Investments Can Make Businesses More Productive by

Investments Can Make Businesses More Productive by.

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James Sellers, left, vice president of AUS Manufacturing Co., watches one of his employees, Jimmy Payne, grind a piece of equipment at the plant in Bonifay, Florida. (AP/ Phil Coale)

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The parlous country of the U.South. economy weighed heavily on Americans’ minds equally they headed to the polls this past Nov, with 63 per centum citing the economic system as the nigh important issue facing the country this election—well to a higher place the second most frequently mentioned effect, the state of war in Iraq, which ten percent of respondents thought was the most of import. And no wonder, amid bank failures and bailouts, rise job losses and lengthening unemployment lines, a volatile stock market and plummeting 401(grand) account balances. With a new Congress and the Obama administration taking office in January, Americans are more than prepare to see Washington swiftly enact policies to bring near an economic recovery that would ease the financial pain families are experiencing.

Such stimulus steps are necessary and proper, but policymakers and the American people must recognize that the economic mess we are in did not happen overnight, and that the path to strong and durable long-term growth volition not be a short jaunt. Two critical aspects of the long-term structural weaknesses of the U.Southward. economy are depression business organisation investment and declining productivity growth. These two trends go manus in hand. Business concern investment is one critical ingredient in faster productivity. And faster productivity growth is an important precondition to address some of the nation’s largest looming economic problems—low or even negative income growth, massive trade deficits, and the demographic challenges of generating payroll tax income to encompass Social Security payments for the aging Infant Boom generation.

How are business investment and productivity growth related? If a local restaurant spends money on upgrades in the kitchen, for example, it can cook food more rapidly and thus generate more sales with the aforementioned number of workers in the aforementioned amount of time as earlier—the definition of productivity. This kind of business organisation investment is related to a visitor’s productivity and ultimately to the entire economic system’s performance. More business investment can lead to higher future productivity growth via an enlarged capital base.

Over the long run, the gains from faster productivity growth should exist deservedly shared, such that higher productivity growth feeds into more than jobs and more income for more workers to spend on more consumption items. This actress revenue will provide businesses with an incentive to increase their investments again in their buildings and equipment, thereby laying the foundation for fifty-fifty higher productivity in the hereafter.

This virtuous cycle of college investment, rising productivity growth, and growing income helped lift almost all economic boats in the late 1990s. Since the turn of the century, however, investment growth has been anemic, productivity growth has declined, and income growth has stagnated and in most years even declined. And now that the ability of the U.South. consumer to continue to drive the economy probably has reached its limit, information technology is even more credible that a virtuous cycle is in danger of condign a roughshod cycle. Slow to nonexistent income growth does not give business organisation executives an incentive to invest more money in growing their businesses, which in turn hampers the chances for stronger productivity growth in the hereafter, thereby possibly reducing future income growth.

The current crisis is an opportunity to take stock of past policies that contributed to this growing business concern investment and productivity crunch and, more importantly, to design and implement economic policies that could help the U.S. economy turn the corner on business investment and productivity growth. This paper reviews the existing evidence on business investment and productivity growth and concludes the following:

  • Productivity growth slowed in the 2000s. Labor productivity (measured equally output per hour, the standard definition of productivity) gradually slowed after 2002. Labor productivity, for instance, fell below its long-term average of 2.2 pct for three years in a row, from 2005 to 2007. With growth slowing markedly in the 2d half of 2008, it is likely that this year will also show productivity growth beneath 2 percentage—a nadir non experienced since the four-year period ending in 1991.
  • Business investment was low throughout the current business organisation bike. From March 2001, when the current business bicycle started, to September 2008, business investment averaged 10.5 pct of GDP—the lowest boilerplate investment level since the 1960s.
  • Investment in this business bike rested largely on commercial construction. Investment in commercial structures such as function buildings, hotels, hospitals, and mines soared to 4.0 percent of gross domestic production in the 3rd quarter of 2008, its highest level since March 1986. In contrast, over the grade of the electric current business bicycle, the ratio of business organization investment in equipment and software fell from 9.0 percent of Gross domestic product in March 2001 to seven.0 percentage in the third quarter of 2008, its everyman bespeak since September 1992.
  • Businesses struggle to replace obsolete capital. Net investment—total new investment minus depreciation—as a share of Gross domestic product averaged 2.0 pct for the entire business organisation cycle, the lowest level of whatsoever concern cycle since World War Ii. Businesses invest more in computers, software, and other it avails that are necessary simply also depreciate more quickly than other investments they fabricated in the by. Businesses must now spend more than to replace obsolete equipment, and thus more money must exist spent in total, earlier the nation’due south capital letter base really begins to expand. The combination of low overall investment and quick depreciation means that the productive asset base in the United states of america is growing more slowly than in the past.
  • Failing investment in our noesis-based economy. While investments in information processing and software equipment expanded relative to Gross domestic product by 1.6 percentage points during the 1990s, they accept declined by 0.9 percentage points since March 2001. Additionally, during this same menstruum, the capital stock in information processing equipment and software, internet of depreciation, declined relative to GDP for the start fourth dimension since the early 1950s.
  • Businesses used money for share repurchases and dividends instead of capital letter expenditures. The share of pre-tax profits used for net share repurchases and dividend payouts was 89.1 pct during the electric current business cycle, larger than information technology was for any previous concern cycle. The share of after-tax profits used for net share repurchases and dividend payouts was 127.9 percent, another tape high for any business cycle.
  • Consumption growth did not provide sufficient incentives for businesses to invest. Throughout the current business cycle, from March 2001 to September 2008, consumer expenditures increased past an annualized aggrandizement-adapted rate of ii.five percent—the everyman consumption growth rate of whatever business bicycle since World War 2. In addition, much of the by consumption increases was funded out of new debt, burdening consumers with record amounts of debt and making a quick recovery in consumption less likely.
  • Investment and productivity growth may exist linked. Since 1947, faster productivity growth has been preceded past business investment expansions relative to GDP. Similarly, periods of stronger investment growth were typically followed by an dispatch of productivity growth over a span of five years. Given the low levels of business investment levels in the U.s.a. in the 21st century, government policymakers may soon discover that the opposite is also true.
  • Business investment could supplant consumers as the driver of the economy. Stronger business investment growth could give the economic system new momentum as consumption growth slows. Consumption has contributed to 74.8 percentage of economic growth during this business cycle—the highest share of any business organisation cycle since the 1950s. But this consumption was largely driven past an unprecedented and unsustainable debt expansion that appears to have concluded. If investment growth were to rebound to the levels of the 1990s, when it contributed to over one-5th the total Gross domestic product growth charge per unit, investment growth could then substitute for faltering consumption growth.

Boosting business organisation investment would have positive effects for the economy both in the short term and the long term. In the immediate future, faster investment growth could give the economy a much-needed boost. Faster investment growth lonely will non prepare all of the nation’s economic woes, but it would be one of many steps in the right direction. In essence, it would get-go putting the economy on a more than sustainable economic path than the debt-driven growth of the past seven years. And over the long run, faster investment growth could help lay a stronger foundation for innovation—the primal but elusive measure of our nation’s overall ability to accost a number of large and sometimes even growing challenges, such as declining incomes, an aging population, and large merchandise deficits.

Policymakers face many challenges in helping the economy recover, and this area is not an exception. Businesses will not invest unless Americans’ incomes rise faster than they have recently. Fundamentally, policymakers need to ensure that workers volition begin to see job growth and that the economy will reverse the decline in jobs throughout 2008. At the same fourth dimension, policymakers must create additional incentives for companies to invest in new technologies appropriate for a artistic U.South. economy that remains on the cutting edge of global innovation.

This paper will examine the links between investment, productivity, income, and economic growth as well as consider some worrying trends in all iv of these interconnected arenas. In the pages that follow, we volition revise and update our first examination of these problems, “Ignoring Productivity at Our Peril: Slowing Productivity Growth and Depression Business Investment Threaten Our Economy,” which was published in Baronial 2008 by the Center for American Progress, and so item why more robust business investment growth and higher income growth are necessary for our economy to spark innovation and new economical opportunities to help pull the U.s.a. out of its electric current economic downturn, focus again on our long-term needs, and ultimately provide a path for employees, employers, and the overall nation to grow forrad together.

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The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here. American Progress would similar to acknowledge the many generous supporters who make our work possible.

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