Book Description

Investing in our nation's future can mean different things to different people. Members of local school boards understand that functioning heating and air conditioning systems help students learn. College coaches know that a bigger stadium with more comfortable seats and better vendors will make for a more enjoyable experience that, in turn, will result in higher revenues and more competitive athletic programs. And broadcast executives invest in new, high definition cameras to give viewers superior picture quality to build program loyalty. These types of investments have one thing in common -- they allow schools, sports teams, and TV stations to be more productive. Teachers, athletes, and newscasters can generate a more enjoyable experience and more revenue in the same amount of time. That's the definition of high productivity. Similarly, business investment is related to a company's productivity and ultimately to the entire economy's performance. More business investment can lead to higher future productivity growth via an enlarged capital base. The rewards of higher productivity growth come in the form of more money for workers to spend on consumption items. This extra money will provide businesses with an incentive to invest more in their buildings and equipment, thereby laying the foundation for even higher productivity in the future. The virtuous cycle of higher investment, rising productivity growth, and growing income helped lift almost all economic boats in the late 1990s. Since the turn of the century, however, investment growth has been anemic, productivity growth has declined, and income growth has stagnated. A virtuous cycle is in danger of becoming a vicious cycle. Slow income growth does not give business executives an incentive to invest more money in growing their businesses, which in turn hampers productivity growth, thereby reducing future income growth. Our national economy is not necessarily locked into such a vicious cycle, but government policymakers are currently ignoring these trends at our peril. This paper reviews the existing evidence on business investment and productivity growth.