Wednesday, June 27, 2012

Business investment remains flat


May capital goods orders (a good proxy for business investment) were up a bit less than expected (1.6% vs. 1.9%), but the bigger story is that they haven't increased much at all over the past year. Business investment has gone flat for the past year. If anything explains why the economy has been sluggish, this is it. Corporate profits are very strong, but businesses are reluctant to put those profits to work.

It's not hard to understand why business investment has been flat. U.S. corporate tax rates are the highest of any developed country. Regulatory burdens have been increasing relentlessly. Obamacare threatens to push healthcare costs even higher, while adding to regulatory burdens, but until tomorrow we won't know if it is actually going to happen—that adds up to lots of uncertainty if nothing else. With the federal government spending 23% of national income, while collecting only 15.3% of national income in taxes, corporations and individuals are justified in fearing a significant increase in future tax burdens.

Another to look at it: in the four quarters ended last March, total after-tax profits of U.S. corporations were about $1.5 trillion, while the federal budget deficit was $1.25 trillion. The federal government effectively borrowed and spent 83% of all the profits earned by U.S. companies. Corporations worked hard to generate profits using scarce resources in the face of increasing difficulty, but the government effectively took most of those profits and redistributed them. The profits weren't invested, they were handed out in the form of unemployment benefits, food stamps, welfare, grants to green companies that failed, and grants to state and local governments so that they could avoid cutting back on their bloated spending, among other non-productive endeavors. Government "spending" of this sort doesn't create jobs, it simply wastes scarce resources and ends up weakening the economy.

With excessive government spending effectively smothering economic growth, those who are able to save end up "investing" their money in Treasury debt because the outlook for growth in the private sector is bleak and uncertainty is high. It's a vicious circle: the more government spends and borrows, the weaker the economy becomes; the weaker the economy, the more investors become risk-averse; and the more risk-averse investors become, the more they want to invest in Treasuries. Treasury yields are at rock-bottom, all-time lows—and TIPS real yields are negative—because the market holds out very little hope for any meaningful growth or any substantial improvement in the outlook.

This is the best explanation I know of for why the huge increase in federal government spending and borrowing has pushed interest rates down instead of up. 

The way to break out of this vicious circle is to reduce the size and scope of government, increase the rewards to private-sector risk-taking, and reduce regulatory burdens. There is hope that this will happen; after all, federal spending has already declined from a high of 25.3% of GDP in Sep. '09 to 23.3% in Mar. '12, thanks to the fact that spending has grown by less than the growth in nominal GDP.

19 comments:

Jake said...

I like how you pretend that all government spending is handouts to the poor. How about the amount spent on national defense, infrastructure, or the amount subsidizing those business profits? Taking national defense along ($750 billion http://www.usfederalbudget.us/defense_budget_2011_3.html) is more than 50% of all corporate profits.

But that doesn't feed into your lazy narrative, so best to ignore it....

Jake said...

Here's a white paper showing a simple equation that outlines why the government deficit has been responsible FOR the record corporate profits we are experiencing: http://tinyurl.com/7uwzyrb

Donny Baseball said...

Jake-
Payments to individuals is 65% of all federal spending. Defense is close to 20% and interest payments are @7%ish, set to balloon to over 10%. SG is not pretending anything. Overwhelmingly, the government just cuts checks to people.

Donny Baseball said...

Jake-
Thanks for the white paper from a dodgy website. I'll pass. We have excellent data on what the government spends our money on and right now 75% is going to people via some entitlement or another or our bondholders.

Jake said...

Yeah... why read opinions that disagree with your own.

Let's go Mets!

Jake said...

Btw- welfare spending is 13% of the budget.

http://www.usgovernmentspending.com/year2011_0.html

Squire said...

Durable Goods orders report was relatively good in contrast to the Fed Regional manufacturing surveys. Maybe now we will see who is more accurate, the Census Bureau or the Fed. The one down side to the good Durable Goods order is that inventories continue to climb. That is a good thing if the economy continues to grow and a bad thing if it contracts.

marmico said...

"after all, federal spending has already declined from a high of 25.3% of GDP in Sep. '09 to 23.3% in Mar. '12"

Right, the feds only have to cut spending down to 22.4% (another 90 basis points) to get to the average spending level during the Reagan presidency.

Do you not think that the sun setting in December 2011 of the accelerated and bonus depreciation "REGULATIONS" has something to do with tepid capex?

Scott Grannis said...

Marmico: During Reagan's presidency (Jan '81 - Dec. '89), federal spending averaged 21.5% of GDP. It hit a high of 22.9% in Mar. '82, during the depths of the recession, when spending typically peaks. Today, three years into the Obama recovery, spending is still more than 8% higher, as a % of GDP, than the average during the Reagan years. Of course, only Congress can spend money, so presidents don't deserve all the blame.

A further note: the federal deficit averaged 3.8% of GDP during the Reagan years, and to date it has averaged 8.9% under Obama.

Donny Baseball said...

Jake-
I read opinions, most all opinions, just not the fever swamps. Give me something more than white papers from crazy websites.

marmico said...

"During Reagan's presidency (Jan '81 - Dec. '89), federal spending averaged 21.5% of GDP"

I'm using GPO fiscal year data Table 1.2. 1981 belongs to Reagan.

http://www.gpo.gov/fdsys/pkg/BUDGET-2013-TAB/pdf/BUDGET-2013-TAB.pdf

Jake said...

Donny Baseball- GMO (the firm authoring the white paper) manages more than $100 billion in assets. While that doesn't alone make them experts, is should prove they aren't "dodgy" or "crazy". What's your rationale?

Benjamin said...

In fact the USA spends more than $1 trillion annually on the national defense-homeland security-VA complex, double in real terms what we spent before 9/11.

24 Saudis armed with box cutters on 9/11 have added trillions to our national budgets and debts....

Interest rates are low because of heavy government borrowing? This new thesis by Scott Grannis may require vetting.

More likely, we have weak economic growth and global capital gluts....

Jake said...

Donny- if you meant crazy site because the link was screwy, here's an alternative place to view it:

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/02/Montier%20-%20What%20goes%20up%20must%20come%20down.pdf

marmico said...

"Corporations worked hard to generate profits using scarce resources in the face of increasing difficulty, but the government effectively took most of those profits and redistributed them."

In fiscal 2011, corporations paid an effective tax rate of 12%, the lowest in 40 years.

http://online.wsj.com/article/SB10001424052970204662204577199492233215330.html

marmico said...

Regulatory burdens have been increasing relentlessly

So. Sure regulations have costs but they also have benefits. The empirical rather than the theologic analysis is to weigh both.

The Office of Management and Budget does. Benefits exceed costs. The 2012 OMB edition is posted below.

http://www.whitehouse.gov/sites/default/files/omb/oira/draft_2012_cost_benefit_report.pdf

Paul said...

"The Office of Management and Budget does. Benefits exceed costs."

Oh, well there's a non-partisan source to trust...

marmico said...

Oh, well there's a non-partisan source to trust...

You gotta better one? Didn't think so.

Robin Williams said...
This comment has been removed by the author.