In my previous post, I highlighted the fact that success in describing the drivers of recent global investment behavior is proving somewhat illusive. The International Monetary Fund takes a stab at it in chapter 2 of the September World Economic Outlook:
This low investment is largely a result of the still-ongoing efforts by corporates in many countries to strengthen their balance sheets by paying down debt. Consequently, despite strong corporate profit growth, investment has generally remained weak. The evolution of investment is therefore likely to be a critical factor determining long-term interest rates going forward. A return of investment to a more normal cyclical relationship with growth would likely put upward pressure on interest rates.
That's my story too, although as far as I can tell, this is an explanation that is more conjecture than demonstrated fact. And as I contemplate the issue, I am a bit uncomfortable that we still don't have our facts quite straight. One thing that caught my eye in the IMF investment discussion was this:
Investment rates in the United States are broadly unchanged from their levels in 1997, although they remain below the peak in 2000. Of course, the decline in the nominal investment ratios over time partly reflects the fact that capital goods have become relatively less expensive—mainly owing to the extensive process of information technology (IT) capital deepening and productivity growth in the capital good–producing sectors.
What this means is that even though the share of investment may have remained relatively flat in dollar terms, technological progress has made a dollar's expenditure more valuable because each dollar buys more in the way of effective capital. A picture:
The blue line in the graph above is the nominal investment ratio for the United States -- it is the current-dollar value of investment divided by the current-value of GDP. The red line adjusts the ratio for the differences in the price of investment goods relative to the prices of all goods and services. If the relative price of investment goods falls -- which we often interpret as a rise in the inherent productivity of new capital -- the red line increases more than the blue line.
The distinction matters. The nominal investment ratio is, at best, about in line with its post-WWII average. When we adjust for relative prices, however, we see that the ratio has risen substantially since 1991. Although the recession of 2001 is clearly associated with a dive in investment spending -- relative to GDP, investment began to fall dramatically in third quarter of 2000 -- it has since recovered, and is now near its postwar peak.
Can this sort of measurement issue explain the global investment bust? No, probably not. And it is certainly less clear that the measurement problem contaminates cross-country comparisons. On the other hand, the picture above is based on price adjustments from the National Income and Product Accounts that almost certainly understate the magnitude of productivity gains embodied in new investment goods. As we rightly scratch our heads over the pattern of global investment, it is a good idea to bear in mind that what we see is not always what we got.