Investment is what's needed for Growth

One of the basic axioms of macroeconomics is that the single most important driver of economic growth is investment. We often hear about how the government has taken action to increase consumption; the 2% payroll tax holday is a good example of this. The reasoning in Washington (it was hard to write reasoning and Washington in the same sentence) is that the extra money in the pockets of Americans will lead to extra purchases which in turn will mean growth in the economy. There is no question that increased consumption will cause growth or at least avoid contraction; however, that effect is usually temporary. When the stimulus to consumption has ended, the economy moves back towards where it was before the stimulus. Now consider the effect of investment. Let's use the example of a new factory that gets built for 10 million dollars and compare it to the same amount of additional consumption. The cost to build the factory is another form of consumption; the steel, concrete and equipment that is purchased is the consumption rather than clothing, food and other daily needs. Once that consumption/construction is complete, however, the factory then starts producing new goods and with it new wealth. Every year, so long as the factory can turn a profit, that new plant will be adding to the economy. On the other hand, once the purchase of clothing and other personal items is over, it is truly done. Investment in the economy is truly the gift that keeps on giving.

In many respects, the lack of understanding of this basic principle is the main reason why none of the Obama programs for the economy have been successful. Using a quarter of the stimulus to pay for health and pension benefits or salaries for state employees was a methodology directed solely at consumption. Spending a tenth of the total on grants for "reasearch" at universities was mostly consumption as well. If the subjects of the research had been focused on those which could contribute to economic growth, then they could have been hybrids between consumption and investment, but sadly, most of the topics were focused on areas that had no such component. Indeed, some (like my personal favorite for worst of the worst, the research into the sex habits of coeds at Syracuse University) can only be described as a waste of time.

The latest report on GDP illustrates the failure of Obama's programs to generate investment. Prior to the recession, one of the bigger components of investment in the USA was construction. According to the government total investment in office, mall, residential, and multi-family construction in the last year before the downturn 2007 was a total of 7.2% of GDP. In 2011, almost three years after the formal end of the recession, investment in these areas was only 2.4% of GDP.

Obama's programs for the housing and other construction industries have all been focused on keeping people in homes that are being foreclosed. Each of the programs should properly be called a flop. The numbers of folks helped have been somewhere around 10% or less of the number expected by the government. Indeed, the only effect that the Obama programs have had has been to slow down the ability of the economy to clear the problem. Just in the last week or two, Obama announced formation of a new Justice Department strike force to look for wrongdoing among those involved with the mortgage industry who may have "caused" the recession. Anyone with any knowledge of the subject knows that this is an election year stunt to look good for the folks. Nevertheless, the formation of this DOJ unit may have caused the proposed settlements between the various states and the banks issuing mortgages to break down. Instead of a settlement which allows the market to clear, we continue to have a clogged system which effectively works to stop investment in home and multi-family construction.

Let's be clear. Obama's actions which slow or stop investment in residential construction SLOW DOWN ECONOMIC GROWTH!!!!! It may well be that Obama's actions play well with the middle class; only time will tell that. The problem, however, is that he is doing things that mean slower growth or even recession as we move forward. The US deserves a president who understands economics well enough to act for the benefit of the American people. The US deserves a president who weighs his actions by deciding what will help the economy rather than what will help his re-election campaign.