An interesting story line on the Great Recession has developed over the past few days. It appears that while company profits are up, company investment is not. The Sunday New York Times ran a story on this (Industries Find Surging Profits in Deeper Cuts) and Treasury Secretary Geithner commented upon it on the weekend news shows (Geithner Says U.S. Employers `Very Cautious,’ Job Growth Not Fast Enough). An article in the Wall Street Journal (Investors Say No to ‘Let’s Expand’ Companies) showed how the stocks of companies with expansion plans are doing poorly.
“You’ve got plenty of investors convinced out there that the economy is going to double dip,” said David Bianco, chief U.S. equity strategist for Bank of America Merrill Lynch. Given those worries, he adds, it is no surprise many investors are likely to react nervously if companies start ratcheting up production, lest they spend hard-earned cash preparing for a wave of customers that never materializes
Over in today’s Washington Post, Robert Samuelson blames the failure to reinvest on the “bunker mentality” that has taken hold. But he also takes a longer view, citing recent work by Robert Gordon on the business cycle. Gordon’s point is that the there has been a structural shift in the economy since the 1980’s that has changed the historical positive relationship between productivity and employment:
What explains this structural shift? First, the rise of immigration, imports, and medical care costs, together with the decline in the real minimum wage and of labor union power, have contributed both to a rise of inequality and an increasing tendency of firms to treat workers as disposable commodities. The ICT revolution has both increased the flexibility of labor markets and provided firms with new tools to boost productivity during economic recoveries as they continue to cut labor costs.
I have long argued the same case as Gordon – but with a different twist. The structure of the economy started to shift in the mid-1980’s. The Reagan Recession was the last of the industrial era cyclical downturns where workers could expect to be called back. Since then, cyclical downturns have combined with structural shifts to change the nature of the recession. People aren’t called back, production shifts to different sectors and the economy slides into a new configuration.
The irony of this new dynamic is striking. As Gordon notes, there is “an increasing tendency of firms to treat workers as disposable commodities.” At the same time, the shift to the I-Cubed Economy means that worker skills and knowledge is increasingly important.
In any event, if companies are afraid to invest in increased production then we may well be headed for a double dip (or at least a slowdown). If this is the case, we need to re-orient economic policy. Attempts to boost consumption may not be the way to go if companies aren’t willing to boost production to match. Nor will policies that boost company profitability — since we currently see profits not going into production. Rather, we may need more direct policies to boost company investment — like the green manufacturing tax credit (see earlier posting). The key is to expand and scale up such programs. That will be difficult in the current political environment. But in the long run, these type of programs may be the only way to prevent the return of an investment-led economic downturn.
BTW – over a year ago the WSJ Real Time Economics blog posted a note on research by Alliance Bernstein economist Joseph Carson on how Job Losses Outpace GDP Decline. That piece ended with this optimistic note:
“Improved productivity levels reflect an extremely lean corporate sector that should be capable of generating profit growth at much lower levels of GDP growth than in the past,” Carson writes. “By improving productivity during a recession, companies may even be able to generate extraordinarily strong and sustained productivity and profit gains when the economy reverts to more normal levels of activity. In time, a recovery in corporate profits will generate the need for additional labor.”
“In time” hasn’t seem to have arrived yet.