James Livingston |
By James Livingston, The New York Times, October 25, 2011
AS an economic
historian who has been studying American capitalism for 35 years, I’m going to
let you in on the best-kept secret of the last century: private investment —
that is, using business profits to increase productivity and output — doesn’t
actually drive economic growth. Consumer debt and government spending do.
Private investment isn’t even necessary to promote growth.
This is, to put it mildly, a controversial claim. Economists will tell
you that private business investment causes growth because it pays for the new
plant or equipment that creates jobs, improves labor productivity and increases
workers’ incomes. As a result, you’ll hear politicians insisting that more
incentives for private investors — lower taxes on corporate profits — will lead
to faster and better-balanced growth.
The general public seems to agree. According to a New York Times/CBS
News poll in May, a majority of Americans believe that increased corporate
taxes “would discourage American companies from creating jobs.”
But history shows that this is wrong.
Between 1900 and 2000, real gross domestic product per capita (the
output of goods and services per person) grew more than 600 percent. Meanwhile,
net business investment declined 70
percent as a share of G.D.P. What’s more, in 1900 almost all investment came
from the private sector — from companies, not from government — whereas in
2000, most investment was either from government spending (out of tax revenues)
or “residential investment,” which means consumer spending on housing, rather
than business expenditure on plants, equipment and labor.
In other words, over the course of the last century, net business
investment atrophied while G.D.P. per capita increased spectacularly. And the
source of that growth? Increased consumer spending, coupled with and amplified
by government outlays.
The architects of the Reagan revolution tried to reverse these trends
as a cure for the stagflation of the 1970s, but couldn’t. In fact, private or
business investment kept declining in the ’80s and after. Peter G. Peterson, a
former commerce secretary, complained that real growth after 1982 — after
President Ronald Reagan cut corporate tax rates — coincided with “by far the
weakest net investment effort in our postwar history.”
President George W. Bush’s tax cuts had similar effects between 2001
and 2007: real growth in the absence of new investment. According to the
Organization for Economic Cooperation and Development, retained corporate
earnings that remain uninvested are now close to 8 percent of G.D.P., a
staggering sum in view of the unemployment crisis we face.
So corporate profits do not drive economic growth — they’re just
restless sums of surplus capital, ready to flood speculative markets at home
and abroad. In the 1920s, they inflated the stock market bubble, and then
caused the Great Crash. Since the Reagan revolution, these superfluous profits
have fed corporate mergers and takeovers, driven the dot-com craze, financed
the “shadow banking” system of hedge funds and securitized investment vehicles,
fueled monetary meltdowns in every hemisphere and inflated the housing bubble.
Why, then, do so many Americans support cutting taxes on corporate
profits while insisting that thrift is the cure for what ails the rest of us,
as individuals and a nation? Why have the 99 percent looked to the 1 percent
for leadership when it comes to our economic future?
A big part of the problem is that we doubt the moral worth of consumer
culture. Like the abstemious ant who scolds the feckless grasshopper as winter
approaches, we think that saving is the right thing to do. Even as we shop with
abandon, we feel that if only we could contain our unruly desires, we’d be
committing ourselves to a better future. But we’re wrong.
Consumer spending is not only the key to economic recovery in the
short term; it’s also necessary for balanced growth in the long term. If our
goal is to repair our damaged economy, we should bank on consumer culture — and
that entails a redistribution of income away from profits toward wages, enabled
by tax policy and enforced by government spending. (The increased trade deficit
that might result should not deter us, since a large portion of manufactured
imports come from American-owned multinational corporations that operate
overseas.)
We don’t need the traders and the C.E.O.’s and the analysts — the 1
percent — to collect and manage our savings. Instead, we consumers need to save
less and spend more in the name of a better future. We don’t need to silence
the ant, but we’d better start listening to the grasshopper.
James Livingston, a professor
of history at Rutgers, is the author of “Against Thrift: Why Consumer Culture
Is Good for the Economy, the Environment and Your Soul.”
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