Let it bleed
One thing that bothers me is that businesses today aren’t investing in the future anymore. I have written in the past how investments in research and development have declined so much that we are putting future productivity growth at risk. While researching for another project, I came across a development for US businesses that I wasn’t aware of in all its awfulness. So, I thought, I share it with you.
The chart below is taken from the Bureau of Economic Analysis’ NIPA tables and it shows the cost of equipment and intellectual property products for private businesses. This is essentially the cost of what makes businesses hum and the good news is that since the mid-1990s the cost of equipment has declined dramatically and is now 28% lower than 25 years ago. The cost for intellectual property products is 14% higher than 25 years ago but has basically stalled over the last decade. The average annual inflation rate for intellectual property products (e.g. software) has been just 0.5% per year over the last decade.
Cost of equipment and intellectual property products
Given the lower cost for the vital parts of most businesses, one would imagine that businesses are taking advantage of these price declines and invest heavily in equipment and intellectual property products. Yet, except for a brief investment boom in the 1990s, the trend is clearly downward. Net investment in equipment and intellectual property products as a share of GDP is falling steadily. In the 1990s, the average annual net investment was about 2.2% of GDP, in the 2000s, a period that included the Global Financial Crisis (GFC), it was 1.9%. One would imagine that in the booming 2010s investments would have risen significantly to catch up with missed investments during the GFC. But no, the average of the 2010s was even lower than in the decade before and a mere 1.8% of GDP per year.
Net investments in equipment and intellectual property products
In the name of shareholder value maximization, businesses are slowly bleeding themselves to death. Because it is not like businesses don’t have the money to invest. On average, they are highly profitable, but instead of investing these profits into their businesses, they keep it in cash and spend it on dividends and share buybacks (and the occasional overpriced merger). This way, short-term shareholder value is maximized but long-term shareholder value declines steadily because as every investor knows the value of a business is driven by the value of its assets, its growth and its profitability. But without investments in equipment and intellectual property products, the assets depreciate more and more, growth slows down and productivity declines. In short, the company slowly becomes worth less and less.