What the world is missing is investment demand. The real tragedy is that investment in physical capital has been weak at the time when financial conditions have been so favorable. Why is that? Jason Furman (and early the IMF) argues that the best explanation is that this the outcome of a a low growth environment that does not create the necessary demand to foster investment. And this starts sounding like a story of confidence and possibly self-fulfilling crises and multiple equibria. But that is another difficult topic in economics so we will leave that for a future post.
Pointer from Mark Thoma.
The puzzle in macroeconomic data is that the real interest rate is low and investment is low. There are a number of stories, none of them fully convincing.
In the Keynesian category, we have:
1. Low “animal spirits.” As far as I know, no one has actually propounded this.
2. Accelerator model. That is, when other forms of spending are high, investment is high. So when spending by households goes down, investment goes down. I put Furman (and most Keynesians) in this camp.
In the non-Keynesian category, we have:
3. Real interest rates are actually high, because prices are falling. This is perhaps more plausible if you think about sectoral price movements. If the price indexes go up because of college tuition and health insurance, then prices elsewhere may be falling.
4. Real interest rates are actually high for risky investment. Interest rates on government debt and on high-grade private bonds are a misleading indicator of the marginal cost of capital.
5. Crowding-out can occur at low interest rates. That is, if financial intermediaries are gorging on government debt, they may not seek out private-sector borrowers.
These explnations are not mutually exclusive.
How about the marginal returns to additional capital are low (ala Lawrence Summers)?
A slightly unfair paraphrase of Arnold: “Prices (interest rates) are low, quantity (of investment) is low, and economics has no good framework for explaining how that can happen.”
Yeah, I don’t want to add to the recent Kling-Sumner arguments, but this is classic reasoning from a price change.
I was going to say something like that. How about this: firms in capital intensive industries have significant unused capacity due to previous over-expansion? Seems like there ought to be a way to measure that.
a la Handle too. But my account has a few more puzzle pieces to explain the big picture of what we are observing, and it’s unavoidably lengthy for me. Let’s see if I can articulate some of it in Vox ‘hypercard-style’ rhetorical questions FAQ outline form and avoid another structure-less essay in a reply to a blog comment.
1. The price of capital is determined by supply and demand, and there are ‘consumer’ and ‘commercial’ components to each. The explanation takes time, but assume for the moment that the important driver of the current price level is the commercial demand component, which is now saturated. Entrepreneurs in aggregate are having trouble discovering new profitable uses and don’t know what to do with a surfeit of savings – so the value of marginal capital to them is low, and so is the clearing price. It’s not that they couldn’t expand output of ‘stuff’, it’s that the consumer ‘stuff budget’ component of aggregate demand is stagnating. More on that in a bit.
2. Why saturation? Technological developments are causing a radical re-equilibration of the labor market, especially in developed countries, like the transition from agriculture to manufacturing taking off a century ago (and much earlier in England). Global shipping, telecommunications, and information processing are now extremely cheap relative to prices a generation or two ago (e.g. Google can now lay a kilometer of fiber under the ocean for only 54 cents per gigabit of capacity), and more and more human tasks are being automated (or ‘broadcast’) in ways with near zero marginal cost of scalability, which contributes to increasing superstar, ‘winner take all’ sectors. So everything that can be economically outsourced or automated or broadcast will be, and most people will have to compete for what’s left.
3. What’s left? It’s not that new jobs can’t be created, but only jobs with a certain special attribute can employ most people. Thos jobs have some feature that can’t be outsourced, broadcast, or automated (yet). Increasingly it’s “those new service sector jobs” with a special character – ones that have to be done in close proximity to other people, customers, coworkers, agencies, counter-parties, etc. for practical or legal reasons. If they don’t have to be done close, they’ll go not just out of the city, but to the cheapest place on earth. Agriculture, Manufacturing, Tourism, and Internet Services require fewer and fewer people to provide everything everyone else can afford to consume, so by necessity most people will have to find some valuable service to perform in the vicinity of lots of other people.
4. Can those jobs easily and profitably absorb or be augmented by more capital to increase labor productivity (and thus average levels of wealth?) No, they can’t. This is really important.
5. Why not? Labor productivity is a rate of output per man-hour. But some jobs are really hard to speed up in an economical way. Sometimes that is due to physical constraints (e.g. air travel) but most of the time these service jobs present ‘Baumol Cost Disease’ which is another way of saying that, by their very nature, they can only proceed at ‘human speed’ in a way that can’t really be improved much over time – certainly not at a few perfect every year on a near-continuous basis – and don’t have major components for which there are cheap capital substitutes (yet).
Some human tasks are so difficult and expensive to automate (vs the cost of labor in the cheapest place) that we’ve probably got a generation or two before we enter into a different and much more severe phase of this phenomenon. Imagine IT being on a logarithmic spectrum between 0 and 30, with 20 the start of the ‘strong-AI’ era, and 30 being the ‘all bets are off’ point. From 0-10, we could absorb improvements in IT profitably before most people are saturated. From 11-20, things are faster than people can exploit, but slower than can act as economical human replacements for a lot of important tasks, so there’s a lull. We’re in the 11-20 era now. Until we get to the 20 and beyond era, these jobs will be done by people, and they won’t be getting more productive over time during the lull than they are now. We’ve already augmented most of these occupations with as much IT as they can profitably exploit given today’s technological level.
Notice also that these jobs by their nature are strictly local and can’t be part of the global economy or in export sectors, and hence are not disciplined by global competitive forces. What has to move for the arbitrage reduction in price differentials is labor, not capital, and that has all sorts of political implications because any policy will have winners and losers. The most valuable people will indeed move, but that brain-drains the source country, which leaves them arguably worse off.
But also, it means that plenty of developing countries will never develop, because all the exportable stuff anyone can afford is already being produced in a few industrial hubs in the world with a shrinking need for labor, and near the marginal cost of globally-priced commodities anyway. There’s no way to undercut them. So ‘trapped’ countries can’t use most of their labor force to produce things they can offer to trade to the rest of the world – their people can only mostly sell services to each other. That implies that we should be in an era of ‘peak global trade’, and indeed we are starting to observe some data consistent with that conclusion.
6. Wait, some jobs are getting more productive, right? Yes, but because certain fields cant keep the pace, that’s just the problem and the mechanism which is making things even worse. First, labor productivity increases vary a great deal by sector and company and have a very high dispersion. But also, and by mathematical necessity, a sector which gets more productive relative to the others has to reduce it’s share of the labor force. (This is not too hard to demonstrate, depending on what you accept as proof and whether you like or dislike equations)
But the basic idea is that the important constraint is what most people can afford, and that relies on their income, and their income is related to their labor productivity. So if your potential consumers are working in stagnating fields, their income will be stagnant and they can’t increase their consumption much. But your productivity increase means you can now satisfy that demand and produce that level of output with less workers, so you’ll shed.
7. And where will the shed labor-force portion go? There is nowhere else to go but to sectors with even lower rates of labor-productivity growth – that is – stagnating ones. And you’ll see flatter and flatter (or even declining) average wages too. Baumol service sectors start to dominate, and these don’t need to borrow much additional capital because it can’t augment the work much more than it already does. (I.e. most of the capital in those fields is human capital, which is hard to augment and price inelastic.)
So there is lack of commercial demand for capital in services. And for the manufacturing sector, it could use more capital to produce more stuff, but since most people are in stagnating fields, they don’t have rising incomes and so they can’t afford any extra stuff, so the stuff-sector can’t use more capital either. The inexorable result is long-term, very low real interests rates.
8. Well, maybe we could be clever and use taxes and redistribution and spread the wealth somehow to make sure some of the gains from the high-productivity-growth fields are ‘recycled’ in some balanced way to stagnating consumers who could then buy more stuff! I mean, with all this extra excess capital being produced and lying around, surely capital-per-capita should be high and we can all be rich. And if we just keep recycling, we can restore the positive return to capital by keeping the cycle going indefinitely. Maybe, but, if you think about it, we already do this, and so much so that perhaps we’re already near levels where we can’t goose the economy any more. There are deadweight losses and capital-allocation problems to think about. Also, there’s another problem with that approach.
9. What’s that? The problem is that even if you redistribute the capital around, it won’t make people rich if they just use it to bid up the prices of something scarce. Money is fungible, so if you give people extra wealth to spend, they won’t necessarily spend it on ‘stuff’. You can try to give people stuff directly, but then they’ll just shift around the rest of their budget to buy more non-stuff, if they think it’s more valuable than stuff. Instead, we mostly tend to give people cash (Social Security, Welfare) or subsidize services (Health Care, Education, Child Care).
10. But what else would they buy then; what’s more valuable than stuff? For the average person the most valuable thing to buy is the capacity to leverage their comparative advantage. Sometimes that’s no big deal. But if there is some scarce, zero-sum, or inelastic thing you need to do your job and optimize your standard of living, you and your competitors will bid that thing up to the point where all your surplus is diverted into paying for that thing. This is like taxi medallions in NYC being worth a million dollars (before Uber).
11. And do we have these things in our economy; what are they? Two big things. One is education credentials, which might as well be like buying a “right to work in a lucrative sector” license at this point, and which also buys ones some very important social status (maybe the most valuable thing of all). Educational institutions have ranked-eliteness, and any social ranking is zero-sum. With everyone perceiving that one’s future income is, on average, proportional to the eliteness of their alma-matter, individuals will bid up the price of tuition to the level of their expected surplus. Elite institutions that don’t need the money to actually educated the students get to benefit from the Blagojevich effect, and can spend all the surplus on projects that shore up their relative prestige. And more and more people are trying to go to college these days, which all right-thinking people encourage, but elite institutions aren’t growing.
12. What’s the other thing then? Prime real estate. The re-equilibration of the labor force increasingly into ‘local-interaction’ service jobs means that, increasingly, in order to work in a lucrative and/or prestigious profession, one has no choice but to try and get as close to the center-of-gravity of some hub as feasible. That’s where your ‘interactive counter-parties’ and the whole network of their successive higher-order counter-parties have to be too.
So we are seeing a new phase of accelerating urbanization and centralization around super hubs, the whole local economic ecosystem of which orbits around a few ‘primary producer’ anchor industries that occupy a particular niche in the broader national economy. National matters more than international for a lot of these sectors, again because ‘local interaction services’ aren’t exposed to international trade, and international migration has important barriers and frictions. Every country seems to be settling on just one or perhaps just a few super-hubs. Examples for the US could be NYC and Chicago for finance, DC for government, LA for entertainment, and SF for tech.
Prime real estate is price inelastic and difficult to expand. Yes, there are property-development impeding regulatory exacerbations of this problem, but those are usually exaggerated by people for whom regulation is the favored boogeyman. There are major physical constraints as well, and these give rise to an ‘Induced Demand’ and Jevons problem. Like with traffic, the pain of crushing commutes is all that keeps some marginal people from also piling onto the highway. You can’t lower the pain – that’s the major ‘cost’ of using the infrastructure. You can divert congestion time-cost into toll money-cost, but the most efficient use will have an aggregate cost that the market deems more or less equivalent. The same principle holds true for the availability of both residential quarters and office space near the center of a hub, and the efficiency of the use of the land in that region.
That means, just like with education credentials, individuals have little choice but to bid up the price of prime real estate in these hubs to the very limit of their surplus. This problem is made even worse by the face that residential space near the center also has to compete directly for commercial office space near the center. This is because the transformation in the uses of the labor force into ‘local interaction services’ means that what most people are doing in those offices requires them to be in the same space where other people work and live.
And indeed, a major phenomenon happening all over the globe is that real estate prices in prime central spots in these national hubs are skyrocketing to the very edge of affordability, because that’s the only place most people can still work for good wages.
13. Ok, so education credentials and urban hub real estate are getting really, really expensive, but what’s that got to do with real interest rates for capital? Remember that part about the ‘stuff budget’ above? When most people are now working in stagnating ‘Baumol’ fields with no productivity growth so no income growth, and they also have to spend an increasing portion of their income on education and real estate, then their per-capita ‘stuff-budget’ is totally maxed out. There’s no extra disposable income for more stuff, and certainly not for continuous annual growth. That component of aggregate demand must stagnate, and that means manufacturers don’t have any source of additional demand to justify an expansion of output, which means they don’t have any use for additional capital.
14. Ok, but that’s only the demand side, but what about the supply side for savings? You need both to make a low price! Wouldn’t low interest rates discourage savings? A lot of people say this, but I (and Michael Pettis) would argue no. The relationship is ambiguous depending on your psychological model of saving (and the variance in personality types you assume in the population). First of all, the situation is complicated, because of demographic aging happening at the same time as technological change. But mostly, the crude models of time-preference discounting and interest-rates as an ordinary price do not capture the reality of saving behavior, and that’s easy to observe.
Let’s say you are a person trying to save for retirement and smooth consumption over your whole lifetime. A person like that saves more, not less, when interest rates go down. Or a pension plan (or government entitlement program) demands greater contributions from wages in order to satisfy existing promises, since they can’t do it with investment yields. The point is, lower rates don’t necessarily mean less savings, and can mean more for some people. What drives prices is the most elastic component of supply and demand, and commercial demand for capital is much more elastic than the other components. Since that demand is low, the price is low.
15. Oh man, there don’t seem to be any obvious ways to stop these trends and fix these problems, and now I’m totally depressed. Surely this story can’t get even more gloomy? Sorry, it can.
16. Oh no, how’s that? The problem is with the particular sectors in the ‘local interaction services’ sphere that have come to dominate that growing part of the economy (for various reasons). Think about the real value (the output vs. the cost) of the following ‘New Commanding Heights’ (NCH) fields: Finance, Law, Ordinary Government, National Security (i.e. government or government monopsonist) Health Care, and Education.
There is a lot of complaining that Finance takes up a larger and larger portion of the economy without any apparent significant social gains to justify it. Yes, there is a theory that market trades are not purely zero-sum, because of liquidity and diversification and risk-rebalancing, but recent improvements in those factors seem pretty small compared to the growth in the sector. Instead, what we see is closer to a rat-race competition. A rat race competition is one is which the same end-state ranking prevails at different levels of average effort, and so any effort above the minimal level is wasted.
The EMH doesn’t quite say that trying to beat the market is absolutely futile, but it does say that you shouldn’t be able to get any better compensation per man-hour of looking for under-priced investment opportunities than the prevailing rate of your equally skilled competitors. But since the highest skill players are going to pick all the low-hanging fruit, all that’s left is a ‘tournament market’ like in professional sports where the various funds have to steal talent from other fields and pay major-league salaries to stay in the running with each other. It may not be ‘wasteful’, but it’s not obviously positive sum in the social sense either. At least there are competitive market prices.
Law, by its adversarial nature, has become a lot like finance in this wasteful, zero-sum way. Some aspects of National Security (e.g. huge expenditures just to preserve the current balance of power) are similar too.
But the other NCH fields are even worse. Much, much worse. Just because education has a real value that people are willing to pay because of status signalling reasons and a ‘license to work’, doesn’t mean that it actually accomplishes much of a transformation of the individual that increases their inherent potential labor productivity by any significant margin. If the null-hypothesis of education continues into college, and the ‘signalling model’ is mostly true, then most of this expenditure and diversion of people out of the labor force is truly wasteful, with most of the surplus captured by the staff and administration of the most prestigious institutions. Sound familiar?
What about Health Care? Here the third-party payer problem – as well as huge and numerous political distortions – enter into the picture. National Security Contractors (often near-monopoly or cartels working under cost-plus arrangements) are analogous. The government as both policy maker and major monopsonist divorces prices in these fields from reality. It is notoriously hard to price security.
As for health care, there is good reason to believe that medical expenditures are far, far above the level that people would agree to pay, even in desperate circumstances, if they had to foot the bill on their own (even in a ‘student-loan’ like form of a low-interest debt amortized over the rest of their lives). There is also good reason to believe that a lot – maybe even most! – medical expenditures don’t even produce statistically noticeable results in the form of expected improvements, let enough preserving ‘earning power’ which could have a stronger social justification. Robin Hanson says you could cut expenditures by as much as half without much impact. The combined effect is a lot of waste.
And as for the work that government agents perform – there is probably no good way to calculate whether their efforts in the aggregate improves broader economic output to an extent sufficient to justify their salaries and benefits, but most of the analysis I find persuasive leans towards a net negative impact, especially on the current margin of new regulations. But anyway, as much as it does pay out, the government still doesn’t spend much on salaries and benefits compared to its redistribution role.
17. Sorry, I’m so depressed now that I’m losing the big picture of all those worrying examples. What’s the point of listing those out? The point is that not only are talented people being driven into Baumol-jobs of stagnating labor productivity, but by the nature of talented people, they are going to try and capture the highest paying jobs. But if more and more people are competing for those jobs, then you would expect wages to level out and decline. Which wages are doing, except for (1) A relatively small technical innovation sector, (2) an also small set of superstars at the top who are paid so much because they are competing with other superstars, and (3) those fields that are insulated by particular political distortions to the market, where most talented people will end up.
But the high wages in those fields are not related to the economic productivity of the labor being performed in any more of a sense than that is the amount of surplus they are able to extract from the rest of society and privately capture for themselves. That’s a classic ‘economic rent’, just like the monopoly rent that flows to those medallion holders. It looks like a market price, but it is not really the pure product of free-market supply and demand. It is being sustained by other factors, and so doesn’t have to depend for its value on the underlying real value of the activity: the compensation that would be paid in an undistorted marketplace.
18. Wait, what’s the point again? The point is that it is no coincidence – in fact an inevitable outcome – that the rent-compensation, ‘local interaction services’ NCH fields would be the most socially wasteful ones. The socially useful ones either don’t need much labor, or face too much labor competition to have high wages.
19. Hold on, I didn’t think it was possible, but wouldn’t things even worse? Sad but true. It’s not just real estate, education credentials, and NCH-services that are sucking up everyone’s disposable incomes so that there’s nothing left over for continuously more ‘stuff’ per person. In addition to that, it’s hard to see how a mature economy can continue to grow fast (at least, on a per-capita basis) if most of its income and capital is being diverted into zero-sum games of rat-race competitions, or else entirely wasted and squandered on negative net marginal value endeavors for political reasons.
20. Thanks Handle, now I’m seriously contemplating suicide. But maybe there’s still hope and you’re just an internet crank [guilty as charged] and completely out to lunch on all this, which is just totally wrong. I mean, no one else is telling this story, it’s not like you’re some special genius [not at all] and even our famously contrarian-tolerant host didn’t list this as a non-Keynesian mechanism. Why are you practically alone in this view?
I’m not. It’s not even my theory really, but I’ve been exposed to it and I’m explaining it on behalf of someone else who is working on a more formal expounding of the idea. I don’t know why it’s so rare, but my guess is that most people are really politically biased and desire the power to influence things. Even academics. I know, shocking, right?
But what I mean is really ‘applied normative sociology’. Most people want to blame bad things on their usual-suspect boogeymen, and they also want certain reforms or political intervention courses of action to occur, and they want to tell a story that offers justifications for those. That’s putting the cart (political bias) before the horse (an accurate account of reality). For members of the each of the three axis-groups in our host’s languages of politics, it’s really easy to identify who their boogeymen always are, and what the partisans always want to do, almost regardless of changes in circumstances.
This theory suffers from not satisfying either of those desires, and so it has no demand pool in the ‘market for confirmation bias’. It will go nowhere without a sponsor of some kind.
On the one hand, there are no genuinely evil boogeymen, just technological progress as a major driving force and ordinary people following incentives. No greedy exploiter capitalists, no cultural-philistines or barbarians, and just a few important government coercive agents that are generally popular – if not effectively sacred – outside Libertarian circles.
And on the other hand, there isn’t any obvious way to fix any of those that stands up to analytical scrutiny. People feel motivated to adopt beliefs which have a special seductive allure and magnetic attraction to most like-minded folks, and which can thus justify and promote the coordinated and collective group action of their coalition. That’s why we are a “Yes we can!” naively-optimistic culture, and why it leads us to embark on more than our fair share of hubristic follies. Sometimes that ‘irrationally overconfident’ attitude pays off, but in this case it doesn’t.
So, since it’s probably the case that there’s nothing anyone can actually do about these trends and problems, there’s no group-motivating suggestion to make, and no outlet for ambitious energies or ways to capitalize on them or satisfy the desire to have significant influence on opinions or events.
When there’s no personal payoff for believing the ugly truth, almost no one will. Quite the contrary, in fact. This story is, alas, very, very ugly, but I also believe it to be true. Have a nice day.
Is not most economic conduct motivated?
What group or groups of persons make enterprise investment decisions – managers; proprietors; entrepreneurs (in the original sense of between capital and innovator)? What are their motives in carrying out their concepts of their functions?
Why are surplus earnings (profits) so widely sequestered in “managed” enterprise? Low inflation may decrease the risks of losses from sequestration, compared to the risks of other losses available from redeployments of surpluses (or from reduction of reserve “cushions” via distributions).
So, what is it that affects motivations? Is it to be found principally in those elements detailed above; or, do we need to look for other factors?
Similarities to Japanese experience are so remarkable yet so unremarked upon.
Roger Farmer at UCLA Econ has long been saying that “animal spirits” are responsible for the long slump, with low real rates and low real investment. He tries to model animal spirits in the macro economy.
He may be wrong, but I think he has captured a valid interpretation of Keynes and has a story as plausible as any other.
3. Falling prices is occurring especially with IT spending. We are offically spending less on IT investments but businesses are benefitting a lot here. (IT rol
6. Population demographics of the Developed World Baby Bust. What is causing the slow growth is less people are being born, consuming and entering the work force. Basically, the world is all becoming Japan at different rates.
Some possibilities:
a) Things are better than the macro numbers indicate.
b) Regulation and malinvestment is stifling economic growth. For example, we have too much spending in education, health care and renewable energy that yields small, if any, productive gains but enriches insiders. At the same time environmental and occupational laws and financial regulation and so on are hindering economic growth.
c) The rent is too high! Education, health care and even housing are consuming too much of our paychecks leaving too little for leisure and investment pursuits.
d) Government is too big and too rigid and too focused on preserving the status-quo. This answer is reflected in points 1 – 5 of the original post.
Animal spirits, psychology, is perception, due to lower growth and increased risk adverseness, while secular stagnation, technology, is presumed reality to lie behind perceptions, due to fewer promising investments and riskier in themselves, both expectations. Both would be real interest rates too high for risky investments. not because rates are high, but risk is perceived high, whether that expected risk is perceived or real, and expectations can become self fulfilling.
Some time ago, a blogger (I think it was Arnold) asked – why don’t business people see the large pool of unemployed people as a cheap resource and set out to exploit it?
And I answered – Because no business I’ve ever known anything about starts from “resource X is cheap” but instead always from some idea about how to fill some market demand.
The same applies to real estate, interest rates, oil, etc.
So unless businesses at the macro level see a need for more capital (or refreshing of existing capital) to meet expected demand, they will be unmotivated to make such investments.
This suggests a combination of the accelerator model (more observable demand -> more capacity investment) and some variant of the “stagnation” model – there aren’t enough new ideas which seem credible paths to useful returns to justify investment risks.
Note that if those (or those in combination with some of the Arnold’s other candidates) are more or less true, reducing low-risk or even high-risk interest rates even to real-0 may not have any effect.
If you offer me a box of nice ripe oranges for free, but I cannot possibly eat any of them before they will rot, I will not take them, and might not even let you pay me to take them.
Capital investment is really no different. And at some level, consumption spending is no different.
I suspect you are right.
Used tires are really cheap as are shipping containers. Not sure anyone has figured out how to make a lot of money using either one. Lots of people have tried.
Uber has made use of a lot of underutilized capital (personal vehicles) although I doubt that was the impetus for their business. They were probably trying to meet an unmet need and the underutilized capital was just a bonus.
The tightening regulatory environment in a growing number of industries has to have a major negative impact on investment. Dodd-Frank killed new bank formation. The creation of new small banks literally stopped cold due to the regulatory overhead. Now if you want to start a new small business, you have to deal with a much smaller pool of much larger banks. Healthcare is experiencing the same thing after ACA, and even before. The regulatory overhead is unimaginable, the small players are getting gobbled up, and no sane investor would put their money in many parts of this space. These are just two massive industries where new investment by smaller, possibly disruptive players is getting choked off by the environment. There isn’t a lack of demand – no reasonable investor that is new to either of these spaces or experienced enough to try a start up will be willing to jump in. I only point out these two industries as I’ve worked in both. Experience in either of these will come to resemble working with the cable company more and more. There is no threat from smaller, nimble players because you can’t start small and grow any more. Have a nice day.
Then there’s Scott Sumner’s answer – never reason from a price (rate) change, reason from whatever is causing the price to change.
How about real options theory? Investment is low despite low interest rates because uncertainty is high. Option value is high, better wait rather than invest now.
My favorite pet story is the economy is awash in “buggy whip profits”. Many businesses that currently generate free cash flow will be either outsourced or computerized in the future, but it is clear that investment in such firms is not profitable.
This is consistent with the productivity dispersion recently discussed on MRU and also with the large share buybacks made by mature firms.
Because our financial system cannot intermediate these funds towards the really innovative firms, the result is high asset prices and low interest rates.
PSST. In PSST I put a lot of the emphasis on the Patterns. Investors can be last movers. So they can wait until the next secular trend makes itself apparent in a time of uncertainty.
“Andrew'” and Bryan Willman kind of beat me to the punch here.
But I would suggest looking for explanation of the current simultaneous low interest rate/low investment phenomena from another perspective – from within Arnold’s “Patterns of Sustainable Specialization and Trade” (PSST) conceptual framework. [heavy emphasis on Sustainable]
“Andrew'” suggested PSST and emphasized the “Patterns” component. I agree with that, but Bryan Willman also rightly introduces aspects of the “Sustainability” component – reluctance of “investors” to accept risk irrespective of the current dollar-cost (interest rates). Business/investors have to be able to explicitly identify, and have some certainty of, the “Sustainability” of their investment as far into the future as possible.
And just now, uncertainty is dominant – everywhere. And for business/investors and the financial markets, uncertainty represents infinite risk to the “Sustainability” of any investment.
There have been shifts between high return low risk environments to low return high risk environments throughout history and those low return high risk environments turned out to be mistaken expectations. This time is different hasn’t had a good track record but past returns are not indicative of future ones.