Kudlow’s lament: Is capital on strike in the U.S.?


Nov. 27 2019, Updated 12:31 p.m. ET

Investment in the United States

The below graph reflects the capital strike in fixed domestic investment in the United States. The “strike” of U.S. capital is the notion raised by CNBC commentator Larry Kudlow that despite record profits at U.S. companies, profits and capital aren’t recycling back into the U.S. economy as investment. As displayed below, U.S. corporate profits (the red line) were approximately 45% of total investment in the United States during the Reagan era in the 1980s. However, corporate profits now represent 85% of total investment in the United States—or nearly twice the historical levels. The most disturbing part of this trend is that despite the dramatic recovery in corporate profits post–2008 crisis, there hasn’t been an offsetting growth in investment in the United States.

What is fixed investment and why is it important?

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“Fixed investment” refers to fixed capital investment, including the replacement of depreciated fixed capital. Fixed investment doesn’t include financial assets such as bonds. Fixed investment, from an accounting perspective, includes physical assets held one year or more. Fixed investment is important because the level of fixed investment indicates potential longer-term economic growth and future productivity gains. The more fixed capital available per worker, the more each worker can produce. When fixed capital growth rates decline, productivity and economic growth rates are more likely to slow in the future. Fixed investments include items such as machinery, land, buildings, installations, vehicles, and technology. In the 1980s, fixed investment stood at approximately 20% of U.S. dross domestic product, or GDP, though it’s now closer to 15% of U.S. GDP.

As GDP is the sum of consumption, investment, government spending, and net exports, investment is a very important factor. Investment may be the most important factor in estimating the future of the U.S. economy, as investments create immediate economic growth and provide the foundation for the future economic growth required to maintain or grow consumption and create a strong revenue stream that governments derive tax income from.

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Without investment bouncing back in sync with corporate profits, future economic and productivity growth rates are increasingly likely to decline, and the government may continue to increase its debt levels to fill in for this investment shortfall. Conservative economists such as Larry Kudlow, and many others, feel strongly that “big government” and its spending policies are a poor substitute for private sector investment and spending. They believe the economic return on investment made by governments is very unlikely to be profitable or effective, and that it will likely only exacerbate existing economic weakness by increasing debt and crowding out the private sector from investment opportunities. There’s the belief that, in order to restore confidence and growth to the U.S. economy as well as investment, “big government just needs to get out of the way.”

Obama and Bernanke: “We created record profits and all we got was this lousy T-shirt”

The above graph may very well express that sentiment. Once again, you can can imagine the capitalist saying “Not with my money.” Perhaps capitalists are hearing Obama say “Technically, that’s not your money.” Perhaps this is a Mexican standoff between capitalists and the current administration. President Obama and Federal Reserve Chairman Ben Bernanke have apparently thrown in everything but the kitchen sink on fiscal and monetary policy since the 2008 crisis, pushing gross debt-to-GDP over the academic “magic number” of 100%—and what thanks do they get from the capitalists, other than criticism of their reckless spending and monetary policy?

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As the above graph shows, it’s clear that team Obama and Bernanke has nearly doubled corporate profits since the 2009 bottom. Investors and capitalists publicly applaud the estimated 2013 record S&P 500 Index earnings—topping $1 trillion for the first time ever—while privately (and sometimes publicly, as with Kudlow) bemoaning the monetary and fiscal costs required to generate those earnings. Perhaps it’s time for a little capitalist gratitude by giving the government some credit for financing the recovery and investing aggressively in the United States. Should these record profits not be invested in fixed investments (not simply in financial assets such as risk-free low-yielding government bonds) in the country, the United States could have wasted a wonderful opportunity. Simply plowing profits into cash and short-term government bonds seems a fairly risk-averse reaction to such incredible profitability. Is there something the capitalists know about the future of the country that the average American citizen doesn’t? Or are they simply risk-averse and self-interested? We’ll explore these issues in further detail in upcoming series.

Recycling more profits into investments in the United States would be great for the future of the country, reducing unemployment and enhancing the productivity of the American worker—thereby ensuring a sustainable and hopefully more prosperous future for all. The Obama Administration has done what it can in terms of monetary and fiscal policy, and perhaps now it’s up to capital to see if it will end the strike and invest in technologies that teach the average American worker to do more with more.

  • “Give a man a fish and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” —Anne Isabella Thackeray Ritchie
  • “Teach a man to fish and you destroy a wonderful business opportunity.” —Karl Marx
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Should investors see weaker fixed investment data in the near future, they may wish to consider limiting excessive exposure to the U.S. domestic economy, as reflected more completely in the iShares Russell 2000 Index (IWM). Alternatively, investors may wish to consider shifting equity exposure to more defensive consumer staples-related shares, as reflected in the iShares Russell 1000 Value Index (IWD). Plus, even the global blue chip shares in the S&P 500 or Dow Jones could come under pressure in a rising interest rate environment accompanied by slowing consumption, investment, and economic growth. So investors may exercise greater caution when investing in the State Street Global Advisors S&P 500 SPDR (SPY), Blackrock iShares S&P 500 Index (IVV), or the State Street Global Advisors Dow Jones SPDR (DIA) ETFs. Until consumption, investment, and GDP start to show greater signs of self-sustained growth, investors may wish to exercise caution, and consider value and defensive sectors for investment.

For further analysis of how China could be affected by slowing consumption in the United States, please see China’s exports: Is the golden age of cheap labor coming to an end? For further analysis of how Japan’s export-led recovery could be affected by U.S. consumption trends, please see Why Japanese exports could break out of a 5-year slump in 2013. For further analysis of consumption trends in the United States, please see U.S. consumer spending: Sustaining the unsustainable?


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