Noah Smith Notes a Puzzle

Noah smith has a question which I paraphrase as : Interest rates on corporate bonds are very low. The return on capital for business as a whole is quite high. Why isn’t investment very high ?

My thoughts

This is related to average v marginal.
I think it is important to distinguish fixed capital into residential capital (AKA houses) non residential structures and equipment (and software).

The user cost of equipment and software is mostly depreciation. There isn’t any particular reason to expect equipment investment to respond to interest rates nor is there much evidence that it ever has.

Most of the rest of investment is residential. It is not related to the returns reported by Gomme et al — households don’t publish balance sheets or profit and loss statements. The return is partly housing services but also, in large part, expected capital gains. These have declined vastly. Or to put it another way, low current investment is almost entirely low housing investment and has nothing to do with corporate bonds or returns on capital.

The question becomes why aren’t firms building lots of structures ? Here I guess that a lot of it is that much of non residential investment in structures is retail (shopping malls) and office parks near new housing developments. That is very much a complement to residential investment and low (given interest rates) as a result.

But also (here really marginal v average) a lot of the profits are going to financial firms (the legend says business not non-financial business). Their marginal return to new structures is low. Another huge chunk is going to high tech. Their return to structures is low as stressed by Summers

I guess the common theme is that corporate profits and investment don’t have much to do with each other, so the Gomme et al meets Smith puzzle isn’t so puzzling.