Report Links U.S. Economic Stagnation to Decline in Private Sector Capital Investment

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The Information Technology and Innovation Foundation (ITIF) has released a new report which argues that the continued stagnation of the American economy can be linked to serious declines in capital investment.

Investment in new equipment and software is the primary means through which innovation, the key driver of economic growth, diffuses throughout the economy.

The Information Technology and Innovation Foundation (ITIF) has released a new report which argues that the continued stagnation of the American economy can be linked to serious declines in capital investment. Restoring America's Lagging Investment in Capital Goods analyzes trends in private sector investment in buildings, equipment and software over the last three decades, investigates the causes of the decline, and proposes policy reforms designed to spur increased investment growth moving forward.

“Investment in new equipment and software is the primary means through which innovation, the key driver of economic growth, diffuses throughout the economy,” says Robert Atkinson, President of ITIF and co-author of the report. “Without new capital investment refreshing our nation’s capital stock, innovation loses its power, productivity growth stagnates, and national economic competitiveness declines.”

Historically, private capital investment has been a main engine of growth. While business investment grew by 2.7 percent per year on average during the 1980’s and 5.2 percent annually during the 1990’s, from 2000 to 2011 it grew by just 0.5 percent. Moreover, capital investment that was once broadly distributed across industries is now much more concentrated in a few select domestic service sectors, while industries, especially manufacturing, that once powered U.S. investment growth and global competitiveness have seen sharp declines.

The authors argue that “short-termism,” the growing focus on short-term profits over long-term investment by many firms, and the increasing trend to invest offshore, especially in lower cost nations, has had a deleterious effect on private investment. To restore robust capital investment rates in the U.S., the report calls on Congress to establish an investment tax credit to encourage additional investment in machinery, equipment and software. The Obama Administration should also establish a task force on market short-termism to recommend policies to ameliorate the problem.

“Tangible investment in new equipment and software is an essential input to a healthy and competitive innovation ecosystem,” Atkinson adds. “It is therefore essential that policymakers make addressing this problem a top priority of our national growth and competitiveness agenda.”

Read the report.

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William Dube
ITIF
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