It’s election season in the US and so politicians, supported by their favorite economists, are busy telling us how they will lift the US economy out of its doldrums, ensuring more and better jobs for Americans.
A case in point: the New York Times ran an article highlighting how most Republican presidential candidates are pushing for some form of consumption tax coupled with reductions in income and corporate taxes.
Then the story adds:
. . . the broad direction of their proposals — toward taxing spending rather than income — is one that many economists in both parties applaud. It is also one that politicians, of necessity, may eventually embrace. . . .
“Every one of the Republican plans I have looked at closely has more of a consumption basis,” said Leonard Burman, a former official in President Bill Clinton’s administration who directs the Urban-Brookings Tax Policy Center.
Democratic politicians typically oppose taxing consumption on fairness grounds; lower earners spend a greater proportion of their income than higher earners. They favor what are called progressive taxes, those that tax a higher proportion of wealthier people’s income. That instinct is especially acute in an era of stagnant middle-class wages and widening income inequality.
Yet Democratic economists, like their Republican counterparts, say taxing consumption encourages savings, investment and greater economic growth.
Whoa!—can that be true, that there is a growing consensus for a shift in taxes that would penalize consumption, and that this is the best way to promote savings, investment, and greater economic growth?
Reading this, one might well assume that weak savings must be the main cause of the low investment and stagnant economic growth in the US. However, as the economist Michael Roberts demonstrated in a recent blog post, such an assumption would be wrong.
Roberts, drawing on both an article by Martin Wolfe (a Financial Times economic analyst), and a research study by Joseph W. Gruber and Steven B. Kamin (two US Federal Reserve Bank economists), pursues the reason for weak investment in advanced capitalist economies, including the US, by examining trends in corporate savings and investment.
As Wolfe points out,
companies generate a huge proportion of investment. In the six largest high-income economies (the US, Japan, Germany, France, the UK and Italy), corporations accounted for between half and just over two-thirds of gross investment in 2013 (the lowest share being in Italy and the highest in Japan).
Because corporations are responsible for such a large share of investment, they are also, in aggregate, the largest users of available savings, but their own retained earnings are also a huge source of savings. Thus, in these countries, corporate profits generated between 40 per cent (in France) and 100 per cent (in Japan) of gross savings (including foreign savings) available to the economy.
The following three charts all come from Wolf’s article. This first shows trends in corporate gross savings as a percent of GDP for all six countries. As we can see, corporate gross savings as a share of GDP grew, although marginally, in every country but France over the period 1998 to 2014.
The next chart shows trends in corporate investment as a percent of GDP. In contrast to corporate savings, the investment ratio fell noticeably in every country, again with the exception of France, over the same time period.
Combining the two ratios yields the trend in net corporate savings as a share of GDP, which is illustrated in the following chart. The take away is clear: corporations are saving more than they are investing, which means that the decline in investment cannot be explained by a shortfall in savings. Thus, it is foolish to think that we will boost investment and growth in the United States, or the other countries, by taxing consumption.
So, what explains the lack of corporate investment? Gruber and Kamin’s investigation into what they call the “corporate saving glut led them to the following conclusions:
First, . . . in most of the G7 economies we studied, the net lending of nonfinancial corporations rose to very high levels in recent years, and this rise started even before the GFC [Global Financial Crisis]. . . . Second, consistent with other studies of recent investment behavior, we found that models estimated up through 2006 generally tracked the weakness of actual investment during the GFC and its aftermath; conversely, models estimated up through 2001 often over-predicted investment in subsequent years, both before and after the GFC. We interpret these results as suggesting that investment in the major advanced economies has indeed weakened relative to what standard determinants would suggest, but that this process started well in advance of the GFC itself. Finally, we find that the counterpart of declines in resources devoted to investment has been rises in payouts to investors in the form of dividends and equity buybacks (often to a greater extent than predicted by models estimated through earlier periods), and, to a lesser extent, heightened net accumulation of financial assets. The strength of investor payouts suggests that increased risk aversion and a precautionary demand for financial buffers has not been the primary reason firms have cut back investment. Rather, our results are consistent with views that, for any number of reasons, there has been a decline in what firms perceive to be the availability of profitable investment opportunities.
Roberts appropriately highlights the last sentence. We know that capitalism is driven by the pursuit of private profit. The question for us is: How well does such a system serve majority interests when during this period of great social need our leading corporations are unwilling to invest because existing opportunities do not offer them sufficient profit?
It is as good a time as ever in the US to reject false strategies for economic renewal and seriously begin conversations about alternative ways to organize our economy and political system.
Reports from the Economic Front 