Yesterday we discussedhow there's been little job creation during this "great recession" and that is why unemployment is so high. Another reason the economy is not recovering, is due to low private investment. That according to Robert Higgs writing in today's Investor's Business Daily:
Gross private domestic investment peaked in 2006. Between the first quarter of that year and the second quarter of 2009, it fell precipitously, by nearly 34%.
During the second half of 2009, investment spending increased by only 10%, so that late last year it was still (when measured at an annual rate) running 29% below its early 2006 level.
This huge decline in investment spending portends an extended period of slow economic growth, lasting several years and perhaps longer. Worn-out equipment, obsolete software, ill-maintained structures and depleted inventories are not the stuff of which rapid, sustained economic growth is made.
But why is investment so low? Because of the spending by government:
Federal government spending, meanwhile, has raced ahead. From 2007 to 2009, government purchases of newly produced final goods and services — the federal government's "contribution" to GDP — increased by over 13% in constant dollars.
Unfortunately, while private investment is the engine of economic growth, government spending (despite what generations of Keynesian economists have asserted) is the brake. To understand this negative relationship, we need only scrutinize how the federal government's spending is determined: namely, by political processes devoid of economic rationality.
In this light, we can appreciate that enhanced government spending does not bulk up the economy, nor merely crowd out worthwhile private activity. Instead, it undercuts, penalizes and distorts everything that private parties attempt to do to create wealth. Ham-fisted government regulations and additional taxes are known killers of economic growth.
The investors' famine and the government's feast therefore are not merely coincidental, but causally connected.
So what's the solution? Well, how about restoring stability and reducing uncertainty by not threatening new taxes and new onerous regulations? In other words, just the opposite of what the Obama Administration and the Democrats in Congress are doing.
But as Glen Reynolds often points out: tax cuts don't give opportunities for graft.
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