One thought on “Corporate net lending

  1. Hi Michael – an excellent reply to Wolf’s fascinating article. Below is a comment I made to the FT article; I’ll be interested to read any responses to it, from FT readers or from you or readers of your blog – John

    The long-term decline in capital investment is hugely important, and it is clear from Martin Wolf’s comments and in the sources linked to in his article that mainstream economics has little idea why it is happening.

    Two points.

    First, the problem may be a good deal more severe than Mr Wolf’s article admits. Since changes to the UN System of National Accounts in 2008, corporate expenditure on R&D, software and also on branding and other forms of so-called “intangible capital” are now counted as investment rather than as expenditure on intermediate inputs. As Robin Harding reports (“Corporate Investment: A Mysterious Divergence,” Financial Times, July 24, 2013), tangible investments in plant and machinery by U.S. private industry have steadily declined from 14 percent of their output in 1980 to around 7 percent by 2011, whereas intangible investments have gone in the opposite direction and now make up more than two-thirds of total investments by U.S. industrial firms.

    Second, Mr Wolf asks “Why is corporate investment structurally weak?” and mentions as one reason “Globalisation [which] motivates relocation of investment from the high-income countries.” This refers to the shift of production to low-wage countries, driven by global labour arbitrage, i.e. the substitution of relatively high-paid domestic labour with low-wage workers in China, Bangladesh etc. During the past three neoliberal decades, production outsourcing has become an increasingly-favoured alternative way to cut production costs and boost profits than investment in new technologies and expansion of production at home. The shift of manufacturing to low-wage countries is the most important underlying cause of the USA’s current account deficit which, as Martin Wolf explains in his book “Shifts and Shocks”, is the clearest expression of the “global imbalances” that were the proximate cause of the global financial crisis – yet this particular shift is not considered in his book and is glossed over in the article above. The US current account deficit declined from its high point of 5.8% of GDP in 2006 to 3.1% of GDP in 2013, but this largely reflects a big growth in its surplus on trade in services. The USA’s manufacturing trade deficit with developing economies, as a % of US GDP, actually increased over this period, from 2.4% of GDP in 2006 to 2.7% of GDP in 2013. In other words, some 85% of the USA’s current account deficit now represents the excess of manufactured imports from China and other low-wage countries over its manufactured exports to them.

    Why have non-financial corporations favoured outsourcing over domestic capital investment? This is the most important question that needs to be asked, but neither Mr Wolf nor any other FT correspondent has dared to ask it. Yet the answer seems obvious: apart from being more profitable and much less risky, it frees up funds for capital concentration in the form of M&A and share buy-backs, and for speculative investments in financial markets, allowing companies from Boeing to Volkswagen to become more like financial corporations themselves.

    The implications of this are profound. One is that profits, prosperity and social peace in western nations has become ever-more dependent on the extraction of value from super-exploited workers in low-wage countries. Perhaps the biggest of all is that the so-called financial crisis must be understood as the surface expression of a crisis whose roots are not in finance, but in capitalist production. No wonder that capitalism’s apologists don’t wish to go there.

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