Greenspan gets it

Alan Greenspan gets a bad press in this blog.  The great ‘maestro’ of the global credit boom and bust gets a good whacking from me (particularly in my recent paper, The causes of the Great Recession) and by others.  But Alan’s recent piece in the Financial Times, Fear undermines America’s recovery, 6 October) did pick up a key piece of data.  Greenspan points out that whether capitalist companies will invest more to restore jobs depends on their confidence that the economy is recovering and people and other companies are willing to buy more of their goods or services.  A good measure of willingness to invest, says Greenspan, is, from the amount of cash that a company is taking in, how much it is prepared to reinvest in plant, equipment and materials rather than hold on deposit or spend on buying back its shares or speculating in financial markets.

You can measure this by the ratio of US corporate investment in fixed assets to internal corporate fund flows.  This is how it looks in the US right now.

As you can see, the share of non-financial corporate cash going into investment is at all-time low of 79%.  US capitalists don’t want to invest in new capacity, at least not yet.  Sure, profits have risen sharply from the depths of the slump in mid-2009, but that has been achieved by sacking millions of Americans, closing down unprofitable units, shifting work to cheaper regions and intensifying the work levels of existing staff.  As a result, profitability has risen.  The mass of profits in top 500 US companies is now up 10% from 2008, although below the peak of 2006.  But, and here is the rub, sales revenues are still 6% below the levels of 2008.

When there is doubt about future sales growth and when there is still considerable capacity available to use (see the post, Capacity utilisation and the rate of profit, 16 September 2010) and a lot of financial debt to pay down (see the post, America on a debt diet, 6 October 2010), then capitalists won’t invest in new capacity to grow the economy.  Indeed, as one commentator pointed out, “companies are not spending much on anything but necessary maintenance.” (Howard Silverblatt, S&P senior analyst).

Indeed, US corporate net new investment in fixed assets (that’s after depreciation) is falling for the first time since records began.

And investment in productive capacity is key to sustainable growth.  Don’t believe as the underconsumptionists do, that booms and slumps are due to the up and downs in workers’ spending.  Recessions are never triggered by a collapse in consumer spending, even though such expenditure accounts for the bulk of GDP and it often looks like that.  Rather, it is investment which plummets, dragging down overall activity and jobs (and eventually feeding into consumer spending).

Robert Higgs, of the Independent Institute in California ( makes the valid point that US consumer spending as a share of GDP actually increased during the Great Recession, going up from 69.2% in Q4’07 to 71% in Q2’09.  In contrast, private domestic US investment peaked in Q1’06 when $2.3trn (in 2005 dollars) were spent by firms, worth 17.5% of GDP; it troughed in Q2’09, having collapsed 36% to $1.45 trn, 11.3% of US GDP.

The main problem is that gross private corporate investment still remains over 20% below peak – with net private investment a disastrous two-thirds under its previous peak.  What isn’t a problem at all is consumer spending.  US personal consumption is actually at an all-time high of close to $9.3trn (in 2005 inflation-adjusted dollars).  What matters is the expected profitability of any new investment.

Indeed, when you compare the growth in US corporate profits (cash flow funds) with investment, you can see that profits lead investment.  Every time there is a significant fall in the mass of profit (green line), it is followed by an investment slump (red line).

One thought on “Greenspan gets it

  1. I got this comment from Rick Wolff but for some reason it would not register in the right place so I repeat it here.

    Dear Michael

    Good piece, solid argument. Yet does your final graph point – in the red and green line movements in 2010 – to the return of profit mass and consequently of investment?

    rick wolff

    Rick, yes I think the rise in the mass of profit in the recent period suggests an investment recovery. I’m no double-dipper. It’s just that this time it may be weaker than compared to previous recoveries from slumps because of the still high level of excess capacity and debt.


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