Digging through the Data
The BEA today revised down its estimate of GDP growth in the second quarter from 1.3 percent to 1.0 percent. Pretty dismal.
Interestingly, one piece of (relative) strength was business investment spending. Overall non-residential fixed investment – spending on new factories, machines, software and the like – rose at a 9.9 percent annual rate. Non-residential structures soared at a 15.7 percent rate and equipment and software 7.9 percent. (As an aside, the dismal housing market notwithstanding residential investment was up 3.4 percent.) Non-residential fixed investment contributed 0.94 percentage points to overall growth – meaning that it was 2nd quarter growth and the rest of the economy was flat.
This is potentially a foundation on which to build better growth. The policy imperative for more rapid growth must focus on the business sector. Households and governments are simply awash in debt and will not be able to power the recovery. Policies for sustained rapid investment growth should be at the top of any “jobs plan.”
Two candidates spring immediately to mind. The first is a reduced tax on repatriated earnings such as that proposed in the “Freedom to Invest Act of 2011” would reduce the tax on repatriated dollars to a maximum of 5.25 percent (from 35 percent). This is a sensible step toward the right long-run tax reform – a territorial tax system that would impose no tax on bringing funds back to the United States – and would pay immediate dividends.
The second would be to lower the corporate tax rate immediately and permanently. Again, this is consistent with the imperatives of long-run tax reform, which would feature an internationally competitive rate and territorial base. It would also provide immediate investment incentives (as well as increase equity valuations that would shore up household balance sheets).
Growth is unacceptably slow. A successful pro-growth strategy must feature a focus on business investment incentives.