B School for Public Policy

Professor Joao Gomes

The Decline of US Corporate Investment

Certainly, the onset of the 2008 Recession hurt many aspects of the US economy. One area of impact was on corporate investment. It sank significantly, and even though it has been increasing in recent years, it hasn’t increased fast enough to catch up with projections of where that investment should have been if you take the Recession out of play. Joao Gomes joined Dan Loney in the Knowledge@Wharton Business Radio studio to discuss his B-School seminar on the topic of the Decline of US Corporate Investment.

An edited transcript of the conversation follows.

Knowledge@Wharton: Let’s go back a decade and start with how significant of a decline we saw in investment in general here in the US.

Joao Gomes:   Obviously, the 2008 Recession was damaging in a lot of dimensions for the US economy – output and GDP income and employment. Everything suffered, but investment, perhaps more than anything else. While maybe the average American – maybe 15% were worse off relative to some sort of hypothetical alternative world that would have taken place if the crisis didn’t exist – corporate investments actually may be 25% or 30% below what it would have been in that alternative universe. So it’s quite significant.

And this is more significant in a world in which we keep talking about US corporations having enormous profits and paying out enormous dividends and returning capital to investors. So there’s this puzzle, question mark, about what exactly is the US corporate sector doing. Why are US corporations not investing in the United States? And this feeds into a number of other things, like what’s the future of the country, and are we investing enough yet, or are we investing abroad? Are we [doing] something to damage our workers? There are lots of questions that are tied to this one.

And so we started to be intrigued by this a few years ago, when we started looking at the numbers, and we started looking at everybody’s focus on the income of the average American, the employment opportunities, and so on. But actually the US corporate sector seemed to be more striking and more puzzling to us. And it seemed like the question mattered more and more as we got into the 2016 election and afterwards, when we start talking about maybe the government should replace the private sector. Maybe we should do public investment instead.

And that was really the trigger for us to think more deeply about the reasons why the private sector was not investing. Is this something that they’re doing because they don’t want to, or because they can’t? That’s kind of the central question, when you think about policies. It’s something that – should the government take over and do public infrastructure, because that’s really going to sort of be the catalyzer that’s just going to trigger the private sector? Investments are going to follow it, pretty much like the rationale of the highway system of the ’50s or the ’60s, or maybe the investment in technology that sort of – even military technology – that triggered maybe the technology boom after the ’70s and the 80s. Is this really a good reason to spend a lot of money on public infrastructure?

Knowledge@Wharton: Right.

Gomes: Or maybe not. Maybe the reason we’re not investing in the private sector – we don’t see this – is because the private sector collectively is coming to the conclusion that the 21st century is just a different economy, where we just don’t need these kinds of heavy assets, capital-intensive technologies like big plants and big –

Knowledge@Wharton:  But there are elements of the US economy and infrastructure being one, which a lot of people still see. And it’s an ongoing process.

Gomes:  Absolutely.

Knowledge@Wharton:  That you need to continually invest in roads and bridges and such. And for a while there, it felt like we got away from it. Now we’re starting to see – obviously it was the initiative under President Obama to put more money towards that, and we continue to see that now – especially the concerns around the Highway Trust Fund, about making sure there is enough money to be able to have the best roads and bridges that we need.

Gomes:  Absolutely. And so the question with maintenance and repairing – keeping the existing capital and so on – is unquestionably something we should continue to do by and large. I think the real questions are about do we need a high-speed line in California? Do we need a new airport in New York? Do we need even a high-speed line on the East Coast? Those are sort of the big money-grabbing initiatives, and we should think about them carefully as we go forward. Of course, repairing bridges, our water supply system – there are a lot of things that absolutely need upgrading, and so we’re not talking about zero spending on infrastructure. We’re talking about do we need to put a trillion dollars?

And one of the things that I think – to think back, and not to get sidetracked too much out of corporate investment – but one of the things that motivated me to think about this is a lot of the countries in Southern Europe, a lot of their fiscal problems came because of the fiscal spending they devoted to infrastructure in the last decade.

Knowledge@Wharton: Right.

Gomes: We always think of infrastructure the way we think of China. Infrastructure has been crucial for China’s development experience, we think. But infrastructure has really not been very helpful for Spain. Spain has built highways that nobody uses. It has built airports that are literally abandoned. And we should think carefully about what is our role model? And it doesn’t follow – maybe China was successful because it was growing, and that’s why the infrastructure ended up being – in some sense generating the revenues for the governments to pay for the infrastructure. Spain had no growth. The infrastructure cost a lot of money. The government did not have the tax revenues to pay back those debts.

I don’t know where we fall – I honestly don’t. But I think we should ask that question, does it make sense to spend a trillion dollars on infrastructure? And I think part of answering that question has to do with why is the private sector not investing on its own, in a world in which it has the resources, quite clearly? We look at a huge amount of profits. We look at the payouts they’re making to shareholders. It’s no longer – it might have been in 2008, 2009 – but it’s no longer a question of financial capability. The private sector collectively has the resources to do a lot of things. Why are they not doing it?

Knowledge@Wharton: Well, I guess part of the question – and we’ve talked a little bit about this too – is whether or not we’re going to more public/private partnerships, especially in infrastructure, being one of them.

Gomes: Absolutely.

Knowledge@Wharton: It’s the history of what this country has been in terms of the investment. The expectation has been that that money is coming from the government. Well, it’s not coming from the government as much as it did, say back in the ’50s and the ’60s, when we were building out all these roads.

Gomes:  Exactly.

Knowledge@Wharton: And then obviously the costs have increased markedly, as well.

Gomes: Exactly. So public/private partnerships are actually the solution that most of the Southern European countries adopted. It’s extremely complicated to negotiate these things, and fundamentally they have worked in Europe as a transfer of risk. So the basic reason you do a public/private partnership is exactly the public government at the federal level probably in the US. But even state and local for sure doesn’t have the resources to build whatever it is you want to build. Do you want to build a new airport in New York City? We just don’t have the resources in the state of New York, and the federal government is not willing to do it. So the private sector will build it and pay for it, and then in exchange for that, you give them the rights to exploit the airport and extract revenues. The question then is, what if the revenues don’t show up?

Knowledge@Wharton:  Sure.

Gomes:  What if – ? And so, who pays the bill?

Knowledge@Wharton: Yes.

Gomes:  Well, in Southern Europe, the governments got stuck with the bill, so the governments of Spain, Greece, Portugal, England – in the case of railroads, have basically guaranteed a stream of revenues to these private agents to build these railroads. And now they are struggling to make those payments. And in some cases, they had to renegotiate those contracts. In some cases, they just defaulted.

Because the question always comes down to the same: The private sector will want a revenue compensation for this investment up front. It makes it more of a market-driven decision. A government can just walk into something like building a road and not worry too much about the economic benefits. “Will I have the tax revenues to pay for that? If I don’t, I’ll get them from someone else – fine.” A private agent will not want to do that, right?

Knowledge@Wharton: Yes.

Gomes:  They’ll want to know “If I’m going to put a hundred billion into this, I want to make a big profit out of it, because the risk is large, too.”

So it makes the economics, if anything, more difficult, in my opinion. It makes the funding up front easier on the federal government, on the state and local government – that’s for sure. But it brings the economic consideration – does this investment make economic sense? – much more to the forefront than say, a purely public-funded investment.

Knowledge@Wharton: For people who don’t follow it closely, when you talk about corporate investment, what is it that really drives corporate investment these days?

Gomes: Right. So one of the things we wanted to do was we excluded what we would call “residential investment.” The whole housing sector, we just set aside because we have this episode that we might classify as a bubble of construction and then a crash afterwards. We set that aside.

Knowledge@Wharton: Okay.

Gomes: So we’re looking just at plants, machines, computers, even intellectual capital and software, trucks, for example – you know, tangible assets, long-lived assets that we would use to manufacture something. So undoubtedly investment is tied a bit to manufacturing. Warehouses would be maybe an exception on that to be tied to other parts. But you know, factories would be sort of the largest component in dollar value with what we are talking about.

Knowledge@Wharton: Right.

Gomes: So I think that’s essentially the component that we’re looking at, and that’s really where we’ve seen the largest decline in the last –

And to be fair, the one thing we made this – the whole project sort of change a little in nature is we started thinking – 2008 was our starting point. We saw something bad happen in 2008. We saw a structural shift in the US economy. Actually when we looked at the data, we started to see that maybe this happened way earlier, and maybe we were deceived by this big boom of upgrading of technology in the late 1990s, where everybody was a little bit worried about Y2K, and we saw a massive boom, particularly on the equipment part of equipment, computer software. We saw massive upgrading of technology at that point. And that sort of distorted the numbers. If you sort of take that out, it seems like for the last 35 years or so, you see a steady decline in corporate investment that really accelerated post-2008. And as I said, explaining that – and there are lots of possible explanations that we went through – explaining that has been something that has fascinated us for a little while.

Knowledge@Wharton: : In one of the areas that you talked about a little bit, but I want to delve deeper into, is the impact that technology is having on this right now. Because it seems like there’s an expectation that technology is going to be the cure-all for this.

Gomes: Yes.

Knowledge@Wharton: And it’s not going to be. There still is going to be very much a human element that needs to be incorporated into all of these projects and this investment moving forward.

Gomes:  I think so. I think absolutely. And I think that’s in some sense it’s – what the data speaks in some sense is that the US corporations are concluding that they need to invest more in people – in human capital – and maybe more on intangible creations that those people manage to achieve, and less on the physical part of it.

So consistently – and I say more and more as we looked at it over the last 30, 35 years – you see the strain where corporations just have concluded that we do not need these tangible assets. We need the intangible part – the human capital part – to be more important and to play a bigger role in the production of goods and services in the whole nature of the US economy, going forward.

I think it’s an important conclusion when you think about evaluating public infrastructure. I mean, what is the US economy in the 21st century? If you want to build an airport, it’s going to be around for 50 years.

Knowledge@Wharton: Yes.

Gomes: Does that make sense in a world in which maybe we will just do a lot more – we’ll just do a lot more videoconferencing? I don’t know. It’s just not obvious when you think about something 50 years out. Are you that certain about the future of the US economy in the 21st century that you want to reorganize the interstate highway system for the 21st century?

I don’t know what that looks like. I don’t know if high speed rail is a good bet or not. There are lots of things that I think – where risk is much more important. And the US corporate sector clearly is not that certain anymore.

Knowledge@Wharton: But one of things you talk about in the paper that you did is the fact that the concerns of being able to get the capital – that obviously were there in 2008, 2009, and 2010 – those problems are not as bad, significantly different, than they were seven or eight years ago.

Gomes: Absolutely. I think one of the things that really deceived us for a number of years were just those concerns and generally a sense of uncertainty about the world. There was heightened uncertainty about what was happening. Where is the US economy? Is this a new Great Depression? All those things sort of masked for a while what was really driving investment.

I think now we’re down to basically two or three things. One possibility, which a lot of people have pointed out – I’m not that sympathetic to. I don’t think the debt is debt-supportive, but there is some legitimate disagreement that some of this is just an increase in concentration. So for example, consolidation in the airline industry would be sort of the typical example. Airlines consolidate. They just shut down capacity, and that’s why we see less investment.

I think that’s an explanation for some sectors, for sure. I don’t see that as an overall explanation of what’s going on in the US, but I have to say, I’m not a hundred percent –

And I mentioned this one, because this is the one explanation where you would think if you believe that’s true, then you move towards an explanation in which the US corporate sector does not want to invest. Airlines do not want to increase capacity. They’re consolidating.

And if you believe the more weight you give to this explanation, the more you feel like maybe we should do something on the policy side. Maybe it makes sense for the federal government, for the state government, whatever, to intervene more aggressively and to compensate for a lack of private investment.

I think it’s possible. I don’t think it’s the most likely explanation. The only evidence for increase in consolidation is the enormous level of corporate profits that we see. I think that is masked by the fact that so much of corporate profits come from abroad. They don’t come from the US.

Knowledge@Wharton: Right.

Gomes: And so I don’t see the evidence as very clear to cite that that is my explanation for investment. I prefer to think of it as a technology explanation, and to be honest, just a structural decline in the US economy. The demographics look terrible going forward. I think the idea – you know, why build here, if we do not see them producing power in the future years? We don’t see the productivity.

Knowledge@Wharton: But it is interesting, talking a little bit about the technology again for a second, is that it feels like we’re almost at a transition point where we’ve had so much new technology come into our lives in the last 20 years.

Gomes: Yes.

Knowledge@Wharton:  And seemingly, it feels like that technology is continuing to change on a much quicker cycle than may be back in the manufacturing era. And because of that, to a degree, are companies worried about – or the airline industry – making the investment in an airport now, when potentially an airport may not be needed in twenty years?

Gomes:  Exactly. I think that’s exactly the way we should be thinking about it – particularly when an airport is a 50 or 60-year-old project. I think that’s exactly right. And I think we can tell lots of anecdotes, and I’m always very reluctant to extrapolate from anecdotes, but you can argue in a world of Airbnb, do we need lots more hotels?

Knowledge@Wharton:  Seven hundred-room hotels, yes.

Gomes:  Exactly. I think those are the questions about are we becoming so much more efficient at using the assets that we have, the structures that we have in place – our houses, our hotels, our cars – with Uber and so on. Do we need to build new things?

Again, I don’t want to extrapolate from too many anecdotes or just a few anecdotes in this case, but I think that’s the question for this particular part of the economy – because it involves such a long lead period. You’re going to put a road in place. It’s going to be there for 30 years. You’re going to do the same thing with a bridge. So you need to think very carefully about the benefits and the costs of this, whether it’s on the public side or the private side. On the private side, we don’t see businesses jumping the gun the going out and doing massive amounts of investment. There’s one exception, which is the whole intangible software creation.

Knowledge@Wharton:  Right.

Gomes:  But on the heavy structures – machines, equipment, factories, even hotels – we don’t see that. So I think, as I said, there are lots of reasons. We went through that. But I think fundamental to technological transformation is where we settle as the most likely explanation of why we are moving to an economy that just needs less capital goods as assets.

Knowledge@Wharton:  Do you think, then, there is going to be a fundamental shift moving forward because of, as you said, maybe just a need of having less moving forward?

Gomes:  I think so. I think absolutely – no doubt about it. I think corporations are going to look very different. I think that even our wealth – what does it mean to be wealthy? There’s just going to be less physical things to own, absolutely. I think so.

But I would say I’m a little worried about speculating what it will look like. I’m sure it will look very different.

Knowledge@Wharton:  Well, you mentioned the policy side of things, and then that means that the policy-makers are really going to have to take a deeper dive into what this is going to look like. And unfortunately we’ve kind of gotten into this pattern now, in the last 20 or 30 years, of policy-makers playing catch-up to be able to see what’s happening now, instead of looking forward, ahead, being able to kind of plan out where we are going. That’s a very fundamental problem that we have right now, and it’s also economically a very costly one.

Gomes:  And I don’t think there’s anything more costly than this particular one, because we are talking about spending hundreds of billions of dollars – even on the public side – even if it’s a public/private partnership, we would spend 100 or 200 billion dollars of new taxes on things that are going be around for 50 years that we may not need – very likely will not need.

I think we need to – there’s no more damaging, I think, decision than this one. This is a long-lived thing we’re going to have to live with. And we’re going to do it for the only reason that we want to spend money, we want to give people jobs for a few years. But we’re going to put in place things that literally, the private sector is telling us, we do not need right now.

Knowledge@Wharton:  So it means part of the spending, or I should say maybe more and more of the spending is going to be on the “patch,” the fix – you know, taking care of what we have now and just making sure that it continues to have life moving forward.

Gomes:  Yes, I think until we have some visibility about what’s going on. But I always go back to the basics. If you see people who are making business decisions, who are looking at the dollars and cents of this are telling us, “We don’t want this. We don’t want to do this. We have the money. We don’t want to do it.” How comfortable do I feel spending tax-payers’ money on this?

Knowledge@Wharton:  Yes.

Gomes:  And it’s never a question of – people sometimes say, “Roads or bridges collapse, people die.” That’s just the wrong thing to say. If I have money, I can spend it on saving health care. I can spend it on retirement benefits. The question is, is this the best use for public money?

Knowledge@Wharton:  So then do we need to have more of the mindset of the private sector CEO, C-suite playing out in the public sector?

Gomes:  I think we should be mindful of – I think yes – but I think we should be mindful of the fact that in this case, our gap in –

We can differ. We can legitimately say, “Look, they don’t know what they’re doing. They make mistakes.” Of course they make mistakes.

Knowledge@Wharton:  Sure. Yes.

Gomes:  But did they make that big of a mistake? Are they making these billions of dollars worth of mistakes? They’re literally not investing. I mean, they’re basically replacing the old capital and not putting new capital in play. Are we sure? Are they that wrong? Are we that sure? And that seems to me very difficult to –

They could be a little bit wrong. We could sort of say, “Okay, maybe the return on private capital is rather low, but maybe there’s something on public capital that has enormous benefits to society, and we should do it. But boy, the gap has to be really large right now for us to believe that’s a sensible thing to do. 

Knowledge@Wharton:  But then do you believe that at some point, whatever that period of time is – 25 years, 50 years, whatever it may be – that we are going to figure it out, and we’re going to have just this rush of investment on a variety of different levels because we understand where the path needs to be going into the 22nd century on the planet?

Gomes:  I think if that happens, the private sector will show first the interest in doing it.

Knowledge@Wharton:  Yes.

Gomes:  I don’t see – there could be, obviously, exceptions – but you would see that fever of interest coming out of the private sector first. I think when they show such manifest lack of interest in private investment, I think you have to be – you have to conclude there’s something fundamental about it, in my mind, that you should listen to.

Knowledge@Wharton:  We’ve seen quite a few mergers in the last couple of years. Is the expectation that you’ll continue to see a higher level of M&A activity?

Gomes:  I think so. This is where – so I’ve avoided on purpose to talk about the tax code, but I think the reform of the tax code created some additional incentives for firms to merge, to take advantage of some of the – I mean, I would consider them loopholes. I can’t believe that that’s the way it was designed with respect to subsidizing investment.

Knowledge@Wharton:  Right. 

Gomes:  We do have some measures in the tax code that are likely to boost the investments in the United States in the next couple of years – some very generous incentives for the next five years or so. So we might see, for example – we allow firms to fully expense their capital expenditures for the next five years. And then those get phased out.

So we should see a bunching up of investment in the next few years, if that tax law doesn’t get changed. Which – we’ll see.


Knowledge@Wharton:  What was the reaction that you got from all of these ideas? Because, I mean, you’re talking to people that are, in many cases, the decision-makers that need to kind of think about these things in the years to come. 

Gomes:  I think intrigue. I think we’re intrigued. I think that it does challenge a little bit the perceived wisdom about public infrastructure. I think people who believe in public infrastructure should really take a close look at Southern Europe and why they got into trouble.

We keep looking at China, and the argument for public infrastructure has always been, for the last number of years, “Look at these beautiful, shiny things in China. We should have the same.” 

Knowledge@Wharton:  Right.


Gomes:  And to me, that’s the same as saying, “Boy, Dan, you have an iPhone 10? I should have the same.”

Knowledge@Wharton:  Right.

Gomes:  I can’t stand having an 8. That’s a bad argument. I mean, that’s the argument that my daughter would have. You know, “I want the latest PlayStation or something.” That’s just not a serious economic argument. The right argument is, “Does this make sense for us? Can we generate the growth going forward that pays for itself, that makes our lifestyle improved and makes our citizens better off, et cetera. And I see none of that argument.

Knowledge@Wharton:  Right. 

Gomes:  So the jealousy argument is the argument that got us into trouble with the housing market. “I want a McMansion, too,” you know. It’s the kind of argument we used to make fun of. But somehow with infrastructure it doesn’t apply.

Knowledge@Wharton:  Yes.


Gomes:  If you’re going to look at somebody in infrastructure, look at Spain. Look at Greece. Look at Italy. Look at Portugal. Look at England. Look at how they got into trouble. Don’t just look at China. It’s just not enough. You can get beautiful, shiny infrastructure, and you can go bankrupt the next year or two. And the reason is the growth is not there. You don’t need it. You really don’t need it. It’s not your silver bullet.

And I think when you look at corporate investment, it’s hard to avoid the conclusion that the private sector collectively – billions of dollars, CEOs from everywhere – are telling us, “We who collectively operate in the US economy do not see the need for these assets, for these capital goods.” Does the government feel that comfortable, that all of them collectively are substantively wrong? I don’t.

Knowledge@Wharton:  Joao, great seeing you again. Thank you for coming in.

Gomes:  This was great.

Knowledge@Wharton:  Thank you.