Businesses Need to Spend More. The Future of the Economy Depends on It.

Courtesy of The New York Times. EDITED BY DAVID LEONHARDT

Dear C.E.O.s of America:

You know all that money your companies have been making the last few years? The way profits are at a record high as a share of the economy? You know how the stock market keeps reaching new highs and long-term interest rates near record lows, so you can finance any new investments cheaply? Could you maybe think about spending a little of that money? You know, buy yourself something pretty, like a nice new industrial lathe, a fleet of trucks, new computers or even a shiny headquarters office building? The rest of us would really, really appreciate it. Thanks!

Love, Everybody Else

Five years into the economic recovery, businesses still aren’t plowing much money into big-ticket investments for the future. Nonresidential fixed investment — what businesses spend on equipment, software, buildings and intellectual property — still hasn’t bounced back to its pre-crisis share of the economy, let alone made up for lost ground from the record lows of 2009. As Justin Lahart notes in The Wall Street Journal, equipment spending in particular has averaged 5.2 percent of the economy over the last five years, down from 6.5 percent over the previous half-century.

If firms increased their spending enough to close that gap, it would mean an extra $220 billion in annual economic activity and perhaps a couple of million more jobs. But there may be even more important and lasting consequences for this lack of spending by businesses.

Capital spending improves worker productivity. And worker productivity improves living standards. Less capital spending by businesses means less investment in the kinds of equipment, software and intellectual property that will make the economy more competitive over the long haul.

The logic is simple. If you have a ditch-digging business and employ one guy with a shovel, you can significantly increase the number of ditches he can dig by spending $30,000 on a Bobcat T190 earth mover — with the trencher attachment. The same could be said of an expensive new software package that makes your sales force log more calls to the right people, or research and development lab equipment that lead to new patents and better products down the road.

The pattern the last three years has been steady increases in the number of hours Americans are working, combined with unimpressive increases in the total value of the stuff we’re making. That is a recipe for terrible numbers on productivity, including a mere 0.5 percent rise in worker productivity for all of 2013. If you believe the first-quarter numbers this year (which deserve some skepticism), the United States experienced a steep 3.2 percent decline in productivity to start this year.

Read more here.

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