Investments as a % of GDP
With the earlier discussion of investments I thought a chart would be of interest.
As you can see, investments grew until the Republicans started cutting taxes, supposedly to increase investments.
(Cutting taxes to grow investments)
Actually, we CAN’T see.
I will fix it….
Maybe tell us what stat is in the chart. I am not seeing that story in several measure of investment:
https://research.stlouisfed.org/fred2/graph/?g=2djZ
It is exactly what the chart says — private nonresidential fixed investment as a share of GDP.
You had private nonresidential fixed investment as one of the FRED series you referenced. Now all you have to do is divide that by GDP and multiply by 100 to convert it to a percent.
Here’s what I see….
The Minimum Wage was increased in 1961 and 1963, and fixed investments went up. The Minimum Wage went up every year from 1978 through 1981, and fixed investments went up. The Minimum Wage was again increased in 1990, 1991, 1995, and 1996, and fixed investments went up.
In short, it looks like increasing the Minimum Wage made capital improvements more profitable than paying employees.
The last Minimum Wage increase did not have that effect. Possibly because it triggered the “Great Recession”.
Generally, labor economist that study the minimum wage recognize that there is a strong tendency for Congress to raise it late in the cycle just before growth peaks. But very few claim there is a tendency for minimum wage increases to lead to more investments. It is a shame,
because more investment is what we need to increase productivity and raise our standards of living.
I keep asking those opposing the minimum wage why they do not want US standards of living to go up, but they never have a good response.
Do you?
You are absolutely correct, Spencer.
I think another part of the change may be the recent trend to “free trade” agreements — which generally entail opening our markets completely to foreign goods while the other side opens their markets little or none. (The agreement might say they are opening their markets to our products, but then they violate the agreement and are never held to account.)
So with the increase in the Minimum Wage here, the most profitable option is no longer capital investment here, increasing our productivity and standard of living, but transferring the jobs overseas.
The other concern is that raising the Minimum Wage puts the most vulnerable out of work entirely — particularly minorities and the young.
Sorry spencer – originally the chart was not showing at the time of my posting. Taking a closer look at the trend.
If consumer spending was the engine that drives the economy then why not give a bit more for consumers to spend. As in share the wealth a bit more rather than just doing stack buy back that actually provide no new capital investment. Perhaps the tax loopholes of rewarding ourselves with unearned income and off shoring profits should be closed to promote more at home capital investment. Perhaps we should also re enact Glass-Steagal to reduce tax payer exposure to undue risk from Wall St. The “fire sector” and governments predatory capitalism model of creating bubbles and then rushing in to save us from ourselves must be stopped as our economy continues to slowly deteriorate…
No problem with your comments Warren.
But my point is that Republican supply-side tax cuts were sold on the premise that they would lead to more capital spending and the data shows that just never happened.
William, companies which do stock buy-backs are taking money out of their bank accounts and putting money into the hands of their shareholders. Isn’t that what you want?
Perhaps the tax penalties for NOT off-shoring profits should be removed. If we were to eliminate the corporate income tax, WE would become the tax haven of the world, and companies would start sending their jobs and factories HERE.
I have to disagree with your premise, Spencer. Investment does not have to be in capital, but can be in labor. Let me take a business I know — ammunition loading. I can buy a single-stage press for each employee, and have them work assembly-line fashion — decap and resize, prime, charge, seat the bullet, and crimp. Or, I can buy one progressive press which holds all the dies and which can be operated by one man. But that progressive press is much more expensive than the single-stage presses, requires more maintenance, and requires a more skilled operator. So I have to decide which to buy.
If labor is cheap, I buy the single-stage presses and unskilled laborers. If labor is expensive, I buy the progressive press and hire someone with more skill to run it.
But whether I buy several single-stage presses for less, or buy one progressive press for more and save on labor costs, I am still investing and still making a profit (I hope) from that investment. Both are spending of capital, but the balance between fixed investments and labor investment is different. That difference does not depend on what the tax rate is, because profit from fixed investments and profit from labor investments is, mostly, taxed the same.
I do not think anyone claimed that lowering taxes would lead to more fixed investments. Now, I am certainly no expert on corporate tax law, and I ask others here who are to weigh in. But I might have expected the balance to shift from fixed investments to labor investments with the lowering of tax rates, because of the depreciation write-offs of fixed investments. As tax rates are lowered, the value of those write-offs is reduced, tipping the balance toward investments in labor.
Except that during the period under discussion labors share of the pie fell.
Business fixed investment is just the way the BEA labels all business investment except inventories — so it is a much broader concept than you seem to think.
I’m sorry, but every supply-side advocates argue just what I am claiming. Just go to Beverly’s post 2 posts earlier and the reason I posted this chart.
I have no conclusion on the effect of tax cuts on demand and investment at this point. Why exclude residential investment? What about government investment, which can effect what the private sector will invest in. Also what is the fiscal stance for each investment cycle?
One thing that I see in the FRED charts, is that gross government investment as a % of GDP has been on a declining trend, and now at the lowest levels as far back as the chart goes.
My hope with whoever is running this show next term that they substantially increase government investment, and make no changes to taxes.
https://docs.google.com/spreadsheets/d/1zfQqUPU7Avx9Vsb18xWukrSwq4r6OjsKx6mg25obMGE/edit?usp=sharing
Spencer: “Except that during the period under discussion labors share of the pie fell.”
Uh, no, not really. Take a look at Labor Compensation: http://www.tcf.org/assets/downloads/21B.png
As fixed investments were falling during the Reagan-Bush years (1981-92), Compensation Share increased, peaking right as those fixed investments were bottoming out. We see the same pattern the other way after 2001 — labor compensation share drops while fixed investments go up.
There is certainly not a perfect inverse correlation there, but you cannot say that labor share consistently declined over that period.
Spencer: “Business fixed investment is just the way the BEA labels all business investment except inventories — so it is a much broader concept than you seem to think.”
Ummmm, again, no.
“Fixed assets consist of structures, equipment, and software that are used in the production of goods and services.”
https://www.bea.gov/national/pdf/NIPAhandbookch6.pdf
Investment in “human capital” (wages and benefits) is NOT included in that total.
The chart you linked to showed labors share peaking in the early 1970s and falling irregularly since then.
If you go to the BLS productivity data for nonfarm business you will find another chart of labor’s share that shows the same thing.
The quote on investments is exactly what I said. Yes, you can consider investment in training labor an investment, but the BEA does not include that in it’s investment data and I use their concept when talking about investments.
“Falling irregularly”? No.
While the TREND is (slightly) downward, it is by no means “falling irregularly”. That would be like Wile E. Coyote falling down a slightly sloped cliff, banging on the sides as he goes down. The RATE of fall is irregular, but he is always falling.
In this case, we see years of rise in there, too (call it a dead-cat bounce, if you will) and there seems to be a little bit of an inverse correlation with fixed asset investment.