I get the sense that a lot of people believe that if we increase investment in the United States we will increase economic growth. This is not exactly the case.

An increase in investment will increase the size of the capital stock which will take us to a higher growth path. The reason we are on a higher growth path is because we have more capital per worker and that makes every worker more productive.

However, the fundamental reason we have economic growth is because increases in technology. Expanding the capital stock happens naturally as technology improves. But, increasing investment will likely have very little effect on how fast technology progresses and thus the long term growth rate of the economy.

This is in contrast to say China, where the story is everywhere about capital deepening.

In that context its worth taking a look at what the US capital stock is composed of when thinking of how big of a deal this is.

Here are the components of the US capital stock


For example its worth noting that home improvements are twice as large as industrial equipment or information processing equipment and software.

The only part of the capital stock that beats out home improvements are homes themselves and the super-category of Commercial and Health Care structures. This latter category includes, offices, malls, warehouses, hospitals, etc.

Now this only includes private capital so roads and other government infrastructure are not in there. However, you can see that its overwhelmingly housing, then shopping.

So when you say, increase the size of the US capital stock to large extent what we mean are bigger and better homes and shopping centers.

And when we say increase the productivity of workers what we mean is that homeowners get more out of being their own landlords and that retail workers are serving customers in nicer facilities.

These are important things, but we should keep in mind that this is what we are talking about, not inducing a new industrial revolution come about. That will come from technological advances that seem to progress along with little concern for tax policy.