The Real Reason American Businesses Aren't Taking Risks—And Aren't Growing

Milton Ezrati

Economics, Americas

Today’s lack of spending threatens the economy’s long-term, fundamental productive potential.

Where are the “animal spirits” that once motivated American business? Their absence bodes ill for the future. This plea must sound as if it emerged from a Trump harangue, but actually it reflects the deep thinking of a very different sort of man, the great economist John Maynard Keynes. He used this admittedly colorful phrase to describe the sometimes-irrational optimism of business people, a confidence in the future that drives them to build and hire on the expectation that the investment will pay out in time. Keynes saw the impulse as essential for economic growth. Alone, he argued, this willingness to construct, update, and re-equip production facilities allows the economy to expand its physical productive capacity, apply new technologies, and so increase worker productivity enough to support higher wages. America has missed such “spirits” and the investment they support for some years now.

Certainly, a paucity of capital spending explains in large part why this overall recovery since 2009 has disappointed. Whereas historically, real economic growth has averaged 3–3.5 percent a year, and closer to 4–4.5 percent in recovery years, it has in this recovery averaged a mere 2.1 percent a year, a third less than the average and less than half the typical recovery. According to Commerce Department figures, this shortfall is almost entirely due to the reluctance by business to spend. For the past three years, the economy has seen business’ capital investment expand only 2.75 percent a year. That pace might seem in line with overall growth, but it is disproportionately slow by the standards of past recoveries. Had capital spending come close to its 7.1 percent yearly growth pace averaged in all recoveries during the past forty years or even the 6.1 percent pace averaged after the 2001–02 recession, it would have increased the economy’s overall growth pace by an additional 1.0 percent point, bringing it much closer to historic averages.