The Investment Recession Continues by Brien Desilets

This article, The Investment Recession Continues (Brien Desilets, March 2013), argues that weak investment—rather than consumption—remains the central obstacle to U.S. economic recovery following the 2008–2009 crisis. By late 2012, total investment was still 14% below its 2006 peak, with private investment down more than 15% and government investment down 12.5%, while consumption had already surpassed pre-recession levels. Desilets contends that policy responses like the American Recovery and Reinvestment Act focused too heavily on consumption support and income transfers instead of infrastructure investment, and that new initiatives like MAP-21 and expanded TIFIA lending are insufficient compared to the $400 billion quarterly shortfall in real investment. He calls for urgent fiscal measures—such as corporate tax reform and a clearer distinction between government consumption and government investment—to stimulate infrastructure and capital formation, warning that without such action the U.S. risks being stuck in prolonged stagnation or another downturn

1. The Investment Recession Continues
Brien Desilets
March 2013

US economic investment levels slowed in 2012 and even turned negative for both the public and private
sectors in Q4. Total investment for Q4 reached $2.3 trillion in 2005 dollars. The peak was $2.7 trillion in
Q2 2006. Private investment peaked at $2.3 trillion in Q1 2006 and was down by more than 15 percent
from the peak in Q4 at $1.9 trillion. Government investment peaked at $439 billion in Q3 2010 and has
since fallen off to $384 billion, or down by about 12.5 percent. Total investment is down about 14 percent
from its pre-recession peak. Meanwhile, government consumption is down only 5 percent from its Q4
2009 peak in real terms and private consumption is already 4 percent above its pre-recession peak.

Given this low level of investment in the economy, the need for infrastructure improvements and new
infrastructure, the high unemployment rate, low borrowing costs and low overall economic growth, the
conditions are right for government action in the investment sector. The American Recovery and
Reinvestment Act was more focused on income transfers and consumption support than on infrastructure
investment. Notable exceptions such as the renewable energy push were too little to have the required
impact on the overall economy. Last year’s new transportation bill, Moving Ahead for Progress in the 21
st

Century (MAP 21), and its expansion of the Transportation Infrastructure Finance and Innovation Act
(TIFIA) program from $1 billion a year to $17 billion for this year and next may have an impact, but as
investment levels are down by $400 billion a quarter in real terms, this is unlikely to deliver the needed
punch to the economy either. Rising natural gas prices may help to incentivize and accelerate investment
in the shale gas boom. However, the 13 percent drop in iron ore prices over the past month does not
bode well for commodities overall.

Quick action by the President and Congress is needed. The extension of the Bush tax cuts has done little
to boost sustainable economic growth. With private consumption already above its pre-recession levels,
investment levels need to be the focus of future actions. Monetary policy has also failed to deliver the
required stimulus to the economy. The solution lies with fiscal policy. Recent indications of bipartisan
support for corporate tax rate reductions are encouraging. Both parties also would do well to begin at
least discussing the differences between government consumption and government investment. That
may lead to the discovery of some common ground between them. Without a concerted policy to boost
investment in the economy, we are doomed to muddle along with low growth, or even worse: another
recession.