The Pretense of Stagnation

Tyler Cowen posts the following graph

and suggests that it is indicative of his Great Stagnation thesis.

However, if we disaggregate the overall stock of capital – which is ultimately what we care about – even a little bit we see three very different trends underlying business investment.

I apologize for the graph quality but the BEA is no FRED. In any case the dark blue line is industrial equipment and has been rising at roughly the same pace over the past 40 years, which means in log terms there has been a steady slowdown as the US deindustrializes. But, of course that is nothing new to any of us.

Transportation equipment – the very light line – is extremely sensitive to the business cycle. It flattens out during the 1980s, reaccelerates in the 90s and then falls off a cliff in the recent recession.

That’s not even investment – that’s the overall stock. The stock of automobiles has been falling since 2007.

On the other hand the yellow line – information processing equipment – has simply exploded as was unaffected by the recession, or any recession for that matter.

The lesson is that what we call fluctuating investment net investment is largely fluctuating investment in transportation. When money is tight or fuel is expensive the stock of transportation equipment in general, and trucks in particular falls. Not, just investment but the actual stock.

While that does represent important losses in economic potential I think its different than what folks have in mind when they conjure up the term “investment.”