U.S. Investment Heroes of 2015: Why Innovation Drives Investment

By / 9.28.2015

Back in 2012, the Progressive Policy Institute identified the shortfall in business capital spending— or the “investment drought”, we termed it—as one of the major economic problems facing the U.S. economy. As we wrote then, “su1stainable economic growth, job creation, and rising real wages require domestic business investment.”

Unfortunately, three years later, the United States is still suffering from an investment drought. Capital per worker-hour has fallen since 2010, meaning that the average American worker has less equipment, buildings, and software to use, exactly the opposite of what we would want. More worrisome, this is not simply a short-run trend. In fact, the 10-year growth rate of productive capital is only 2 percent, by far the lowest in the post-war era (Figure 1).

Leading economists are increasingly concerned that the weakness in domestic investment is making it hard for businesses to boost productivity, measured by output per hour. The 10-year growth rate of nonfarm business labor productivity is only 1.3 percent, compared to 3 percent as recently as 2005. In a recent speech, Jason Furman, head of the White House Council of Economic Advisers called the decline in prod2uctivity growth “an investment- driven slowdown.”

A 2015 report by the OECD on productivity addresses the recent productivity slowdown and the question of whether it is temporary or “a sign of more permanent things to come.” They assert the importance of innovation for achieving growth, writing “productivity is expected to be the main driver of economic growth and well-being over the next 50 years, via investment in innovation and knowledge-based capital.”

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