CAPITAL CONSUMPTION
By Kurt Richebächer
It used to be commonplace in economics that investment in
productive plant and equipment is the key to increased
productivity and rising living standards. Sufficient
investment spending takes care of supply and demand,
productivity and profits.
But the crucial, negative point to see about the U.S.
economy's development over the past 20 years is simple. The
key conditions for a high rate of saving and profits have
been recklessly ravaged through policies that boosted
consumption and financial leverage at the expense of
corporate accumulation of productive capital.
It also used to be commonplace in economics that somebody
who persistently spends more for consumption than he earns
doesn't get richer but poorer.
Implicitly, the same is true for a nation. Yet we keep
reading that America has enjoyed its greatest wealth
creation of all times in the past several years, vastly
outpacing the domestic and foreign debt growth.
How to make sense of that? In short, by distinguishing
again between micro and macro perspective. From an
individual's viewpoint, rising stock valuations
unquestionably add to his wealth. But the crucial point to
see is that this wealth adds nothing to the real economy
and in particular, nothing to its real wealth in the form
of productive plant and equipment. From the national
perspective, the only way to greater wealth is to construct
industrial structures and houses. Strictly speaking, it is
net capital investment.
Rising stock valuations, rather, create claims on the
economy. In the United States, they actually fostered the
protracted consumer borrowing and spending binges and, as
its counterpart, the exponential rise in domestic and
foreign indebtedness. For people with common sense, such
debt-financed consumption is a clear case of capital
consumption or wealth destruction.
In the consensus view, the sharp decline in U.S. business
fixed investment is due to prior overinvestment and existing
excess capacities. This assessment is based on the fact that
America had an unusually high gross investment ratio over the
past few years. In our view, the plunge of investment is due
to the extraordinary consumer spending excesses that
essentially resulted in a drastic shrinkage of the share of
GDP that is available for net investment.
What is the difference between the two measures? According
to the conventional first gauge, fixed capital investment
of firms in the nonfinancial sector accounted for 31% of
U.S. real GDP growth between 1997-2000. It was by far
America's highest investment ratio in history. According to
the second version that we use as a gauge, net investment
of firms in that sector accounted for 7.3% of GDP growth in
current dollars during this period.
Which of the two is the more reasonable calculation?
Net investment is gross investment less depreciation
charges. Normally the two move in lockstep, but they
diverge sometimes when depreciations slow or accelerate.
The latter happened in America in the past few years. As
business investment in short-lived computers and software
took a rapidly growing share of total investment,
depreciation charges sharply accelerated. A bigger chunk
out of gross investment is simply replacing capital
equipment that wears out, adding nothing to the capital
stock and national income.
Another major source of the big difference between the two
measures of investment derives from the so-called hedonic
pricing, in which America's government statisticians value
business investment in computers. In 2000, businesses spent
altogether $93.3 billion on new computers, up from $90.4
billion in the prior year. Measuring in real terms,
however, the statisticians come to a vastly higher figure
of $246.4 billion, up from $207.4 billion in the year
before.
By far the single biggest statistical boost to the U.S.
economy's investment ratio occurred in 1999. With a stroke
of the pen, the statisticians of the Commerce Department
took business software spending out of the corporate
expense accounts in their GDP statistics and instead
capitalized them as investment spending. In one sweep, this
drastically padded GDP growth, productivity growth and
profit growth.
To give an idea of the impact of this change: In 1997, the
prior year, recorded business spending on equipment was
$620.5 billion. In the current statistics, it amounts for
the same year to $764.2 billion. Lately, software has
accounted for 45% of total business investment in high-tech
equipment. "Hedonic" computer prices have, on the other
hand, been drastically revised downward.
Frankly speaking, it is a statistical muddle. It amazes us
how easily the large army of the world's financial and
economic experts can be fooled. The miserable reality is
that net investment and the capital stock have been sharply
falling in relation to GDP since the early 1980s.
Worldwide, forecasters are virtually united in saying that
the string of big losses in the stock markets is bound to
stop after three years. It does not bother them that the
very same forecast made a year ago went utterly wrong.
For sure, a mere lapse of time will not stop this downturn.
Regards,
Kurt Richebächer,
for The Daily Reckoning |
