Thursday, July 25, 2013

Why are American companies not investing?

Profits of American companies are at a record high; the cost of capital is at a record low. Yet American companies are not investing. The facts: pre-tax profit are 12% of GDP while investment is a mere 4%. Why? An article in FT attempts to shed light on this mystery:

  • Excess capacity was created in the boom years and this effect has to wear off before fresh investment can begin (one notable area is housing)
  • Excessive regulation is stifling investment (for example, the high costs associated with compliance).
  • Profitability has been boosted by more use of IT, which replaces workers with computers. But this does not explain why higher profit is not being ploughed back into investment
  • Investment is happening but it is intangibles such as brand-building, research and better organisation
  • High profitability reflects rent from monopolies (Paul Krugman)
  • Wall Street's focus on quarterly numbers means that it makes more sense to focus on cost-cutting and efficiency than on risky investment, especially when the economic outlook is murky
  • Profits are being appropriated by avaricious managers rather than going into investments that would benefit shareholders
 None of these would explain the phenomenon fully but, together, they add up to a worrying narrative. As the author indicates, it's time for policy makers to get their acts together. 

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