Thursday, September 3, 2009

Are We Investing Wisely for Our Economic Future?

Some recent data suggests that the U.S. lags in the global race to invest in production technology and research. Since this economic downturn has taken profits away it is not surprising that companies are not investing as much. Many companies are focused on reorganizing and rebalancing to a newer lower revenue. With all this excess capacity there is little motivation to invest in production.

In the last two quarters, investment in equipment and software, key factors in our high-technology industrial economy, fell by 28% and 34%, respectively, at annual rates. Production of industrial equipment has fallen by 21% since its high in 2007, the biggest decline since the 1950s. This contrasts sharply with an investment boom in China, where fixed asset investment already averages more than 40% of GDP and grew by 33.6% in the first half of 2009. India, too, invests nearly 50% more than the United States in terms of the proportion of GDP. In the tough year of 2008, even Germany increased investments in machinery and equipment by 6%.

The US government is immersed in massive policy changes that are bound to ultimately affect businesses. This spending in excess will certainly be paid for in part by businesses. It is unfortunate that much of the money they will likely forfeit will not support them.

The massive stimulus bill in the United States was billed as an investment, but the amount going to infrastructure and industrial investment in areas like alternative energy production, amounts to around 0.5% of GDP in 2009 and 2010. Again contrast this with China, where its stimulus package led to increased infrastructure investment of 57% at an annual rate in the first half of 2009, according to economist Ed Yardeni.

If we want to continue to be a global leader in manufacturing we must change this short term aversion to invest in sophisticated capital goods and technology. This investment is what is needed for new products and technologies to be developed which will spur on the next growth cycle in our economy.

If we are to compete with the rising economic powers, and traditional ones like Germany, we must do better in the short and longer run. We need to think more carefully about how we spend "stimulus" dollars and pay attention to the fiscal imbalances that constrain future investments. We must create anew a policy environment that favors investment in technology and productivity-enhancing processes, which are key not only to manufacturing, but also to improving our quality of life.

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