Capital Investment

Discussion in 'Economics' started by morganist, Feb 19, 2011.

  1. Capital Investment. The two words that should be on the lips of all leaders of countries at the moment, so why aren’t they?

    Capital investment is the investment in goods and machinery used to produce other goods and services. For example factories, diggers, tractors, hand tools and even stationary (in an office environment) enable workers to create output. Without investment in these goods it is impossible for the economy to grow in any way that can be considered progressive and long term. Infrastructure improvements and new technological innovations are the most common forms of capital investment that are initiated to restart growth during downturn periods. It is a way of increasing aggregate demand which is not dependent on consumer spending habits or meeting individual peoples’ wants. At least in the initial stages as most of the big efforts to increase capital investment improve national infrastructure or services, which in themselves enable greater prosperity through the efficiencies they create.

    It is important to point out to economists and governments in particular that capital investment is a crucial and in fact the most important component of aggregate demand during a recession. Remember aggregate demand is made up of C + I + G + E (consumer consumption, investment, government expenditure and exports). Consumer consumption and exports seem to be receiving all of the attention from western governments at the moment. This is indicated by the competitive price war for consumer goods that has been emerging over the last eighteen months, which is likely to accelerate over the next couple of years. In the countries that have expanded government expenditure, such as America, there have been efforts to increase capital investment but only in the public sector through centrally funded projects in the form of infrastructure improvements and innovations in environmentally friendly sciences. These efforts have only been mildly successful so far (although it is early days).

    The aspect of aggregate demand which I believe has been neglected is investment in the private sector. This is the form of investment that is required to get the free market functioning again to increase output and employment. This has partly been down to the limitations in the banking system due to the constraints on lending required by the higher reserves demanded on banks. It has also been created through fears in the future of the economy and risk of losing investments. However there are other ways to increase investment in the private sector. Canada, China, India, Brazil and Russia among other countries are all increasing their investment in other countries, which could be used increase demand. Currently foreign demand creation all ready exists in the form of lending to consumers to purchase foreign goods. However the borrowed money would be better invested in private sector funded infrastructure or capital goods. For example funds could be started to build new bridges which would then generate a profit when people pay to use them, like turnpike trusts.

    This is just one example of many methods of increasing capital investment in the private sector. The problem is that western governments’ are not taking any actions to make this investment possible due to the high cost of employment and high levels of taxation in their domestic economies. Unfortunately it is very hard if possible at all to grow if the means of production are not available to enable the creation of output. The question is why are western governments so slow to acknowledge this is where action needs to be taken and more importantly why have they made such poor attempts at relieving constraints on growth?
  2. tea party republicans.
  3. Are you saying that I am a tea party republican or that the government is?

    Also can you post on my blog so it looks like people are reading it. I get a hundred or so views a day but no one posts there it looks like it is not viewed but it is.
  4. no i am saying that any talk of investment is futile now that tea party republicans have the stage.
  5. Oh right. I guess Sarah Palin is a bit of a worry. Other than that I don't know much about them.

    What about private sector investment. Like the investment in new machines and factories that makes demand too instead of the idea demand is solely for domestic consumer goods. That is the idea of the post, that the emphasis has been on domestic consumer demand rather than productive demand and this has prevented us from competing with the east.
  6. private enterprize only invests in response to a level of demand for their goods that they can not meet with current factories.

    government has tried to spur investment with accelerated depreciation schemes but it is somewhat counter productive because that kind of investment is only done to increase productivity. increased productivity = less need for workers.
  7. Building the factories and the tools that enable production creates production in itself. This increases demand in itself, it also enables the country to offer the goods to foreign countries, which will need those goods when they come out of recession or in the case of the emerging BRIC countries as they continue to growth.

    This is a chicken and the egg argument, demand versus supply argument. I do agree the government has a part and that the republicans will not deal with that.

    I do however think that there is still some grounds for my argument, in that the private sector has huge potential at being able to take countries out of downturn as long as the labour and production constraints dissolve. I believe the democrats are failing in this area.
  8. hedge123


    I'd like the U.S. economy to do better as much as the next person - in terms of employment, balance of trade, and total output. But I'm also extremely wary of "forcing" investment, let alone spending (especially the consumer kind) by government fiat. If the market doesn't want something, it stops investing in it or buying it. This is not some abstract concept - this is the result of individuals making decisions that are in their own self interest. If people don't want SUVs and prefer gas-saving vehicles, they will switch their spending accordingly, and the smart entrepreneurs and business people will respond in kind.

    It is not the role of the government to "correct" mistakes of businesses or consumers, because frankly the government cannot simply optimize the lives of 300 million people simultaneously. Communism tried that one - didn't work. And a democracy is even worse at making long-term decisions, given the 24-hour news cycle, never-ending election campaigns, etc.

    Right now consumers and businesses are repairing their balance sheets - just as they should - after decades of over consumption and over borrowing. It's the government that needs to show some leadership and tell us the truth - that we need to pay for our past profligacy and tighten our belts now, not later. That means cutting federal deficit spending, which is running now at over 11% of GDP. Because if we keep delaying the consequences of our public debt burden, the interest payments alone will absolutely overwhelm us. Why Obama ignored the advice of his own bi-partisan budget commission completely escapes me, and was an extreme disappointment.
  9. Thank you for your reply. Perhaps you could see that part of the point of my post was that america should start looking at what A, gets their own economy working again and B, what other countries want to get their demand. Both of these in my opinion require the development of capital goods, wither to regenerate the domestic economy or to sell to foreign economies.
  10. You could probably run a dozen business plans in a dozen sectors and come to the same conclusion, all the easy money is gone. You'll be left with a cash churning zombie.

    A business may support dozens of regulatory industries with little profit incentive.

    R Wagnor of GM was the first to admit he was running a health and pension business, not an auto company.

    Suppose a model is profitable. Round 2 is the risk associated with the business. Obviously we can't insure against all risk but there is high risk in unknown litigation, unforeseen legislation, to name a few.

    Imo, we can't assign a politcal party to the problem, it's the culture of current politics to bash business.

    This has partly been down to the limitations in the banking system due to the constraints on lending required by the higher reserves demanded on banks.

    Bernanke has done all he can do in his regard, Congress need sto redefine various business incetives. Imo, our biggest hurdle is going to be the EPA, unelected beaurucrats who put fear in the hearts of lawmakers.

    As an example, Bush could not find anyone to ally with him against Fannie and Freddie. How did we let any agency get so large with so much power? We all know how that worked out. Well the same with the EPA, this agency is unmanageable for a corp to navigate.
    #10     Feb 19, 2011