation and the like. The issue of who pays for the building supplies would need to be worked out, but many localities already offer grants for this type of thing.

I'm sure there are dozens of other areas which could benefit from some volunteer labor. Since these volunteers are being paid they are not sacrificing financially by being good Samaritans.

Unlike the job corps or the peace corps or the WPA these efforts would be from the bottom up and responsive to local needs. One could use a mechanism like Craig's List to coordinate things. All of these projects are "shovel ready" right now.

[crack]

How is overcapacity rectified by increased investment? We've had two recessions in a row caused by burst bubbles rather than inflation crushing. Both had great productivity increases. Demand was artificially supported through over consumption and personal leverage, that demand was never real. Secular Stagnation is what we have. Have fun with it.

[Beezer]

First, all that money supposedly sloshing around in treasuries is, potentially, investment money. Problem is, it has nowhere to go that looks any good. So, it just sits there.

The capital formation needed for the next decade at least, is probably in the utility, railroad, and energy sectors. Housing values, on net, are likely to be less 5 years from now than they are today, so forget that sector, unless there's a massive, government induced, need to retrofit housing with geothermal or other energy savings methods.

So, government investment into the utility, railroad and energy industries will have to be huge, probably dwarfing all other forms of productive investment. This will provide jobs, and will "suck in" accompanying private investment as well. This will help support consumption and probably also support debt reduction by families.

If you want a detailed accounting of investment demand and suppy, or lack thereof, during the 1920s and the 1930s, go to here.
http://books.google.com/books?hl=en&lr=&id=FnuKMfXfE4AC&oi=fnd&pg=PR5&dq=%22moody%27s%22+%22productive%22+%22capital+construction%22&ots=p2Ow8__jrr&sig=ME2kMEl3t17CDtHffjScRYBYiZo#PPA44,M1

The inflation/hyperinflation hawks figure there's no way all that money supply can be put to good, productive use, and therefore we're about to go into hyperinflation drive.

Could be. I mean building more F-150s isn't going to work very well. But has anyone checked lately on the capital investment needed for energy reformation, or transportation system reformation. Me either. But I'll wager the total we could productively use the next ten years on these two areas alone will dwarf any capital formation figures of the 1990s.

Now, if we could just get on with it, would be nice.

[Beezer]

As for universal health care, including dental. Sure, let's do it. First, it's the ethical, moral thing to do. Second, figure out a payment schedule that includes debt forgiveness for dentist and doctor's educational debt. The higher the percentage of public health care they provide, the higher the debt forgiveness. And put a floor under income so that these incredibly important professionals are guaranteed a very nice living, even if they devote 100% of their lives to providing public health care.

Use the government's purchasing power to negotiate the lowest possible prices for all the tools and medicines used in these professions to help reduce costs.

And this money has some velocity, I'd imagine. For one thing the demand for these services will surge because suddenly millions of millions of people will begin using health care who aren't using it now. Suppliers will prosper, as will their employees, landlords and all the support personnel common to office based businesses.

And virtually all of this is private industry. You want some consumption, employment increases and all the rest? Bam, this will have immediate impact throughout the economy.

[paine]

beezer add a med sec mark up
cap and trade system to your single payer plan
and you got the full montee

[anne]

So that we understand, Hal Varian may teach or not teach but Varian is actually the chief of economics for Google. I may love Google, but I still understand the corporate and self promotion.

[save_the_rustbelt]

robertf:

Interesting idea, but there would have to be a waiver on dozens of federal and state regulations.

The downside of government regulation.

[bp]

Google's Chief Econ
reinvents Says Law

can't spend what don't have
won't spend if don't have

must have to spend
will spend if have

excess demand caused the problem
increased supply solves the problem

it's not a lack of aggregate demand
it's a lack of aggregate supply

which is the chicken required to produce the egg
of investment demand, to create the supply

like, we're already at full employment
never left it really

all that saving, tied up in tax bondage
yearning to escape with Laffered rescue

don't you see, they never wanted to spend it
on consumption in the first place

that's why they saved it
so someone else could invest it

Google it for yourself
under simultaneous equations

[Callahan]

Maybe to stimulate the economy, we should be investing in shoe repair shops, pawn shops, payday advance stores, auto repair shops, second hand clothing stores, clothing repair places (if any), and those few discount food markets that can be found.

[Ken]

Beezer wrote: "First, all that money supposedly sloshing around in treasuries is, potentially, investment money. Problem is, it has nowhere to go that looks any good. So, it just sits there."

Even though the Treasuries are earning zero percent! And remember, the Treasury rate is set at auction. People with money to invest are choosing to receive no return from the government, rather than to loan it to the private sector. It sure looks like the problem is an over-supply of creditors, relative to the available investment opportunities.

[kthomas]

@ Ken "It sure looks like the problem is an over-supply of creditors, relative to the available investment opportunities."

That's what I call inflamitorious! I love it.

[mike]

I'm not quite as skeptical as the hecklers.

If your an Austrian/Libertarian, you just want the government out. Those are your beliefs and you're sticking to them. We get it.

For the rest of ("We're all Keynesians now"), we need more discussion about the size and nature stimulus packages should take.

We need more spending, a LOT of it, as paradoxical as it seems to many. And fast. But where to spend?

The worry is that government spending on useful projects will take too long to implement. Another worry is that government will spend in the wrong places (some say so what--it will still improve things). Some call for tax cuts but then people will just save them not spend them, especially the rich.

So what to do? Subsidizing private expenditures seems like a good way to boost spending quickly. It could be investment, it could be consumption. I like the idea of subsidizing auto purchases. Or maybe just a value-subtracted subsidy, like a negative sales tax. It's easy to implement and easy to take a way. Moreover, it could bring out a lot of private spending to complement government spending. The multiplier would be huge, much bigger than the usual pathways. Subsidizing investment could work too, but I like the idea of appealing to the masses.

Maybe some of the investment/spending wouldn't be wise. But it would probably be a lot better than if the government were making the decisions directly. I can't emphasize enough the easy-of-implementation aspect either.

[Callahan]

Not to worry, we'll be fine in twenty years or so, given there are no REAL disasters ahead.

Just think Service Industry. You know, you serve me, and I'll, ... I'll serve you. I will, ... I really will.

[Alex Tolley]

In practice, what is the difference between the private sector investment and public sector investment in infrastructure that uses private contractors?

Are we arguing for speed of stimulus, productive investment, employing people or...what exactly?

says...

Let the market decide what is and what is not good a good investment - stop "playing market". Let the market correct, let consumption fall to sustainable level.

The only thing the Gov can do at this point that would be a benefit is to prevent the money supply from unduly contracting by purchasing items only at a discount to market prices.

[John V]

bahko,

NO!!!!!! If you don't recognize the problem how can you solve it?
Lying? Ignorant? Shilling for the wealthy patrons? You decide.

What makes you so sure Varian doesn't see the problem? And makes you so sure that you got it so right?

Of three causes that you listed , #1 seems to be the only one having to do with the recessionary atmosphere that we are in.

But then you need to take that one further. Problem is that when you do take that further and to the nth degree by leaving out unrealistic assumptions about capital and forcing yourself to acknowledge some very real factors concerning the true nature of capital and microeconomic concerns, the "solutions" don't jump at you anymore. The problem looks as complicated and messy and it can possibly be. And it is indeed an messy and complicated as it can possibly be.

[anne]

Beyond skepticism, I have been puzzled for several years over the relative and remarkable slowness in growth of domestic investment and continue to be puzzled. Through the expansion, even with corporate profits and savings at record or near record levels and profit growth far above the norm for expansions since 1945, even with repeated tax incentives, the growth of non-residential corporate investment was remarkably slow.

Why, and the answer is not foreign investment?

[Callahan]

How about a little R and R? "American Recovery and Reinvestment Plan."

[John V]

Alex,

In practice, what is the difference between the private sector investment and public sector investment in infrastructure that uses private contractors?

Almost everything.

Private investment can be anything and is chosen be market actors for sustained ROI.

Public sector investment in infrastructure is just that. It's everything private investment from the decision-making process and the intent to long term sustainability in terms of growth, productivity and future jobs.

The only thing they have in common is that money is involved and people are paid.

But I don't think the difference matters. If there is public spending in infrastructure to be done, it should be done.

But it is not a real substitute in terms of real, healthy economic stimulus.

[anne]

http://www.cbpp.org/8-9-05bud.htm

August 29, 2008

How Robust Was the 2001-2007 Economic Expansion?
By Aviva Aron-Dine, Chad Stone, and Richard Kogan

[Peak to peak growth in non-residential domestic investment was 2.0% as opposed to average expansion growth of 3.7% since 1945. But, as Paul Krugman pointed out the difference in American investment abroad and foreign investment here was only $61 billion in 2006. Even continually rising energy-commodity prices from 2002 generated fairly little investment growth.]

[don]

Hal is a real heavy weight and he makes some very good points (the floor on consumption, the need to keep up state and local spending, and the need to allow personal saving to increase), but his proposals need to be flushed out. An investment tax credit would be a very good idea if you could structure it so as to exclude investments that would have happened anyway, but that is virtually impossible. The qaulity of the pivate investments would almost surely exceed the ones the federal government is likely to devise, but the policy would still be a nonstarter if the demand for new investments were highly inelastic, so that most of the credit was just a give away that provides little stimulus.
I wish Hal would weigh in on the question raised by Paine - should anything be done to discourage China's currency interventions? Here we have Pettit making the case that China's trade policies are akin to Smoot-Hawley, and the guy is teaching in Beijing, for heaven's sake!
Mark - may I suggest you post some of Pettit's stuff for comment?

[GloomBoom]

The problem with stimulating the economy is that Congress doesn't have a clue where the spending will be stimulative. Infrastructure, tax rebates, unemployment bennies? They will try the shotgun approach with $1 trillion and see what sticks.

[robertdfeinman]

Rusty:
Yes, that's where the government(s) get involved - a review of existing good Samaritan laws where needed.

I'm not sure what the situation is with volunteers who participate with Habitat for Humanity, but I'm sure that could be used for a model for those in the buildings trades who would volunteer to upgrade homes for better energy efficiency.

Since you seem to be an expert on government regulations why don't you sometimes propose solutions instead of just saying that they are a problem?

[anne]

I may be critical about economic policy through these last years, but not generally critical about efforts to increase domestic investment. The only criticism I can think of is explicitly limiting direct investment from a country such as China, for security reasons that strike me as questionable, and implicitly limiting investment for cultural or social reasons. But, the problem was not with foreign investment but in limited investment by American corporations.

Also, there seems little question that business opportunities will be relatively limited for months even with a stimulus program so how to change an American corporate tendency is far from clear.

[anne]

"I wish Hal would weigh in on the question raised by Paine - should anything be done to discourage China's currency interventions?"

Paul Krugman has made it clear, this is not an issue. Not, not, not an issue. Direct foreign investment by American corporations in China has been 1% or less of our foreign investment for years. Good grief, if there's the problem then the problem is not China or India with accounts for less than 1/2% of our foreign investment, the problem is Britain.

Boycott Britain which accounts for 15 times more foreign investment than China and 30 times more than India!

[anne]

http://www.bea.gov/international/datatables/usdctry/usdctry.htm
http://www.bea.gov/international/fdi-ctry.htm

December 28, 2008

U.S. Direct Investment Abroad, 2007

(Millions of dollars)

All Countries 2,791,269

Canada 257,058

Europe 1,551,165

Germany 107,351
Luxembourg 113,611
Netherlands 370,160
Switzerland 127,709
United Kingdom 398,836

Latin America or Atlantic 471,953

Bermuda 148,633
Brazil 41,552
Mexico 91,663
United Kingdom Islands 90,803

Africa 27,764

Egypt 7,513
South Africa 4,839

Middle East 29,370

Israel 10,119
Qatar 7,139

Asia or Pacific 453,959

Australia 79,027
China 28,298
India 13,633
Japan 101,607
Singapore 82,623

[anne]

http://economistsview.typepad.com/economistsview/2007/05/the_china_syndr.html

May 1, 2007

The China Syndrome
By Paul Krugman

Well, that's weird. I've gotten a lot of comment alleging that the reason for low investment in the US is that all the money is going overseas, especially to China - and quite a lot of the comment was vituperative: I'm an idiot, I don't know anything about the real world, etc. etc. I've gotten accustomed to that sort of thing from the right - in fact, I feel like a failure if I don't get accused of being a liar and a traitor after each column - but what's going on here? Anyway, a note on the numbers. As I already pointed out at the Times, almost as much direct foreign investment is coming into the US as is going out. But what really amazes me is the China obsession. China is a huge export machine, and I take the impact of Chinese exports on US workers quite seriously. But it is not, repeat not, a major destination of US corporate investment.

Look at the BEA numbers: http://www.bea.gov/international/datatables/usdctry/usdctry.htm.

China is only about 1 percent of the total stock of US direct investment abroad, less than $24 billion. Oh, and one fallacy I've seen confidently asserted is that foreign direct investment doesn't count retained earnings. Sorry, but it does. There are some real questions about mismeasurement of the overall investment position - dark matter and all that - but there's no way you can make the case that corporations are taking all their profits and putting it into China.

[anne]

http://www.bea.gov/international/datatables/usdctry/usdctry.htm
http://www.bea.gov/international/fdi-ctry.htm

December 28, 2008

Foreign Direct Investment, 2004-2007

U.S. Investment Abroad
Investment In the U.S. From Abroad

All Countries

(Millions of dollars)

2007
2,791,269
2,093,049

2006
2,454,674
1,843,885

2005
2,241,656
1,634,121

2004
2,160,844
1,520,316

U.S. Direct Investment Abroad

China

2007 28,298
2006 23,405
2005 19,016
2004 17,616

India

2007 13,633
2006 9,226
2005 7,162
2004 7,658

[DW]

Maybe consumption is falling off a cliff because the truth is w really have enough stuff already. The only things I'm buying are those that keep my friends employed. Bought some knives last night from a friend of my son's who lost his father lost year, and selling knives was the only job he could find in his desperate attempt to help replace the family's income. A 19 year old kid, unable to get a good job in this economy, who is trying to replace a lost father's income. I am sickened by billion dollar bailouts when people are hurting this badly in this economy. Private investment supplements? Sickening.

[John V]

Anne,

I think that is one of the most important questions to be asked. I also think it's tied into the "jobless recovery" of the 2000s.

I'm not sure that it has one simple answer.

However, I would tempt to say that some semi-blind groping around would reveal something having to do with the bursting of the tech bubble and its stratospheric highs. Investment was in retreat during the following recession and looking for new growth potential. This was preceded by changes in the tax code in 1997 to make investment in real estate much more attractive and easier. But those changes didn't result in big move into real estate because the stock market was doing too well and people were slow to change strategy.

Following the recession of 2001, an overflow of money into tech and tech stocks during the late 1990s started moving a little out of that area while hunting for new gains to replace losses. The change in the tax code coupled with super low interest rates caused the beginning of a flow into easy real estate opportunities. The continued success in this area with good returns along with continued super low interest rates started the swells of self-perpetuating perfect storm bubble.

Mind you, it did not need to be real estate but I think the incentive structure, options and landscape at that time made it go in that direction.

A lot of money hence went into real estate as a good way to get healthy returns. But it got out of hand. People made mistakes and the whole capital structure got tied together in a dangerous way.

****But now, the capital structure is a mess because of all this malinvestment that would have gone elsewhere if the signals had not been distorted. The distortion was made worse by a desire to get value back as quickly as possible from tech crash. That's tech part is an important backdrop to this. But anyway, now it's too late. An infinite number of possibilities compounding into other (better and more sensible) opportunities were NOT taken. And now the mess must be sorted out.****

Now, I liken the problem to a computer in defragmentation mode. All the color blocks represent different types of capital that need to come apart and go somewhere else. There's no easy for that to happen. But making the computer more active and ramping up the CPU isn't going to get it done....if you get my meaning.

Am I right? I don't know. I may be onto something but I don't have to capacity to prove it and take it further in a rigorous study. Someone else may do that and find some nuggets of truth in there. Time will tell.

[bob mcmanus]

Private investment can be anything and is chosen be market actors for sustained ROI.

Public sector investment in infrastructure is just that. It's everything private investment from the decision-making process and the intent to long term sustainability in terms of growth, productivity and future jobs.

I thought Tolley's question related to mine.

Is there a big difference between public infrastructure stimulus and directed (through tax incentives or direct subsidies) private infrastructure investment?

The point of building the fast railroad is not simply the railroad, but the heavy equipment, concrete, steel, etc that creates the multiplier effect, and all of which will be private investment in both cases.

We will not be building US Gov't owned & operated windmill or
solar panel factories.

But another question would be, again, how much of the secondary purchases (like bulldozers) are manufactured overseas?

[Bruce Wilder]

John V: "What makes you so sure Varian doesn't see the problem?"

Well, there's what he wrote for the WSJ.

Retreating into "it's complicated", as a defensive posture isn't all that helpful. Of course, it's complicated! Which is why we are ill-served when someone like Varian, who is capable of an astounding analytical clarity, chooses to repeat mindless cliches to the readers of the Wall Street Journal editorial page.

What Capital is, and how it may induced to "act" is complicated and complex and subtle. Whether it may be more efficiently encouraged by full employment, banking reform, complementary public investments in research, education, infrastructure. I could make a good case that industry regulation of the very sort that the WSJ editorial page loves to rail against -- the FDA regulation of drug treatments or the EPA regulation of source pollution -- can be very effective in inducing private business investment.

Elementary economic analysis of the kind Varian taught me clearly indicates that willy nilly subsidies for private investment are as likely to inefficient as any counter-market subsidy. Yet, Varian writes this insipid nonsense: private investment is what makes possible future increases in production and consumption. Investment tax credits or other subsidies for private-sector investment are not as politically appealing as tax cuts for consumers or increases in government expenditure. But if private investment doesn't increase, where will the extra consumption come from in the future?

[anne]

John:

I think [the relative lack of investment growth] is one of the most important questions to be asked. I also think it's tied into the "jobless recovery" of the 2000s.

I'm not sure that it has one simple answer.

However, I would tempt to say that some semi-blind groping around would reveal something having to do with the bursting of the tech bubble and its stratospheric highs. Investment was in retreat during the following recession and looking for new growth potential....

[Relatively little job growth, possible over-expansion in information technology, with transmission and systems management capacity needing to be absorbed, definite over-expansion in housing and possibly commercial real estate so there was a sort of crowding out of other investment? Even a military spending pattern that fostered little private investment. Does military spending in general foster significant private investment?]

[bob mcmanus]

And I also think we usually overstate by some amount the delay in stimulus by committing to large infrastructure. Committ to actually building that trans-continental high-speed electric railroad and many markets would get an immediate boost.

I think we also vastly underestimate the medium-term rise in marginal propensity to consume gained by a committment to long-term spending.

The consumer getting the quick tax-cut check, knowing another check is unpredictable, will save it. The consumer who knows she has a ten-year job will immediately start borrowing and consuming.

[Alex Tolley]

anne: U.S. Direct Investment Abroad, 2007
Bermuda 148,633

For Bermuda, all this represents is offshore investments in securities markets, much of it back in the US.

So how does this information help in understanding the issue you raise?

[don]

Don: "I wish Hal would weigh in on the question raised by Paine - should anything be done to discourage China's currency interventions?"

Anne: "Paul Krugman has made it clear, this is not an issue. Not, not, not an issue. Direct foreign investment by American corporations in China has been 1% or less of our foreign investment for years. Good grief, if there's the problem then the problem is not China or India with accounts for less than 1/2% of our foreign investment, the problem is Britain."
Anne, you miss the point competely. The issue is not U.S. investment in China. It is $500 billion in annual dollar purchases by the Chinese central bank. This leads to a big U.S. trade deficit (and growth in U.S. foreign debt) and reduced investment in U.S. import-competing production. It is causing huge global imbalances that will need to be corrected at some point.
As your deity admits, he is very worried about the effect of trade with China on U.S. labor.

[Alex Tolley]

anne: Through the expansion, even with corporate profits and savings at record or near record levels and profit growth far above the norm for expansions since 1945, even with repeated tax incentives, the growth of non-residential corporate investment was remarkably slow.

Isn't the answer that returns from physical investments were poorer than financial ones? Didn't corporations engage in large stock buybacks to raise equity prices

http://s.wsj.net/media/issuance_20070718155708.jpg

[John V]

Anne,

Does military spending in general foster significant private investment?]

I wouldn't think so. At least not enough to matter outside the community where the spending takes place.

[John V]

Bruce,

Stressing basic notions is not mindless. In fact, the worst it can be is naggingly inconvenient.

That "insipid" comment you cite from Hal is one such comment.

[paine]

"the "solutions" don't jump at you anymore. The problem looks as complicated and messy and it can possibly be. And it is indeed an messy and complicated as it can possibly be."

john v ...u bore me

you're a mental butt plug

(pardonez moi anne et al )

[bob mcmanus]

Holy Shit ...Krugman, 12:15

I might quote like Anne, but it's mostly a chart and links.

[paine]

"Through the expansion, even with corporate profits and savings at record or near record levels and profit growth far above the norm for expansions since 1945, even with repeated tax incentives, the growth of non-residential corporate investment was remarkably slow."

anne as usual strikes a signifigant chord here

but fails to realize we don't invest in industry because
we import our marginal industrial products now
krug's numbers show nothing
the reason we don't have large investment in production here
is the better profit opportunity to build it in asia

our trans nats would rather use thier net cash flow
to buy and sell themselves and each other

why add production capacity in europe or north america
we already got too much...
unless the dolllar spirals down to where its more profitable to build here
then to buy there

[paine]

"Isn't the answer that returns from physical investments were poorer than financial ones? "

not of the trolley this time alex bravo

[paine]

"Anne, you miss the point competely. The issue is not U.S. investment in China. It is $500 billion in annual dollar purchases by the Chinese central bank.
This leads to ... reduced investment in U.S. import-competing production...."

exactly correct
the imperial dollar must fall to 3 PRC rmb to 1 US dollar

however we have a full employment problem to solve first
and right up front
we need a wage earners rebate
of a trillion dollars per annum
until alls clear on the job markets

"dembos party of working america "

i tire of pub sec spending chitter
when recovery oughta preceed restructuring

dollar policy waits off stage as a big part of the
future
self sustaining big enough to earn its way in the world
clean lean green norte americano production machine

[ron]

Production capacity seems a bit robust for a round of intense private investment.

[anne]

Alex Tolley:

"Through the expansion, even with corporate profits and savings at record or near record levels and profit growth far above the norm for expansions since 1945, even with repeated tax incentives, the growth of non-residential corporate investment was remarkably slow."

Isn't the answer that returns from physical investments were poorer than financial ones? Didn't corporations engage in large stock buybacks to raise equity prices.

[Nice, but remember that dividends have continually declined since at least 1990 and John Bogle suggests that actual stock buybacks, or buybacks other than for paying option grants, have barely compensated for the dividend declines. Buybacks announced and executed can be markedly different, and buybacks for options have been pronounced but are not financial investments.]

[save_the_rustbelt]

"Obama names special watchdog for federal spending"

Now we have a CPO, Chief Performance officer.

No earmarks and no pork.

I'll bet Congress has other ideas.

[anne]

Don, Paine:

"The issue is not U.S. investment in China. It is $500 billion in annual dollar purchases by the Chinese central bank. This leads to a big U.S. trade deficit (and growth in U.S. foreign debt) and reduced investment in U.S. import-competing production."

I would argue otherwise, but I am thinking this through again.

Alex:

American investment in Bermuda as in British islands in the Atlantic is direct business building investment though often financial business building investment. I have been thinking about what this represents.

[anne]

The America trade deficit was 4.7% of gross domestic product in 2007, * a fair portion of that had to be energy imports. I am thinking but while the trade deficit will be important financially in the long run I do not think it is important for now or represents a worrisome loss of jobs. Competition from China is largely in terms of manufacturing that will not be done in America no matter whether done in China.

* http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2006&LastYear=2008&3Place=N&AllYearsChk=YES&Update=Update&JavaBox=no#Mid

[Donald A. Coffin]

One can agree entirely with Hal Varian's essay (and I think I do), but he leaves us hanging. Businesses are reluctant to invest. But we need to encourage investment. So how do we do that? Tricks like investment tax credits, which lower the (apparent) marginal cost of capital are less likely to be useful when businesses fear, with good reason, that they will have difficulty selling the products that the increased investment spending would allow them to produce.

The problem is to induce businesses to believe that consumption spending (or exports, or government purchases) will be enough higher in the future, when the increased productivity of increased current investment spending comes on line, to justify the increased current investment spending. Varian does no explain how we can accomplish that, and this alone makes a focus on increasing current investment spending something of a shot in the dark.

[anne]

Bob McManus:

http://www.nytimes.com/2009/01/08/business/economy/08deficit.html

Janaury 8, 2009

$1.2 Trillion Deficit Forecast as Obama Weighs Options
By DAVID STOUT and EDMUND L. ANDREWS

With a $1.2 trillion budget deficit being projected, Barack Obama said changes in Social Security and Medicare will be needed to bring spending in line.

[Even more ominous.]

[paine]

i'm certain the time will come...and soon
for a green production system
part of that will doubtless be clean machines
now not installed but required by greening goals

investment tax credits enter here n'est pas ???

[calmo]

Hal Val generates the steam but good...polarizing at best...condensing, at best, what is left of the Business Pole.
But I digress wickedly, then...but, not compared to following the knife seller above.
I wonder if DW's (possible Playwright now but if not, soon) remark is not more the worry? As in "One more handout to the Badguys, and you will be an ex-representative."..as in the late, stone cold representative of anything. The suicide bomber attitude making an unexpected appearance...the attitude that has had it with authorities.
As personal losses mount, mis-characterized (mis-represented essentially exactly like this) by the media as possibly rallying mere stabilizing non-diving levels of the DOW, the Minnesota Consumer Sentiments may not be a reliable reflection of citizen's hopes and expectations.

[paine]

"changes in Social Security and Medicare will be needed to bring spending in line."

sounds like the nasty-think
of that disguised forecloser in chief
chi boy austin ghoulsbeee

[paine]

"Competition from China is largely in terms of manufacturing that will not be done in America no matter whether done in China "
that line is pure poison
but i agree first things first

full employment before
re industrialization
the four r's
come in pairs

first
relief recovery
then
reform restructuring

[save_the_rustbelt]

robertf:

As to solutions.

In order to use "paid volunteers" I think some sort of legislation would have to passed modifying or waiving a number of human resources regulations, including wage-and-hour, immigration (hiring), drug testing, antidiscrimination, benefits, taxes, WARN Act, and whatever.

Not to mention someone carrying liability insurance, vehicle insurance and workers compensation insurance (construction is dangerous, as is driving anywhere).

This would require determining what party is the "employer," local government, state, feds, NFPs, etc. (?).

So, could it be done, yes. It would have to be done carefully and thoughtfully, otherwise it could become a lawyer festival.

(The most similar (contemporary) program I can think of was the CETA program during the Carter administration, when funds were given to local governments for temporary hires, the workers were exempted from union and some hiring rules, although taxes and overtime applied, etc. It was, by the way, a giant boondoogle.)

[paine]

donald a coffin
you're too cautious

varian only has one real point

investment tax credits for google
do u agree with that ????

[save_the_rustbelt]

Not a good sign:

from the AP today

ALBANY, N.Y. – Electronic unemployment filing systems have crashed in at least three states in recent days amid an unprecedented crush of thousands of newly jobless Americans seeking benefits, and other states were adjusting their systems to avoid being next.

About 4.5 million Americans are collecting jobless benefits, a 26-year high, so the Web sites and phone systems now commonly used to file for benefits are being tested like never before.

[paine]

rusty
sometimes you strike me as a prisoner
of your practical experience

at heart a knight in shining armour
a righter of aweful wrongs
but hamstrung by quixotic details
like
balanced account books
" better as the enemy of the okay "
type scrupples
and decent family heirloom values etc etc

play high timing devil more
and heedless dice tosser

[paine]

"About 4.5 million Americans are collecting jobless benefits, a 26-year high"

isn't the job force 40% larger now
90 vs 140 million ???

we got a lot more records to burst on this dive

[Alex Tolley]

anne: American investment in Bermuda as in British islands in the Atlantic is direct business building investment though often financial business building investment.

Bermuda is fundamentally a tax haven for investments. It takes financial assets from wealthy individuals, "excess" profits from corporations and insurance premiums, which are then reinvested in financial assets, often US ones. AFAIK, this hasn't changed since I worked there. If that assessment is correct, I would not regard that as investment in new productive assets. But finance can be complicated and I may be wrong.

[Alex Tolley]

varian: "There are worthwhile public infrastructure projects; the trick is to find them and fund them promptly. One possible plan is to set up an independent commission to prioritize public investment projects, and then subject the plan to a single up-or-down vote in Congress. "

Another example of the requirement to put the stimulus through the "is it good business" filter rather than just stimulating.

My question on private investment stimulus is what new private projects are likely to show a good ROI during the recession/depression. My guess it will the acquisition of distressed assets rather than new capital/business investment. How would that stimulate the economy?

[Beezer]

Re: comments that fiscal stimulus infrastructure spending will "take too long." OK, then we'll never make them. If it's "too long" now it isn't going to be shorter tomorrow.

If I read the info correctly, in the 1920s less than 50% of private savings went into capital formation (much less in several years). And in the 1930s, even as savings went higher than in the '20s, it didn't move into capital formation then either. It was in the '30s short term govt. debt went negative for the first time. It was the fed and the states who spent money.

Outside of some spectacular discoveries, or inventions, there really isn't any big trigger to spur investment--other than the huge ones regarding energy, transportation and sustainability. And that's the government's job to get moving. It will suck in some private investment, probably on the bond side (muni and treasury).

And finally. James Livingston maintains there's no proof that progressive tax rates hurt productive investment rates. In fact, what he states is "Suffice it here to say that economic growth has proceeded as a function of declining net investment."

In short the wealthy were not making productive investments and non productive investment spiked as a result. Ergo bubblgum on your nose.

And the comment that a sustainable economy is not likely to be a growth economy may have some merit. We seem to be hard wired to feel that growth (the more the merrier) is the only existance. Maybe not. Quality not quantity my be the rule of the day going forward.

[anne]

"American investment in Bermuda as in British islands in the Atlantic is direct business building investment though often financial business building investment."

The data are here and are consistent year to year:

http://www.bea.gov/international/datatables/usdctry/usdctry.htm
http://www.bea.gov/international/fdi-ctry.htm

December 28, 2008

U.S. Direct Investment Abroad, 2007

(Millions of dollars)

All Countries 2,791,269

Canada 257,058

Europe 1,551,165

United Kingdom 398,836

Latin America or Atlantic 471,953

Bermuda 148,633
United Kingdom Islands 90,803

[anne]

Here is more meaningful jobs data:

http://www.bls.gov/webapps/legacy/cesbtab1.htm

The Bush experience in monthly job creation has been,

38,800 x 95 months = 3.7 million jobs created in all so far;

enough job creation to keep up with civilian work force growth would have meant,

140,600 x 95 = 13.4 million jobs created so far or 13.5 million jobs created in 96 months.

[anne]

What is as critical as understanding why Paul Krugman is so worried that the Obama stimulus will not be sufficient, is the astonishing announcement by Obama that the budget deficit is to be lessened by changing Social Security and Medicare. For Obama even before becoming President but safely after being elected to attack Social Security and Medicare is an immediate and startling betrayal of trust.

[anne]

Correcting:

For Obama even before becoming President but safely after being elected to attack Social Security and Medicare is an immediate and [critically harmful] betrayal of trust.

[Rusty]

"sometimes you strike me as a prisoner
of your practical experience"

Paine;

Those pesky government regulators have a funny habit of strict application of the rules, good intentions or not. The fines, penalties and the occasional indictment are a practical lesson in compliance.

[paine]

i agree rusty

but damn the torpedos ...

[ken melvin]

I, Manuel, know nothing about banking and less about finance, though faulty I be, it is my best guess that, instead of doing the right thing, Paulson and Bernanke have been trying to prop up bank books without burning the derives that make them look solvent while rome burns.

[mike]

I think we need to recognize that there *is* a lot of cash out there waiting for the right time to jump into the market.

In the big scheme of things, it matters less where than when. But we just don't want the investment/consumption spending to be utterly stupid.

So temp the cash hoarders already. Give them something for spending something, sooner rather than later.

Give a $10,000 tax credit for buying a house.

Give a health chunk of cash for buying a new car. Maybe 10-20% of the price up to a limit of say $5,000.

I think the multiplier would be larger than a conventional tax cut. It would get fence sitters, even if they don't want the subsidy, to invest, if just because they expect others will take advantage of these opportunities.

If 25% of the households in the country took the car credit it would cost 135 billion or so.

If 10% of U.S. households took the house credit it would cost less than 100 billion.

But the rise in spending would be much, much more...

Maybe this is crazy. But we need concrete ideas, kids. Concrete ideas....

[mike]

Bruce:

I'm confused by your position.

Okay, so the government subsidizes investment, not *particular* investments, but investment in general. It still let's the market decide which investments to make.

Maybe the market would make less than perfectly wise choices. But since we're far from full employment we all gain anyway. It's just that if the market were a little smarter we could do just a little better. But that's always the case, no?

What is crystal clear is that heavily subsidizing private investment would provide much more in the way of useful productive investment than, say, World War II, which did wonders for getting us out of the Great Depression. So why not put the same amount of money, in relative terms, to something relatively more productive?

How, in the current environment, could this be a bad thing?

You seem to be confusing basic micro for basic macro. Thankfully, Varian is good at both.

[Pete Murphy]

Any efforts to boost the economy are doomed to failure until the root cause of the global economic melt-down are addressed. The simple fact that no one seems to acknowledge here is that a global economy which relies on the United States to sustain an enormous trade deficit in perpetuity in order to provide employment to grossly overpopulated nations with badly bloated labor forces was never sustainable. The inevitable melt-down of that model finally occurred when the American assets required to finance that deficit were finally depleted.

The economy can only be restored to a sound footing when balance is restored to global trade, whether the global community comes together and does it voluntarily or whether the U.S. forces the issue with a return to tariffs.

Pete Murphy
Author, "Five Short Blasts"

[anne]

"What is crystal clear is that heavily subsidizing private investment would provide much more in the way of useful productive investment than, say, World War II, which did wonders for getting us out of the Great Depression."

What is actually clear is that private investment had essentially recovered to 1929 levels by 1937, the recovery from the Depression lows beginning with Roosevelt becoming President in March 1933. The New Deal era or the decade of the 1930s marked possibly the most important gains in productivity in the century, with incentives for investment coming from New Deal programs as such. How effective specific investment incentives can be, as opposed to economic vibrancy, is an important question after the seemingly effective failure of tax incentives since 2001.

We had essentially recovered from the Depression by 1937, there was a recession set back that year though with recovery resuming in 1938. Markedly increased federal spending from 1939 on would leave us with 6.5% unemployment by 1941.

[anne]

"The economy can only be restored to a sound footing when balance is restored to global trade...."

Balance was never restored to global trade even after the Smoot-Hawley tariffs of 1930, but the economy continually recovered from March 1933 when Roosevelt began New Deal programs.

[roger]

My problem with Varian - even reading the excellent arguments against his proposal in this comment thread - is that he succeeds in disguising the real terms of the debate. As we can now see from TARP and the Fed's actions since October, the U.S. government is willing to commit extremely large sums to shoring up extremely rich people. It doesn't take much retrospect to see how unimaginative the U.S. response was - growing out of the "Great Moderation" ideology represented by Varian, Paulson and the general run of economists. Surely the money allotted to the Treasury could have been better spent capitalizing a national Bank for Economic Investment. During this crisis, the abandonment of strictures against command and control economics seems more than justified. Some such Bank could very actively direct investment into targetted areas that have suffered from underinvestment during the years of chasing after high yield; with the state, if necessary, setting up enterterprises if none exist on the scale necessary to meet our industrial needs. A good example of how the state could use its financial muscle and its coordinating scope is found in the continuing crisis in the auto industry and its intersection with the need for a much more environmentally sound energy infrastructure. Even taking the European example and spreading it to the U.S. - that is, producing high mileage cars that run on low emission diesel - would require a refining capacity we just don't have. That gap would be filled by such drastic government action, which would bring into existence, ex nihilo, such refining capacity if no cooperative private refiner could do the job. One can think of a dozen similar examples. Varian and Obama's economic crew and most mainstream commentators still don't seem to grasp both the scale of the crisis and the scale of the opportunity. This doesn't mean abandoning a model in which the private sphere generally makes its own investment decisions, but certainly suspending it until we have a new base upon which that could be done. The effort to save a dysfunctional financial services sector is not only doomed to failure, but seems to have missed the point - that sector not only failed due to internal problems, but it failed to fullfill its rational economic function of supplying the capital that would allow the U.S. to achieve a higher plateau of economic development, from which it could shed older manufacturing functions. This, by the way, was the old justification for free trade, and the only one that makes sense. The new justification - that free trade makes Walmart tat available for gross and tasteless working class families, a particular favorite of the University of Chicago school - is a parody of a justification.

[ken melvin]

This is how it will be should we go too far with global warming. Knowing little of husbandry or genetics, they will keep the rich for brood stock.

[Greg Byshenk]

I would submit that there is a flaw in Krugman's argument quoted above.

That is, the fact that China (or anywhere else) is not a major destination of US FDI is not sufficient to counter an argument that "the reason for low investment in the US is that all the money is going overseas". Yes, if there were significant FDI then that would show that "money is going overseas", but denying the antecedent is a logical fallacy, and fails in this case because FDI is not the only way in which investment can be redirected from one place to another.

For example, if I am a corporation, I can elect to purchase from a supplier in Ohio or in Shenzen. If I choose to sign a contract with the supplier in Ohio, then there will (probably) be additional investment in Ohio, while if I choose to sign a contract with the supplier in Shenzhen, then there will (probably) be additional investment in Shenzhen. Of course, in this example, in neither case will the be my direct investment (either foreign or domestic), but my purchasing choice will lead to (at least relatively) increased investment in one location and decreased investment in the other. Further, this example shows how one can have "low[(er)] investment in the US" due to "money going overseas" without any FDI involvement.