|SocialismToday Socialist Party magazine|
Issue 163 November 2012
On capital investment
I VERY much enjoyed the excellent in-depth review by Lynn Walsh of the new book by the Keynesian economist Paul Krugman. Lynn clearly shows that, despite the author having a Nobel Prize in economics, he only has a superficial grasp as to the nature of the current capitalist crisis. I think Lynn’s analysis is spot on that Keynesian proposals for addressing the crisis are an absolute pipedream.
However there were aspects of the review that have left me scratching my head, in relation to the points Lynn makes about capitalist investment. I quote: "Capital investment has been declining as a share of GDP in the US and other advanced capitalist countries since the early 1980s, despite the increased share of profits in national income. The stagnation of capital investment continued in the US in the 1990s and the 2000s despite the high level of demand (which was sustained by credit/debt)".
Did US capital investment decline as a share of GDP despite the share of profits from the early 1980s on through the rest of the century and beyond? When I look at the historical data the evidence clearly contradicts this statement. Here is the history of investment based on data from the US Bureau of Economic Analysis (graph 1).
This graphic representation shows crystal clearly that the level of US capital investment in the 1980s was actually the highest ever recorded in the history of US capitalism. At the turn of the century, despite a gradual decline, it had recovered to a higher level than the 1960s or 1970s. It did decline rapidly prior to the 2007 financial crisis not surprisingly, along with a decline in the rate of profit naturally.
Just to provide some figures to support the graphic evidence, between 2003 and 2007, while profits only increased by 35%, investment increased by 151%. During that period capitalist net profits increased by $222 billion but net investment increased by $280 billion. In other words, the US capitalists were investing all of their profits and then an additional amount.
Not to labour a point but is our analysis sticking to a proper interrogation of the data or are these facts regarded as some sort of neoliberal con trick manufactured to hoodwink the working class? Are they impossible to ‘prove’? Any analysis should surely begin by critically assessing the empirical data rather than issuing sweeping statements which are clearly contradicted by the available evidence. Where is our evidence that all of the capitalists’ profits disappeared into the financial sector for instance? Or am I barking up the wrong tree?
Lynn Walsh responds:
THANKS, BRUCE, for your comments. Regarding your query about declining capital investment, I agree that our analysis of trends within capitalism should be based on critical analysis of the appropriate empirical data. Your chart shows one measure of US investment: private (non-residential) investment as a percentage of corporate profits, which are a relatively volatile indicator. More revealing measures of investment are the growth of fixed capital stock (effectively, growth of the means of production) and private investment as a share of gross domestic product (GDP). GDP is the total spending on goods and services in the national economy, of which investment is one component. Investment as a share of GDP shows the weight of investment in the national economy.
Even the data for investment in your chart, however, suggests a long-run decline in investment as a percentage of profits. There were sharp (but short-lived) rises after 1980 (when the ultra-free-market, neoliberal revolution began under Reagan), between 1995-2001 (during the dot.com bubble), and during 2005-07 (when there was an explosive credit boom and housing bubble). Between 1980 and 2007 a growing share of investment was in information and communications equipment, a significant share of which was linked to the financial sector.
There is clear evidence of a long-term decline in capital investment. Capital accumulation is the key to economic growth. Increased capital stock is required to increase capacity and output, and investment is also the key to incorporating new technology in production. Capital expenditure, moreover, is a key source of demand, together with consumer demand. Figures for the growth rates of capital stock 1960-2004 (net growth after depreciation for worn-out or retired capacity) show that the pace of global capital accumulation slowed, especially in the advanced capitalist countries (see Andrew Glyn, Capitalism Unleashed , p86).
Table 2 shows that the growth rate for world fixed capital stock declined, despite the faster growth in China, South Korea, and some other semi-developed economies. For the industrial (advanced capitalist) countries as a whole, the growth rate declined from 5% in the 1960s to 3.3% in the 1990s. In the US, the growth rate declined from 4% to 2% during 2000-04. The main point is that, despite the implementation of neoliberal policies, the decline in the rate of investment was not halted.
Glyn further notes that private investment did increase rapidly in the 1990s in the US. However, this "did not drive the growth rate of the capital stock to unprecedented highs. This is because capital stock growth started from an exceptionally low point in the early 1990s. The… investment boom of the later 1990s halted the seemingly inexorable downward trend in the growth rate of the capital stock which had begun in the late 1960s. Moreover, when the boom came to an end in 2000 capital stock growth plummeted more steeply than ever before". (Glyn, p134)
Another more recent study analyses the "poor rates of private investment", despite the favourable conditions for big business and the super-rich created by neoliberal policies. (JG Palma, The Revenge of the Market on the Rentiers – Why Neoliberal Reports of the End of History Turned Out to be Premature, Cambridge Journal of Economics, 2009, 33/4 p853): "It is still truly remarkable to see how private investment failed to respond positively to the combined incentives of huge income polarisation cum political stability and dynamic growth of personal consumption, high profit rates and overabundance of finance. Private investment [in the US] instead actually declined as a share of GDP, falling cyclically from its peak of 18.5% of GDP in 1979, to just 15.5% in 2007". (Chart 3)
Despite the staggering increase in the share of income taken by the top 1% in the US, investment declined. The chart, says Palma, shows "the changing relationship between what top income earners take away from the economy, and what they put back into it in terms of improved productive capacity. In fact, towards the end of the period this relationship had changed so much that even the income share of the top 0.5% (ie only 700,000 families earning 18.6% of the total in 2006) ended up well above the share of all private investment in GDP (15.5%)".
The decline in investment has also been analysed by Ha-Joon Chang (23 Things They Don’t Tell You About Capitalism, 2010). "The immediate income redistribution into profits was bad enough, but the ever increasing share of profits in national income since the 1980s has not been translated into higher investment either. Investment as a share of US national output has actually fallen, rather than risen, from 20.5% in the 1980s to 18.7% since then (1990-2009). It may have been acceptable if this lower investment rate had been compensated by more efficient use of capital, generating higher growth, however, the growth rates of per capita income in the US fell from around 2.6% per year in the 1960s and 1970s to 1.6% during 1990-2009, the heyday of shareholder capitalism". (p19)
Even Alan Greenspan, when head of the Federal Reserve Bank, admitted there was an alarming ‘softness’ of capital investment, despite the abundance of cheap credit. In his testimony to Congress (House Committee on Financial Services, 20 July 2005), Greenspan acknowledged that "on average, countries’ investment propensities had been declining". Moreover, "softness in intended investment is also evident in corporate behaviour. Although corporate capital investment in the major industrial countries rose in recent years, it apparently failed to match increases in corporate cash flows. In the United States, for example, capital expenditures were below the very substantial level of corporate cash flow in 2003, the first shortfall since the severe recession of 1975".
Greenspan noted that Japanese investment "exhibited prolonged restraint" following the speculative bubble of the 1990s, while investment in the developing Asian economies (apart from China) "fell appreciably after the Asian financial crisis… Moreover, only a modest part of the large revenue surpluses of oil-producing nations has been reinvested in physical assets".
Greenspan (and subsequently Ben Bernanke) tried to blame the ‘shortfall of investment’ on the ‘excessive’ savings of countries such as China. However, their global saving glut (GSG) theory was sharply rejected by two economists working for the French central bank (Gelles Moëc and Laure Frey: Global Imbalances, Saving Glut and Investment Strike, Occasional Paper, Banque de France, February 2006): "The most striking feature of the present state of the global economy is not so much a saving glut as an investment strike, in spite of low long-term interest rates". "This also affects the US economy where corporate investment remains subdued relative to profits, adding to the gradual loss in its tradable productive capacity".
Moëc and Frey accept that global savings rose in the 1990s, "but the level seen in 2004 is by no means an unprecedented level. Contrary to the GSG assumption, an unprecedented low level of investment outside the US explains the bulk of the increase in global net lending".
Drawing on IMF data shown in their tables and charts, these economists show a worldwide decline in capital investment: "Japan and the euro area have displayed a clear pattern of ‘investment strike’ since the mid-1990s in Japan and since 2001 in the euro area. But emerging Asia excluding China has also displayed a sharp decrease in the investment rate. In the latter area, even if the investment rate has lately recovered, it still remains in 2005 almost ten GDP points below the 1995 level".
"Faced with financial imbalances which built up during the bubble years", Moëc and Frey continue, "US firms quickly managed to record high levels of profitability, thanks to aggressive action on labour costs. Nevertheless, business investment has not yet picked up as rapidly as profits. Consequently, the US non-financial corporate sector has recently displayed an unprecedented net lending capacity".
Finally, where is the evidence that a lion’s share (not "all") of the capitalists’ profits disappeared into the financial sector? The brief answer is that the ratio of financial assets to GDP in the US was between 400% and 500% in 1950-70. From the early 1980s, with the implementation of neoliberal policies, it shot up to around 900% by the early 2000s (Ha-Joon Chang, p238). Moreover, in the last three decades, the profits of the financial sector have been higher than the profits of the non-financial sector. In an article published in 2009, Simon Johnson, a former chief economist to the IMF (2007-08), gave figures for the share of corporate profits taken by the financial sector in the US: "From 1973 to 1985, the financial sector never earned more than 16% of domestic corporate profits. In 1986, that figure reached 19%. In the early 1990s, it oscillated between 21% and 30%, higher than it had ever been in the post-war period. This decade, it reached 41%". (Simon Johnson, The Quiet Coup, The Atlantic Monthly, May 2009)
This factual data (most of which has been referred to in previous articles), in our view, confirms the analysis of a crisis in capital accumulation put forward in Socialism Today over many years.