Collapsing Investment and the Great Recession

[marmar]

Collapsing Investment and the Great Recession

Friday, 26 July 2013 09:10
By Gerald Friedman, Dollars & Sense | News Analysis


Investment in real inputs - structures and machinery used to boost future output and productivity - is one of the ways that an economy grows over time. In a capitalist economy, such investments are also crucial for macroeconomic stability and full employment because they provide an “injection” of demand to balance the “leakage” caused by personal and institutional savings. The Great Recession that began in 2007 was marked by a collapse of investment unprecedented since the Great Depression, as well as a dramatic drop in overall production and a sharp jump in unemployment. Since 2009, overall output has been growing again, but we have seen a much slower recovery of investment than after other recessions since 1947. The worst economic crisis since the 1930s, the Great Recession came after a long period of declining investment, and a break in the linkage between corporate profits and new investment.

Rising Profits, Falling Investment: The share of national income going to investment (net of depreciation of existing plant and machinery) has been declining since the beginning of the “neoliberal” era, around 1980. Since the start of the Great Recession, net investment as a share of GDP has plummeted to its lowest level since the 1930s. This sharp drop in investment comes despite sharply rising profits.



Monetary Policy Isn’t Working: The Federal Reserve has helped to shorten past recessions by driving down interest rates to lower the cost of borrowing and so spur investment. During the current crisis, the Fed has conducted an aggressive monetary policy, raising the money supply to lower interest rates. But it has had little effect on investment. While lower interest rates have had only a weak effect on investment in the past, monetary policy has had no discernible effect in the last few years, as investment rates are dramatically lower than would have been expected given the level of interest rates. Substantial excess capacity, weak expectations of future sales, and corporate strategies to shift production outside the United States all may be contributing to the lack of investment demand.



Low Investment Impedes Recovery: In one respect, the current recession resembles past experience. Low rates of investment are associated with high rates of unemployment, just as in previous economic downturns. The difference is that, three years after the official end of the Great Recession, the unemployment rate remains persistently high, and investment remains dramatically lower than in past recoveries. .........................(more)

The complete piece is at: http://truth-out.org/news/item/17801-collapsing-investment-and-the-great-recession

[chervilant]

1. I find it fascinating that economists

talk about this "Great Recession" as though it's over. Then, they trot out gleeful comments about the bull market (usually), and their overused chestnut about the 'normalcy' of boom/bust cycles in our robust and sacrosanct capitalist economy.

Meanwhile, the vast majority of us are struggling to 'put food on our families,' and keep a roof over our heads.

Oh, but, we might win that ginormous lottery! Dangle that wealth carrot just a wee bit closer, won't ya?

[nashville_brook]

2. +1

[bhikkhu]

3. There is a great deal going on...

but its hard to argue that production continues to suffer, and that a lack of investment has crippled the recovery. From another very real perspective, you could write an article about how US production has reached an all-time high.

There is a great deal going on as far as changing methods of production, in the long-term policies of dollar valuation, and technology in general that could easily skew things to make a graphic seem to say things that may not actually be the case.