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Growth Anemia: Blame a Collapse in Business Investment
By Lawrence Kudlow and Stephen Moore*
GDP for the first quarter of 2016 came in at a paltry one-half of one-percent. That sorry showing follows growth of 1.4 percent and 2 percent in the previous two quarters. If such a thing is possible, the already anemic economy is actually getting worse.
But even worse than that, the latest GDP numbers reveal a collapse in business investment, the real driver of the economy.
When businesses don’t spend and invest, they don’t hire and cannot offer better-paying jobs. Business investment and wages are two sides of the same mirror. If a company purchases five trucks rather than 10, there are five fewer trucking jobs. If employers don’t invest in more computers, there are fewer programming jobs. If businesses don’t purchase more jackhammers and cranes, fewer construction workers are hired.
Business investment hasn’t grown for two years. Over the past two quarters, total business fixed investment has fallen by an annualized average of 4 percent. Business equipment and software has dropped by more than 5 percent. Non-residential structures — like commercial office space, shopping malls, factories, and hotels — have dropped by nearly 8 percent.
But let’s go further back. For the entire 32-quarter economic recovery, business fixed investment has averaged just 1.1 percent at an annual rate. Since 1960, however, business fixed investment has averaged 4.4 percent at an annual rate. So the present expansion in business investment is roughly one-quarter of the 55-year average.
Why? One key factor is tax policy, especially business tax policy.
At 40 percent for combined federal and state business tax rates, the US has the largest corporate tax burden in the developed world. We double-tax corporate profits earned overseas, as virtually no other country does. Our depreciation rates for investment tax expensing are among the worst in the world. And despite all the talk about corporate tax reform, nothing gets done — even under a Republican Congress.
What’s more, the Obama administration has raised tax rates on capital gains, dividends, and income (paid by small-business pass-throughs). So, as the tax cost of capital has gone up, business investment has come down.
Arthur Laffer has taught us that “if you tax something, you get less of it.” That’s why firms are moving offshore in droves. It’s not about being unpatriotic. It’s that it doesn’t pay, after-tax, to invest in the United States.
A second key reason for the business-investment slump is monetary policy. While this may not be the right time for rate hikes, ultra-low interest rates have led to financial engineering rather than the deployment of excess corporate cash for productivity-enhancing investment.
Rather than invest in job-creation and higher wages, firms are buying back stocks to boost price-earnings ratios. In many cases, they are even borrowing money they don’t need to buy back stocks.
A third key reason for the business-investment collapse is over-regulation. Obamacare rules and mandates are job-killers. Dodd-Frank red-tape costs have held back lending to such an extent that business start-ups have practically come to a halt. And community banks have drastically pulled back loans to existing small businesses.
Then we have the Obama EPA’s new rules, which amount to a war on fossil fuel. The president pushes for climate-change regulations instead of a massive build-out of energy infrastructure, including pipelines, liquid-natural-gas terminals, and new refineries.
Want more manufacturing? The energy business, and the potential for North American energy independence, is the key. Hillary Clinton, and her promise to end oil and gas fracking, will pull us further in the wrong direction.
Many people do not to understand that business investment is a critical prosperity-booster, leading to more jobs, higher wages, and stronger family income. Put another way, rising tax and regulatory burdens that penalize investors and businesses also punish middle-income wage earners.
And it’s these wage earners who would benefit most from business tax reforms, such as a 15 percent corporate rate for large C-corps and small S-corps. This should be accompanied by immediate tax-deduction expensing for new investment and a territorial tax regime that would stop double-taxing profits earned abroad.
Study after study shows that corporate tax reform is a middle-class tax cut, not a tax cut for the rich. You see, corporations don’t really pay taxes. They simply collect them and pass the cost along in the form of lower wages and benefits, higher consumer prices, and reduced shareholder value.
The overarching theme of this election is an angry revolt by the middle class over the fact that jobs and wages have barely increased in the past decade. They blame Washington, China, immigration, power elites, and almost everything else. So be it. There is a lot of work to be done on all these fronts. But without radical tax, regulatory, and currency reform, business investment will never fully recover.
And neither will the economy.
* Stephen Moore is an economist at the Heritage Foundation.
Published in General
If Clinton or Trump win the Oval Office, Obamacare will stand. How would the economy adjust to certainty that the regulations will remain?
Would Trump relax regulations on banks and investments? Would Cruz? On corporate taxes, how big a drop is the GOP leadership even hoping for?
From personal experiences business only has so much money to go around. It’s not anymore difficult than that.
Mr. Kudlow should listen to Sen. Cruz and Mr. Laffer talk about how Ted Cruz’s tax plan will jump start growth by unlocking capital investment.
Mr. Kudlow has nailed it here.
What is “Wall Street”? It is where businesses go to find capital to fund their growth.
When Wall Street is in trouble, everyone else is too.
Good piece by Mr. Kudlow as usual. One glaring error, or massive overstatement depending on matter of degree. Our current insane corporate tax system does not, as a matter of course, “double tax” corporate profits earned overseas. US based companies essentially pay 35% on all income earned worldwide. That is the system. If a company pays say, 25% tax, to the Canadian authorities on income earned in Canada, they owe 35% tax to the US authorities on that income when repatriated to the US but receives a credit for the 25% paid in Canada so only pays an incremental 10% in the US when repatriated. It is not double taxed like shareholder dividends.
It is truly awful for many, many other reasons – distorts incentives, encourages companies to not repatriate capital, encourages US companies to invest overseas, grossly misallocates human capital in the US (in the private sector and the government) – but it is incorrect to call it double taxation.
It is no accident that the new normal is a low growth, sluggish economy, given the crippling disincentives put in place by our omniscient and compassionate government. This is the thrust of the radical transformation we were promised. Combined federal, state and local income tax rate in New York and California? 55%. Average personal income $27,500 (down from $29,000 in 2000). Cost of “fairness?” Priceless.
Aaron, Trump’s business tax plan would certainly be pro growth.
No business of any size, from a Fortune 500 to a mom and pop shop to a freelancer living job to job, will pay more than 15% of their business income in taxes. This lower rate makes corporate inversions unnecessary by making America’s tax rate one of the best in the world.
He says he will eliminate Obamacare, although he has, in the past, stipulated for single payer government health care, I do not expect that he will push for that with a Republican congress.
Trump is definitely not an ideologue. Some of his ideas trend conservative, others do not. I believe he is about to win the nomination. Therefore, jumping up and down and crying, like George Will has done, is not helpful. Conservatives can influence Trump if they do not alienate him. In Trump’s vernacular, we should be “nice” to him. One thing is for 100% certain…voting for Hillary Clinton, as Will proposes, will yield nothing but progressive agiprop and far left Supreme Court justices. She has stated that fracking will end. We will all spend our winters freezing and our summers in a stifling sweat.