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.
Matters however speak to greater dangers than just disappointingly slow current growth. Today’s lack of spending also threatens the economy’s long-term, fundamental productive potential. Because existing equipment and facilities are always depreciating and becoming obsolete, basic improvements in the economy depend on business’ willingness to keep up spending on new equipment, facilities, systems, etc. Without it, that natural tendency toward depreciation and obsolescence ultimately erodes the economy’s overall ability to produce, its physical plant as well as the relative state of the technologies with which it produces. That deterioration further renders workers less productive and less able to command higher wages. If something does not change, the future seems bound to suffer just such an erosion. Business during the past three years has purchased new physical capital and technology at barely 24 percent above the rate of depreciation and obsolescence. That rate may seem adequate to forestall an outright decline in productive potential, but it is far below the historic 40 percent averaged over the last forty years.
This frightening picture may already show in measures of labor productivity. The average worker’s output per hour in all aspects of the private economy has actually declined at a 1.3 percent yearly rate during the past nine months and increased at barely 1.0 per year at other times in this recovery, half the 2.0 percent a year averaged over the prior forty years. Such measures are of course subject to all kinds of temporary influences, but it is also entirely plausible that this shortfall reflects the relative lack of new equipment, facilities, systems and technologies that in the past have enhanced the average worker’s ability produce and earn. It might also explain why wage growth has so disappointed.
If immediate growth rates and longer-term income and productive potentials depend on a return of “animal spirits,” it is reasonable to ask what stole them in the first place. Two related suspects present themselves. One is the legacy of the great recession of 2008–09. The other is Washington’s anti-business rhetoric and threats coupled with extensive legislation. The former has had the most straightforward effect. During the severe recession many firms had trouble making payroll and nearly went bankrupt. Many did go bankrupt. The understandable fears managers have harbored since have created an equally natural reluctance to extend themselves and their firms, to take on debt, to hire on the expectation of future growth, to put firm assets at risk in any way. It speaks volumes in this regard that non-financial corporations today hold cash deposits almost twice historic levels relative to other balance sheet measures. And they are doing little more with these monies beyond buying back stock.
Washington’s rhetorical and legislative agenda, especially early in President Obama’s first term, has had an independent effect. Threats to firms, common at the time, certainly discouraged risk taking. The Affordable Care Act and the Dodd-Frank financial reform legislation, whether good laws or bad, compounded the problem by creating tremendous uncertainties in a business community already cowed by its 2008–09 experiences. Managers, facing more difficulty than usual calculating future health care expenses, the cost of credit, or its availability, became that much more reluctant to take risks. It has not helped that the legislation, though passed into law in 2010, still remains less than fully defined. Until the details of these immense bills become clear and managers can estimate costs, firms across the entire economy—small, midsized and large—will remain reluctant to hire, expand, and put monies at risk for years before they pay off.
Time may help remedy this situation. “Animal spirits” may return as its passage dulls memories of the great recession. Time may also bring clarity at last to the business implications of the Affordable Care Act, the Dodd-Frank financial reform legislation, and other rules imposed on business during the past few years. Perhaps then business managers will recapture their old spirited ways, spend more on new equipment and the like, and so put growth prospects back on their old and better footing. If time fails to heal, then the economy will need more proactive efforts to inspire business to take risk. The class warfare and name calling that have characterized the past few years and the current election campaign will be especially counterproductive for such an effort.
Milton Ezrati is a contributing editor at the National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and recently retired as Lord, Abbett & Co.’s senior economist and market strategist. His most recent book, Thirty Tomorrows, describing how the world can cope with the challenges of aging demographics, was recently released by Thomas Dunne Books of Saint Martin’s Press.
Image: The New York Stock Exchange. Wikimedia Commons/Kevin Hutchinson