Daniel J. Ikenson
Since the beginning of the Great Uncertainty – the period that began with the “stimulus,” the auto bailout, the push for another major entitlement program, Dodd-Frank, the regulatory dam burst, the subsidies for favored industries, and the proliferation of distinctly anti-business rhetoric from the White House – President Obama has appeared puzzled by the dearth of business investment and hiring. Go figure.
Nonresidential fixed investment fell off a cliff in 2009, and has yet to recover even in nominal terms. As a share of GDP and relative to the trend in investment growth prior to the 2008 recession, the picture is more troubling still. If tomorrow’s wealth and living standards are functions of today’s investment – and they are – reversing the decline in investment should be the economic priority of U.S. policymakers.
Instead, the administration has been cavalier about the problem and aloof to real solutions, choosing to view investment as a casualty of partisan politics, as though business is intentionally holding back to sully the economy on this president’s watch. Such narcissism has obscured the White House’s capacity to grasp the power of incentives.
It’s not just domestic investment that is lagging. Foreign direct investment in real U.S. assets is also on the decline. The United States is part of a global economy, which means that U.S. and foreign based businesses can invest, hire, develop, produce, assemble and service almost anywhere they choose. And that means the United States is competing with the rest of the world to attract and retain investment. Of course, the implication of this – whether policymakers know it or not and whether they like it or not – is that globalization is serving to discipline bad public policy. Policies that are hostile to wealth creators chase them away, while smart policies attract them and harvest their fruits.
Business investment is ultimately a judgment about a jurisdiction’s institutions, policies, human capital, and prospects. As the world’s largest economy featuring a highly productive work force, world-class research universities, a relatively stable political climate, strong legal institutions, accessible capital markets, and countless other advantages, the United States has been able to attract the investment needed to produce the innovative ideas, revolutionary technologies, and new products and industries that have continued to undergird its position atop the global economic value chain.
The good news is that the $3.5 trillion of foreign direct investment parked in the United States accounted for 17 percent of the world’s direct investment stock in 2011 – more than triple the share of the next largest single-country destination. The troubling news is that in 1999 the United States accounted for 39 percent of the world’s investment stock.
To some extent, this declining trend reflects inevitable and welcome demographic changes. Strong economic growth in developing countries has followed periods of political stability and economic liberalization, creating new opportunities and inspiring confidence that these formerly higher-risk bets are viable—indeed desirable—places to invest in productive activities. However, some significant decline in the U.S. share is attributable, not to increasing absolute advantages of investing in other countries, but to decreasing absolute advantages of investing in the United States.
A deteriorating U.S. investment climate is making other countries relatively more attractive to foreign and U.S. headquartered companies alike.
U.S. scores on a variety of renowned investment indices and business surveys measuring policy and perceptions of policy, including the OECDs FDI Restrictiveness Index, the Economic Freedom of the World Index, the World Economic Forum’s Global Competiveness Index, and a survey of 10,000 Harvard Business School graduates about their companies’ investment location decisions, all reflect pronounced and growing concern about a U.S. business environment that continues to become less hospitable and, thus, a deterrent to investment. According to these surveys, perceptions about regulations, taxes, customs procedures, and the prevalence of crony capitalism have repelled foreign investment and chased domestic investment to foreign shores.
Although some policymakers recognize the need for reform, others seem to be impervious to the investment-repelling effects of some of the laws and regulations they create. The most naive consider “American” companies to be tethered to the U.S. economy and obligated to invest and hire in the United States, regardless of the quality of the business and policy environments. Browbeating U.S.-based companies for parking profits offshore in response to a U.S. extra-territorial system that would tax those profits twice betrays a failure to grasp that these companies have no obligations to invest, produce, or hire in the United States.
If they are to play a meaningfully positive role where the economy is concerned, policymakers should focus on creating an environment that is more attractive to prospective investors. Unlike ever before, the world’s producers have a wealth of options when it comes to where and how they organize product development, production, assembly, distribution, and other functions on the continuum from product conception to consumption. As businesses look to the most productive combinations of labor and capital, to the most efficient production processes, and to the best ways of getting products and services to market, perceptions about the business environment can be determinative.
A proper accounting of policies that affect the business and investment climates, followed by implementation of reforms to remedy shortcomings, will be necessary if the United States is going to compete effectively for the investment required to fuel economic growth and higher living standards. Some of the problems and possible solutions are described in a forthcoming Cato study titled “Reversing Worrisome Trends: How to Attract and Retain Investment in a Competitive Global Economy.”