Confusion over the nature of investment is pervasive among economic policymakers and commentators, has bled into the popular culture, and threatens the nation’s future prosperity.
This report provides a systematic, firm-level study of declining business investment and the shift among American corporation toward disgorging cash to shareholders.
Economists and policymakers have forgotten the meaning of the word “investment.” Actual investment requires the deployment of resources in the real economy, toward the development of the nation’s productive capacity. Most of what we call investment, by contrast, entails merely the buying and selling of assets on the secondary market—piles of cash and securities trade hands, but no one builds anything.
The extraordinary growth of the financial sector’s non-investment has coincided with a sharp decline in the real economy’s actual-investment, and not by coincidence. The sector’s massive profits rely not on value-creating transactions but on extracting the wealth that once fueled the real economy’s growth. In pursuit of that profit, the top business talent that would once have conceived and implemented the actual-investment now flows into the hedge funds and private equity shops that traffic in non-investment or active disinvestment.
The results are plain to see in the nation’s slowing rate of investment, declining international competitiveness, stalled productivity growth, and stagnant wages. Equity prices continue to surge higher, disconnected from economic fundamentals, but that can last only so long. The S&P 500’s closing price reflects no actual wealth, only an assumption about the future growth and productivity of the private sector. Without actual-investment, that wealth will not materialize.