When is a slowdown not a slowdown? On the face of it, the government’s statistics tell a very convincing story about cautious companies and weak business investment … There’s only one problem. Corporate America is still spending big time, just increasingly outside the U.S. A BusinessWeek analysis of financial reports from more than 1,000 large and midsize U.S.-based companies shows that global capital expenditures in the fourth quarter of 2006 were actually up 18.1% over the previous year, a number that includes nonresidential construction as well as info-tech equipment and machinery. The comparable growth for domestic business investment, which is all the government reports each quarter: only 8.9%, without adjusting for inflation.
A few things to note. Mandel is not talking U.S. Direct Investment Abroad (USDIA) in total, not just in China. Also note – he does not mention Foreign Direct Investment (FDI). But we can turn to the Bureau of Economic Analysis reporting on our International Investment Position, which reports USDIA and FDI annually through 2005. We have provided two graphs (all figures in millions $). The first shows USDIA in China. From 2004 to 2005, this figure rose from $15 billion to $16.9 billion. So Stormy’s claim that he has explained away Paul Krugman’s puzzle does not cut it. But what about Mandel’s claim? It seems Paul Krugman addressed this claim as well:
Steve A., New York: What do you see as the impact of global capital flows on U.S. investment? While U.S. companies are booking record profits, how much of their investment is being made in the U.S. vs. overseas?
Paul Krugman: A number of people have asked me this question. The short answer is that diversion of investment abroad doesn’t seem to be the big story. Overall, money actually flowed into the United States last year, on a massive scale, although a lot of that was the Chinese government buying bonds. In terms of “direct foreign investment”, basically investment by corporations, $249 billion went out, but $183 billion came in, so the overall effect was only about $85 billion. I know, $85 billion here, $85 billion there, and soon you’re talking about real money, but it wasn’t the main factor in low investment.
Our second graph shows USDIA and FDI from 1990 to 2005, which does not include the 2006 data that Dr. Krugman refers to. Mandel’s argument might have been a good one for the 2001 to 2004 period. But notice something. For both 2000 and 2005 FDI grew more than USDIA. In fact, the increase in USDIA for 2005 was less than $19 billion.