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The Mystery of America’s Missing Capital Investment

Investing in factories and equipment is weak.

The public is in a foul mood this campaign season, in part because living standards have stagnated. The median household income in January was slightly lower, adjusted for inflation, than it was in January 2000, according to Sentier Research. Pay is lagging partly because companies have been underinvesting in the tools that workers need to be more productive. Those tools, which range from machines to software to land and buildings, are collectively known as capital.

The chart under the magnifying glass shows that companies are adding to the national stock of capital at an historically slow pace. In a separate calculation, the U.S. Bureau of Labor Statistics says that what it calls “capital intensity”—the ratio of capital used to hours worked—was so weak that it actually subtracted from workers’ productivity from 2010 through 2014.

Economists and policymakers agree this is happening. They disagree on why. So put one of these theories in your pipe and smoke it, Sherlock.

People Are Too Frugal

Companies have no need to bulk up because nobody’s buying. Former Treasury Secretary Lawrence Summers argues that the amount of money people want to save is greater than the amount companies want to invest. That’s reflected in the 0.78% yield on 10-year Treasury notes, adjusted for inflation, as of March 16.

Not Enough Innovation

Today’s robots and 3D-printing are no match for the great inventions of the past, like air conditioning and jet engines, says Robert Gordon of Northwestern University. As venture capitalist Peter Thiel famously put it: “We wanted flying cars, instead we got 140 characters.”

Taxes Are Too High

Many Republicans say the key to increasing capital spending is to lower the corporate income tax. They note that $2.1 trillion of U.S. corporate profits were held overseas at the end of 2014. Lower rates, they say, would encourage American companies to use some of that money at home.

Nearsighted Investors

Last year, Hillary Clinton said: “We need a new generation of committed, long-term investors to provide a counterweight to the hit-and-run activists.” She wants to raise capital-gains taxes on assets held for one to six years to encourage people to hold stocks longer.

Bottom Line

On March 16, the Federal Reserve’s Federal Open Market Committee said the U.S. economy is expanding moderately: “However, business fixed investment and net exports have been soft.”


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