It’s Investment, Stupid

That nasty ol’ economy. It just won’t do what it’s supposed to do. And you know whose fault it is? Those consumers, who just can’t be talked into spending more. Or so says the cadre of Keynesians who pull our economic levers presently.

There is just one problem. Consumer spending has increased. The folks who run things in our government by and large believe that when consumers gain confidence and become optimistic, the economy grows. What they fail to take into account is the series of events that has to take place before consumers have anything to buy.

One way to understand this is by thinking about how businesses make what it is that they make–not the mechanics of it, but the funding. Investment is required. Investment is essentially money that is put aside (not spent) in order to fund business ventures.

In personal terms, this is savings. We save part of our income in order to be able to use it in the future. However, money just sitting there is not as useful as money doing something, like making more money. We invest our savings in various kinds of instruments, but they all have one thing in common–they are based somewhere along the line on a business. No business creating wealth, no return on investment.

Our problems now are not consumer spending, but investment:

The economy remains moribund not because consumption spending has failed to recover and not because government spending has failed to increase, but because the true driver of economic growth—private investment—remains deeply depressed. Gross private domestic fixed investment fell steeply after the second quarter of 2007, and in the second quarter of 2011 it remained 19 percent below its pre-recession peak.

Why is investment lagging? Mostly because businesses are not about to make plans far into the future when there is so much uncertainty about global finances and the legal and regulatory environment.

The solution? Mostly, it’s getting government out of the way. The prospect of getting a tax break only to get clobbered 16 months later (a core provision in Obama’s deficit reduction plan) is not my idea of an incentive. Add to that the constant refrain of soaking the rich that emanates from the White House and it is a wonder that businesses are willing to risk anything at all. It’s a lot like inviting people to a pistol-whipping. Thanks for the thoughtfulness, but I’d rather just stay home.

As for the long-term, the picture is even worse. Few, including most Republicans, are willing to take on the structural issues with entitlements. Politicians pander to the seniors who are receiving or about to receive the benefits they have counted on for decades. Any attempt to change the structure is twisted into a story about how present seniors will be affected.

Getting a politician to think past tomorrow afternoon is near-impossible, but until our government comes up with a plan to change (preferably eliminate) Social Security and Medicare over a sufficiently long period of time, we are hosed. Businesses have to factor into their investment decisions what the long-term future holds. A currency crash precipitated by a refusal to face the music is not the stuff of investment enthusiasm.

We can delude ourselves into making the world safe for more consumption or we can grow our way out of this recession by letting businesses do what they do best–business. The longer the Keynesians rule the roost, the longer we will be **** upon. Come 2012, let’s encourage them to fly away.

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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