While Robert Higgs no longer edits The Independent Review, he continues his unique commentary in the “Etceteras.” The newest issue is no exception and his “The Sluggish Recovery of Real Net Domestic Private Business Investment” should not be missed by anyone wishing to make senses of the Bush-Obama-Fed Great Stagnation (nor should last month’s “Real Gross Domestic Private Product, 2000–2012 be missed).
The abstract:
Five years after its bust and partial recovery, real net private business investment in 2012 remained 41 percent below its previous peak. This weakness plays a central role in the slow recovery in output and even slower recovery in employment.
The conclusion (footnote omitted):
The current situation is not simply an artifact of wounded banks’ reluctance to make new loans; many businesses are in a position to invest in long-term projects by using low-cost internal financing, but they are not doing so. Something else must be invoked to account for the bloodlessness of investors and entrepreneurs during recent years. I have repeatedly suggested that regime uncertainty deserves serious consideration in our attempts to understand the economy’s present sluggishness. Nothing in the foregoing survey of real net private domestic business investment leads me to abandon this view of the matter at this time.
Higgs adds in a footnote:
Much recent commentary and evidence on regime uncertainty, posted by me and others, appears at The Beacon, the Independent Institute’s group blog; available at
http://blog.independent.org/?s=%22regime+uncertainty%22&submit=go.
Higgs reminds us the difficulty selecting data to help us make sense of economic fluctuations. He argues:
Making sense of economic fluctuations is a daunting task. The economy comprises a gigantic set of interrelated assets, inputs, processes, transactions, and outputs, and its dimensions can be and have been measured in countless ways. If we are to speak sensibly about the economy as a whole—recognizing that almost anything we say about the whole may not apply to various subsets of it—we must carefully choose the variables that hold the most promise for helping us to understand its broad movements.
Those who have carefully studied capital structure (See Skousen’s Structure of Production or Peter Lewin’s excellent Capital in Disequilibrium) arguments know that the Keynesian compatible national income and products are very inadequate as the data tends to greatly understate the amount of current resource use that is actually future oriented – geared to future not current consumption. Mark Skousen provides some suggestive analysis with his discussion of Gross Domestic Expenditures. GDE according to Skousen “appears to be more than twice the size of GDP, and has historically been three times more volatile than GDP, and serves as a better indicator of business cycle activity. I conclude that consumer spending represents approximately 30 percent of total economic activity (GDE), not 70 percent as often reported. This conclusion is more consistent with the leading economic indicators published by the Conference Board.”
A graph (available on request) of private non-farm employment and real gross private domestic investment (St. Louis Fed data) over the recent boom-bust cycle and ensuing stagnation provides additional evidence, even using product and income accounts, that reinforces Higgs’s main point on the importance of investment for prosperity and employment. Fluctuations in private non-farm employment track fluctuations in real gross private domestic investment with a slight lag.
