Why Is Capital Investment Lagging?

“The outlook for slower economic growth is partly a consequence of demographic and education trends that are largely beyond the influence of economic policy,” he said. “Other factors influencing investment can, however, be affected in such a way that more investment is encouraged.”  Don Norman, MAPI Foundation

A significant lag in capital investment since the end of the dot-com bubble in 2000 is a major contributor to lower productivity growth and economic growth, according to a new report from The Aspen Institute program on Manufacturing and Society in the 21st Century and the MAPI Foundation.

The report identifies a number of factors why investment spending has lagged:

  • Policy uncertainty and weak business confidence, including slowing economic growth in Europe and Asia and rapid changes in financial markets.
  • Corporate tax policies continue to hamstring companies; reforms allowing for expensing of investment and lowering rates would make U.S. companies more competitive in global markets.
  • The sheer number and complexity of regulations, and their cumulative cost, have slowly worsened the competitive position of the United States and deterred investment decisions of both domestic and foreign firms in the U.S. economy.
  • Reduced levels of “animal spirits” and entrepreneurialism, partly as a result of growing uncertainty in policy and economic stability.
  • Loss of global market share to rising competitors, especially in manufactured goods.
  • Duesterberg and Norman note that the Bureau of Economic Analysis now includes expenditures on research and development and on education and training as capital investment, and that the trends in investment and labor productivity are correlated.
  • Labor productivity increased at an average annual rate of 3.3% between 1947 and 1973. The growth of labor productivity slowed after 1973 and then picked up in the 1990s, growing at an average annual rate of 3.2% between 1996 and 2004. But between 2006 and 2014 it grew at an annual rate of 1.5%. Since 2011, it has increased by just 0.7% per year.
  • The report concludes that the slowing pace of investment has contributed to slower productivity and economic growth as well as a slower rate of improvement in living standards. 

“Because capital investment is one of the main pillars of economic and productivity growth and, hence, growth in the standard of living, this is a major problem for the United States,” said Thomas J. Duesterberg, Ph.D., executive director of Aspen’s Manufacturing program and co-author. “Nevertheless, a sound mixture of policy changes, especially for tax, regulatory, trade, and spending for research and infrastructure, could help reverse the long slide in capital investment.” 

The study was sponsored in part by the American Council for Capital Formation, Dover Corporation, Madison Industries, the National Association of Manufacturers, Parker Hannifin Corporation, and Snap-on Incorporated.