A central selling point of the tax bill is that it will encourage investment. But that assumes that high tax rates were the primary reason why business wasn’t investing. Instead, the data says business investment is weak because the U.S. has a ton of spare capacity.
First, let’s look total capacity utilization:
It has peaked at lower levels in each of the last three expansions.
Let’s break the data down into durable and non-durable CU:
Both categories of production have ample spare capacity, with non-durable production having greater capacity.
Finally, let’s look at crude, intermediate and final stages of production:
All three have plenty of spare capacity to bring online if needed.
So, will we see a huge wave of investment as a result of the changed tax bill? The data says no.
adding capacity hasn’t been about need for years…companies have been adding plant and equipment that they didn’t need for years because of incentives included in the code, such as the investment tax credit and accelerated depreciation, so it’s really hard to say when that will stop..
Rather than using the Fed estimate of capacity maybe it would be better to use a trend line for capacity utilization and compare that to reported capacity utilization. I think that would give a more realistic measure of economic slack as the trend line shows a long run trend of slower capacity growth.
The main investment might be made to automate things, replacing expensive human workers with cheaper automatic workers who don’t need benefits and an HR department.