There are a large number of indicators of where the US economy is likely to go in the next few years. One of particular importance is investment by business in capital items. Raising capital expenditures has always been a policy goal among those who want to grow the economy for obvious reasons. After all, if a company takes its cash and build a new factory, there will be economic activity generated for construction companies, material suppliers and equipment manufacturers. More important, that factory will provide years of employment for many workers and it will produce goods that will be available in the US economy. The truth is that these expenditures (commonly called CapEx) are more important to the long term health of the economy than any government program to boost the economy.
So where is America today with CapEx? The sad truth is that these expenditures are lower today than they were fifteen years ago. CapEx fell with the recession seven years ago, and they have not really recovered since then. Six years into the Obama "recovery" the economy is still gasping and wheezing rather than showing robust growth. One of the principal reasons for this is the failure of CapEx to grow as would be normal in almost any prior recovery.
How can this be? We know that the cost of capital for business is low right now. Interest rates remain extremely depressed. Stock prices are high, so equity capital is more easily available. These two together mean that the cost of capital is not the reason for the failure of CapEx to grow. So what is keeping these expenditures from recovering?
There are a number of reasons for the lack of CapEx recovery. One is clearly the American tax structure. Investing in the USA will produce profits that will be taxed at the US rate of 35%, the highest rate of corporate taxation in the world. For the last six years, Obama has said that he wants to revise the American corporate taxation structure, but he has never offered a plan or even sat down to discuss possibilities with Congress. Indeed, Obama's only proposals that would have affected taxation of business have all been to raise tax levels on particular activities (like oil and gas drilling). With business taxes extremely high, American firms are investing outside the country where their returns will be better. But not all investment is done by corporations; some is individual. There, the tax system has changed to make returns on investment worse as well. Individuals who might make major investments have seen their tax burden rise by about 20% under Obama for the income earned from those investments. If these are items for which capital gains taxation would be appropriate, the rise in taxation has been about 50% under Obama. This too discourages new investment.
A second reason for the lack of investment is new regulation. Just think how many power plants were not built because first of uncertainty about the new regs from the EPA regarding such plants and then, once the regs were actually issued, because of the harsh requirements that drove the costs up for such plants. China builds power plants almost as if they were on an assembly line, and those new plants produce power at a much lower cost than their America counterparts. America actually has an aging power system that, because of regulations, produces power at a much higher cost. Or how about all those land use rules? If one wanted to build a new building in New York City (or many other localities), how many committees, agencies and the like must approve the configuration, use, etc. of the structure? I've written before of my own experience with the State of Connecticut which for a new school building required construction of a sewage treatment facility three times larger than necessary for the maximum school population along with a huge septic system sufficient for a school population four times that which would be in the building as well as a new well system sufficient to support water needs two and one half times those which were expected. This nonsensical set of water requirements added almost twenty percent to the cost of the structure and came about because each of the three systems (sewage, septic and well) were government by different agencies which refused to consider the effect of requirements by the other two. Regulations or, more precisely, regulations run amok have driven the cost of new installations much higher so that fewer get built.
A third reason for the lack of investment is uncertainty caused by government action. How many investments were put on hold while companies waited to see the impact of Obamacare? No one knows the exact answer, but we all know that the impact was considerable. For the last five years, at least, the president has had no coherent plan for the economy. Obama gives a few speeches a year on the subject, but he never puts forth an actual plan. There is no leader who instills confidence in the business community so that they will go ahead with new investments. The leaders of a large company need to have faith that a five year investment program will start to produce results at a time when the economy is expected to be more vibrant. No one can expect that now.
There are surely other reasons why CapEx have not recovered, but the three above are extremely important ones. It seems safe to say that Obama is not going to change in his last year and a half; we are stuck with him as he is. Nevertheless, as 2016 approaches, we will soon be in the thick of the presidential race. Each candidate is going to have to explain how he or she would take steps to increase capital expenditures. Platitudes cannot be enough. We need specifics.
So where is America today with CapEx? The sad truth is that these expenditures are lower today than they were fifteen years ago. CapEx fell with the recession seven years ago, and they have not really recovered since then. Six years into the Obama "recovery" the economy is still gasping and wheezing rather than showing robust growth. One of the principal reasons for this is the failure of CapEx to grow as would be normal in almost any prior recovery.
How can this be? We know that the cost of capital for business is low right now. Interest rates remain extremely depressed. Stock prices are high, so equity capital is more easily available. These two together mean that the cost of capital is not the reason for the failure of CapEx to grow. So what is keeping these expenditures from recovering?
There are a number of reasons for the lack of CapEx recovery. One is clearly the American tax structure. Investing in the USA will produce profits that will be taxed at the US rate of 35%, the highest rate of corporate taxation in the world. For the last six years, Obama has said that he wants to revise the American corporate taxation structure, but he has never offered a plan or even sat down to discuss possibilities with Congress. Indeed, Obama's only proposals that would have affected taxation of business have all been to raise tax levels on particular activities (like oil and gas drilling). With business taxes extremely high, American firms are investing outside the country where their returns will be better. But not all investment is done by corporations; some is individual. There, the tax system has changed to make returns on investment worse as well. Individuals who might make major investments have seen their tax burden rise by about 20% under Obama for the income earned from those investments. If these are items for which capital gains taxation would be appropriate, the rise in taxation has been about 50% under Obama. This too discourages new investment.
A second reason for the lack of investment is new regulation. Just think how many power plants were not built because first of uncertainty about the new regs from the EPA regarding such plants and then, once the regs were actually issued, because of the harsh requirements that drove the costs up for such plants. China builds power plants almost as if they were on an assembly line, and those new plants produce power at a much lower cost than their America counterparts. America actually has an aging power system that, because of regulations, produces power at a much higher cost. Or how about all those land use rules? If one wanted to build a new building in New York City (or many other localities), how many committees, agencies and the like must approve the configuration, use, etc. of the structure? I've written before of my own experience with the State of Connecticut which for a new school building required construction of a sewage treatment facility three times larger than necessary for the maximum school population along with a huge septic system sufficient for a school population four times that which would be in the building as well as a new well system sufficient to support water needs two and one half times those which were expected. This nonsensical set of water requirements added almost twenty percent to the cost of the structure and came about because each of the three systems (sewage, septic and well) were government by different agencies which refused to consider the effect of requirements by the other two. Regulations or, more precisely, regulations run amok have driven the cost of new installations much higher so that fewer get built.
A third reason for the lack of investment is uncertainty caused by government action. How many investments were put on hold while companies waited to see the impact of Obamacare? No one knows the exact answer, but we all know that the impact was considerable. For the last five years, at least, the president has had no coherent plan for the economy. Obama gives a few speeches a year on the subject, but he never puts forth an actual plan. There is no leader who instills confidence in the business community so that they will go ahead with new investments. The leaders of a large company need to have faith that a five year investment program will start to produce results at a time when the economy is expected to be more vibrant. No one can expect that now.
There are surely other reasons why CapEx have not recovered, but the three above are extremely important ones. It seems safe to say that Obama is not going to change in his last year and a half; we are stuck with him as he is. Nevertheless, as 2016 approaches, we will soon be in the thick of the presidential race. Each candidate is going to have to explain how he or she would take steps to increase capital expenditures. Platitudes cannot be enough. We need specifics.
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