It’s Not Just A Demand Problem

What's behind the lack of business investment?

Listening to people like Paul Krugman, one is told that the reason for the low business investment that is holding back economic growth and job growth is because of a lack of demand, and that economic policies aimed at putting more money in people’s hands, thus increasing demand, would lead to more business investment, more hiring, and more economic growth. Over at his own blog this weekend, Dave Schuler expressed skepticism about the idea that it was low demand that was holding back business investment:

When business is slow, you don’t just sit in your office and say “Boo hoo. Demand is low”. You hustle. You advertise. You develop new products and services. You hire salesmen. You improve your commission plan. You go door to door if necessary looking for new business.

That’s why I don’t understand the explanation of the low level of business investment as due to low demand. I don’t think that’s a sufficient explanation. I’m using that word advisedly. It may be necessary to explain low business investment but I don’t think it’s sufficient. There’s got to be something else at work.

Low ROI I can understand. Low appetite for risk-taking I can understand. Doing all of your investment overseas due to better opportunities I can understand. Not investing due to low demand I can’t understand.

I think Dave is on to something here. Part of the problem with the “low demand” argument is that it’s typically made by academics and pundits who have no real experience in the business world, especially in the management side of  business. Without any practical experience, it’s not easy for such people to conceive of how a businessperson would react to a simply problem of low demand. Giving up, sitting back, and coasting along to destruction isn’t really an option for people who depend on their businesses for their livelihood.

So, if it’s not just a “low demand” problem, then what else could be going on?

A number of factors could be involved. Uncertainty about the near-term future of the economy is certainly going to be near the top of the list, as is uncertainty over health care costs, which constitute one of the largest and fastest growing expenses for businesses that provide it to their employees. The Chamber of Commerce will cite factors such as taxes and regulation, but while both of these factors too add to the cost of doing business, they aren’t all that much egregious today than they were five years ago when the economy was still going strong.

So what is it? To some extent I have to wonder if the main reason that business are sitting on so much cash right now is a reflection of the same economic pessimism we see on the consumer side. Is it possible that businesses look to the future right now and don’t see anything worth investing in? If that’s the case, then I’m not sure what’s going to turn them around.

 

FILED UNDER: Economics and Business
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. Stan says:

    This survey of economists says you’re wrong: http://tinyurl.com/3djh2mt

  2. Surveying economists about a business problem is akin to surveying theoretical physicists about a practical engineering problem

  3. samwide says:

    Well, there is a bright side for the ideologues: The current doldrums offer a keen opportunity to prove one’s favorite theory of The Source of All Evil in the World. However, I’m pretty sure nobody knows what the eff is going on.

  4. john personna says:

    Your technique in this piece was to say (1) demand is down, and (2) here are some things I don’t like.

    Therefore, you’d have us believe, that (2) caused (1).

    There’s not much to grip in argument, because there’s not much there in the first place.

  5. @john personna:

    I have obviously committed the Cardinal Sin Of The Blogsphere in not having an easy answer for every question.

  6. rodney dill says:

    @Doug Mataconis:
    You could resort to ‘I blame Bush’ like all the little attack cockroaches.

  7. john personna says:

    @Doug Mataconis:

    No, as I think James highlighted yesterday, the sin is thinking “everyone is like me” and would have the same concerns.

    So, you actually did a “demand problem” piece without mentioning unemployment? You talked about missing consumer demand, with a list of business-side concerns?

  8. @Doug Mataconis: I dunno, Doug, that seem like an awfully simplistic dismissal of an entire academic discipline.

    And, btw, isn’t the main uncertainty in the economy uncertainty about demand, at least from a business perspective? If I am a businessman who is making money right now, albeit not as much as I might like, why would I engage in the risk of things like Dave is describing (like hiring more salesman) if I am not sure about having more customers?

  9. john personna says:

    @rodney dill:

    I think that’s what we call “throwing up chaff”

  10. john personna says:

    I am going to cautiously recommend a book. I only read part of it. The prescriptions are actually left of my comfort zone, but I worry that it is well researched and well founded:

    Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism

    It is all the rage to dislike modern Keynesianism, but Keynes’ observations on animal spirits really stand apart. We are a social, tribal, species. We have a social and tribal mood. Modern Keynesians have a formula to shape animal spirits and confidence, but even if you discount their formula, you have to see that the underlying thing is there.

    Animal spirits are real. Given that they are “animal” I think they have to be shaped most by our own fears or confidence about our own personal futures. When our stocks fall, our house prices fall, our ability to keep, find, or change jobs falls … then of course our animal spirits decline. And we pull in spending.

  11. Dave Schuler says:

    Note that I do not deny that there is a demand problem or even that it’s important. I’m just suggesting that a) there are other forces at work, too; b) we don’t really know what to do about low demand; and c) we do know what to do about some of the other factors that contribute to slow growth.

  12. Tano says:

    Uncertainty about the near-term future of the economy is certainly going to be near the top of the list,

    I guess Steven beat me to it, but really Doug, what do you think this sentence of yours really means? What is this uncertainty about the near-term future of the economy from the perspective of a businessman? I think it is pretty obviously uncertainty about whether or not there will be sufficient numbers of customers, with sufficient amount of dollars in their pockets to support an expanded production. I.e. its a problem of demand.

    You don’t have a simple answer – and that is fine, except in this case, one is staring you in the face.

    Dave writes:

    Not investing due to low demand I can’t understand.

    Huh? Maybe what you are missing is that it is not just low demand – it is the lack of any good reason to see demand increasing in the near term.
    If you hire salesman, advertise, and do the other things you refer to, you must be making some baseline assumption that the demand is out there, just about ready to manifest itself, and all it needs is a little persuasion. Clearly most people, not just businessmen, do not have such confidence these days. There seems to be no end to the depressed nature of spending on the horizon. What rational businessman would invest in new capacity in these conditions?

  13. john personna says:

    @Dave Schuler:

    As an old chemist, I think of “limiting reagents.” You can mix up a solution of x, y, and z. If the speed of reaction is dependent on x, then adding more y or z doesn’t change things.

    That experience puts the more general “limiting factor” in stark terms. There are systems where you can change things, but if they aren’t the right things, they don’t matter.

    I kind of worry that you are saying “let’s change y or z, because we can.”

    (And of course people with y or z as their political hot button will say “ah, this is my chance!”)

  14. legion says:

    Doug,
    You’re making the same mistake all of Wall Street is.

    When business is slow, you don’t just sit in your office and say “Boo hoo. Demand is low”. You hustle. You advertise. You develop new products and services. You hire salesmen. You improve your commission plan. You go door to door if necessary looking for new business.

    Wrong. That’s the MBA 101 textbook answer, but it doesn’t apply in the economy we’re in. It can be summarized in one simple statement:
    You can’t sell things to people who have no money.

    A larger-than-normal number of people currently have no job. An even larger still number of people are living paycheck-to-paycheck, desperately (and rightfully) worried that any unexpected expense could totally destroy their lives. In that kind of arena “selling harder” simply won’t work. To summarize the summary:
    It’s a demand problem.

  15. snarky bastard says:

    Or we can actually look at the data and see that Non-residential fixed investment (mainly business capital investment) has rebounded sharply since 2008:
    http://research.stlouisfed.org/fred2/graph/fredgraph.pdf?id=PNFI

    Business investment has bounced back fairly nicely since 2008/2009 We’re All Going to Die — the big drop in investment demand is shockingly in residential fixed investment (IE new home construction)

    But why let facts get in the way of a non-Keynesian story that you dislike

  16. john personna says:

    @legion:

    When business is slow, you don’t just sit in your office and say “Boo hoo. Demand is low”. You hustle. You advertise. You develop new products and services. You hire salesmen. You improve your commission plan. You go door to door if necessary looking for new business.

    The other thing that’s wrong with this is that companies actually have data. They can make an informed decision about ROI for any investment, in new locations, new staff, or new products.

    That works for some companies:

    Apple Opening New Stores in Canada, Germany, and Italy This Week

    But not for others:

    Atlantic Books closing most of its South Jersey locations

  17. marcus nunes says:

    It´s never just “one thing” but lack of demand, actual and prospective, is likely the most important factor weighing down the economy:
    http://thefaintofheart.wordpress.com/2011/08/21/%E2%80%9Cuncertainty%E2%80%9D/

  18. Stan says:

    @Doug Mataconis: OK, let’s see what small business owners say:

    http://tinyurl.com/3z4oxbn

  19. Stan says:

    And one of the guys who runs PIMCO:

    http://tinyurl.com/3c4fep4

  20. JKB says:

    Seems to me it is the pipeline problem. The whole host of things that have to come together in order for a pipeline to be built. It is not enough to have oil or gas to sell, you need a long term, contractually committed customer on the other end who will take the bulk of the product. And, of course, the end user has to have customers who will buy the oil or gas at a price above what has to pay for it from the supplier and the costs incurred along the pipeline. But that is not enough, to get a pipeline built. Between the source and the end user, there are a whole host of different jurisdiction who will have to agree, for a fixed assured price over a relatively long period, to permit the pipeline to operate. If any one, jurisdiction says no or want to high a tax or fee, then the pipeline doesn’t get built.

    So there is a demand problem but you can’t just give people some cash to spread around to make it look like there is demand (like con artists do). The demand has to be real, expected to remain long term and at a price that covers all the costs plus some profit between the source and the end user. Of course, if any jurisdiction along the pipeline suddenly makes their charge uncertain, the flow in the pipeline dries up until things are sorted out.

    Yes, there is a demand problem, but it is one of long term, relatively certain demand, not break your piggy bank for one last purchase demand. Otherwise, the pipeline dries up or operates at low rates or since we’re talking about virtual pipelines here, reroutes through more friendly territory.

  21. Herb says:

    Great links, Stan, especially about the small business survey.

    The guy that says insurance is killing him has a point, but I think since a lot of insurance in government-mandated (not even talking about Obamacare), you can’t separate that from the regulation angle.

    The internet angle is an interesting one….and one that I think may actually be worth exploring in more detail. It’s no question that the internet has devastated, not just companies, but entire industries. Who wants to run a record label or a newspaper anymore? Maybe we’re going through an adjustment period or something.

    I will say this, though. The company that I work for didn’t exist in the pre-internet days. It couldn’t exist in the pre-internet days. There are a lot of companies like that, and maybe those are the companies that we should look to for economic growth.

  22. john personna says:

    @JKB:

    So there is a demand problem but you can’t just give people some cash to spread around to make it look like there is demand (like con artists do). The demand has to be real, expected to remain long term and at a price that covers all the costs plus some profit between the source and the end user. Of course, if any jurisdiction along the pipeline suddenly makes their charge uncertain, the flow in the pipeline dries up until things are sorted out.

    What Shiller actually argued in Animal Spirits was that government had to present a “steady on” message, and convince people that it was credible.

    That is different than “one time this” or “one time that.” The thing is though, it is a commitment by government.

    If we don’t want “steady on” support, and we don’t want “one time this,” are we back to austerity and the long wait?

  23. john personna says:

    @Herb:

    You might enjoy two items via Marginal Revolution yesterday.

    This is probably the nub of Jaron Lanier’s argument:

    … whenever you improve efficiency, when you save money, it’s only the same thing as making money if you’re already rich. If there are people who aren’t rich enough to benefit from that, it just makes them poorer because they have less to do, and less ways to earn money.

    That’s not exactly right, but not completely wrong. It’s the “autoteller argument” again.

  24. anjin-san says:

    The GOP spends a lot of time these days talking about the evils of uncertainty. It makes you wonder what they were thinking when they upped the ante and engaged in hostage taking over the debt ceiling, moving us from uncertainty to the much scarier instability.

  25. Herb says:

    @john personna: JP, thanks, man. I ran across that Lanier piece in my blog surfing the other day and could NOT remember where I saw it. I wanted to give it a more thorough reading.

  26. Andy says:

    @legion:

    Wrong. That’s the MBA 101 textbook answer, but it doesn’t apply in the economy we’re in. It can be summarized in one simple statement:
    You can’t sell things to people who have no money.

    Money hasn’t disappeared. Demand is down, but it hasn’t disappeared. The businesses that aren’t hustling in order to compete are the businesses that are going to fail. The point is that when demand is down businesses don’t passively sit around waiting for demand to go up – they try to generate more demand and they try to out-compete others for what demand does exist.

    Anyway, the real problem is that no one knows how to create demand.

    Let me use me as an example. For the last six years or so my family has been saving about 30% of our income (to include our kids college funds) mainly because we have little confidence that we will actually receive the retirement and government retirement benefits promised us. The math doesn’t work. So we are saving as much as we can even though my wife’s employment is about as secure and stable as one could hope for – so we are not concerned about losing income or a job even in this environment. We are almost completely deleveraged – we should (hopefully) be debt-free in less than a year which is a process that’s been long and arduous (selling a house at a loss and bringing cash to closing sucks big time). These actions mean we are buying fewer products and services than we otherwise would. We are consuming a lot less than we used to. Furthermore, we don’t have any plans to begin increasing our consumption. We are part of the “demand” problem. Frankly I don’t know what government or anyone could realistically do at this point to convince us to increase our consumption and decrease our saving.

    I’m one of the lucky ones because we have the ability to save a significant amount of money by cutting debt and expenses and living a more frugal lifestyle. A lot of people don’t have that luxury – how are we to increase their demand? I don’t know the answers and it seems to me that no one else does either.

  27. Ben Wolf says:

    The post borders on foolishness. You reject actual quantitative data in favor of anecdote in individual transactions. “Gee, if I were a businessman I would . . .” is not empirical evidence, it’s a method for imposing one’s own biases upon a given problem.

  28. gVOR08 says:

    @Doug Mataconis: No Doug, you’re guilty of having a weak argument. I see Stan at 09:57 beat me to the McClatchy link. The one where they actually asked small business people why they weren’t selling, investing, and hiring. The one where they said it’s because nobody’s buying stuff.

    As for Schuler’s argument that everything would be good if business people were out hustling, weren’t they supposed to be doing that before the crash? Don’t you think they were? Don’t you think they are?

    You’ve been flogging an anti-stimulus argument from one angle or another through this and the broken window posts. Based on comments, you’re losing. It might be prudent to back off and rethink both your arguments — and your position. You might start with Ezra Klein’s post today on how Republicans were just fine with stimulus until very recently. What changed?

  29. Hey Norm says:

    Schuler poses a narrow focus solution:

    “…You hustle. You advertise. You develop new products and services. You hire salesmen. You improve your commission plan. You go door to door if necessary looking for new business…”

    To a broad based problem.
    Demand is lacking across the board. It’s not just Acme Widgets problem. If it were then yes – Schuler would be onto something. But the problem exists in almost every sector.
    We have 9% unemployment. Our solution to that problem is to institute an austerity program that slashes spending and cuts even more jobs. We’ve had over a year of private sector job creation. Yet we have done our best to offset a good share of that with public sector job contraction – over a million jobs lost.
    And yet you can’t figure out what the problem is. Is there a license required for blogging?

  30. Rob in CT says:

    @Andy:

    One thing the government should *not* do is to target stimulus at people like you and me. When I got my tax cut from Bush the Younger, it did nothing to my consumption – I simply saved more.

    Whatever is done should target people we know would spend the money. That usually means relatively poor people. Of course, standard right wing thinking is that poor people largely deserve to be poor and get too many handouts already, so that’s dead in the water.

  31. Steve Verdon says:

    @john personna:

    I don’t think you know what you are talking about when it comes to animal spirits. Here, lets go to the source, Keynes himself,

    This [operation of varying animal spirits] means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent;—it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends.”

    So the question is, is the current atmosphere congenial to the businessman? Not just Wall Street, and not just big firms, but all businessmen? If the answer is, not like it was 5 years ago, then that could be a factor in why our economy is performing so poorly.

    And I find it amusing so many are discussing “animal spirits” when Krugman is so dismissive of the issue of confidence and refers to it as the confidence fairy. The irony is quite amusing.

  32. Lit3Bolt says:

    @john personna:

    That article you referenced was a good one.

    It’s funny how often we come back to this tired old canard of virtue vs. vice in economics. If you can’t sell something, you’re lazy and immoral. If you can’t buy anything, you’re lazy and immoral. If you can’t save or invest, you’re lazy and immoral. But if you have wealth and land, you’re a lord among men and deserve respect for the hard work it took signing papers and examining financial assets. Why? Just because. It’s tautology.

    The same virtue/vice morality play occurs in a government spending debate. If people get money seemingly for free, wrath and rage erupts and pouts over the unfairness of it all abound. But was it people getting money from their government tax dollars putting them to work or from investors using computers and models to make millions on microsecond transactions? Somehow, one is more “moral” than the other, depending on your view.

    There’s plenty of work to be done. Infrastructure, teaching, maintenance, new domestic industries, etc. The government can print money to make it happen. But somehow putting millions of people to work for 10 dollars an hour is more evil than giving billions of dollars to a select few financial titans. But millions of people consuming has more of an economic impact than a single investor putting billions into a computer network. Both of have gotten something for nothing. But one is more “fair” than the other.

  33. Ben Wolf says:

    If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent;—it is the mere consequence of upsetting the delicate balance of spontaneous optimism.

    You aren’t quite getting your own quote, Steve. What this means (and Keynes made this clear) is that markets often react in an irrational manner, and that governments must take steps to ensure that irrationality doesn’t damage the economy. It’s an argument for a greater governmental role in the private sector.

  34. Ben Wolf says:

    The government can print money to make it happen. But somehow putting millions of people to work for 10 dollars an hour is more evil than giving billions of dollars to a select few financial titans.

    The irony of worshipping the private sector when every dollar it has comes from the federal government seems utterly lost on conservatives and right libertarians.

  35. Lit3Bolt says:

    @Steve Verdon:

    The confidence fairy and the dreaded dragon Lack of Demand are the same beast, indeed. I’m also confused why Krugman dismisses one and not the other.

    I for one recommend putting all of the investing class on a strict cocaine and vodka regimen, like we had back in the 80s. I’d bet we’d see Dow 30,000 in less than a week.

  36. john personna says:

    @Steve Verdon:

    I’m totally comfortable with that Keynes quote, though it makes a narrow focus on the businessman. It is more or less the definition Shiller and Akerlof use in their book, but I think they go wider, that we are a market democracy, and all of our spirits matter.

    So the question is, is the current atmosphere congenial to the businessman? Not just Wall Street, and not just big firms, but all businessmen? If the answer is, not like it was 5 years ago, then that could be a factor in why our economy is performing so poorly.

    Yes, in this paragraph you limit yourself the the spirits of businessmen, and not of the broader, aggregate, communicating, on-line, society.

    And I find it amusing so many are discussing “animal spirits” when Krugman is so dismissive of the issue of confidence and refers to it as the confidence fairy. The irony is quite amusing.

    If Krugman was trying to say animal spirits matter, but you can’t more them, that would be a strange position for an arch-Keynesian. Of course, if he is saying cuts are the wrong way to move them, that would be consistent with his position.

  37. john personna says:

    Shorter: Our animal spirits matter. Right here, in this thread.

  38. Steve Verdon says:

    @Ben Wolf:

    No Ben, it is saying that if businessmen are worried about government action then that is a problem and one policy makers should keep in mind. Keynes says it isn’t rational, but I’m not sure I agree with that. Government changing the rules of the game on people can have a very disconcerting effect and for very rational and good reasons.

    @john personna:

    It would help if you wrote in a more coherent manner. For example,

    Yes, in this paragraph you limit yourself the the spirits of businessmen, and not of the broader, aggregate, communicating, on-line, society.

    WTF does that even mean? That people posting on blogs is going to have an impact, that it is a form of investment or did you omit a few words making it harder to understand?

    BTW, I find the review article a hoot where the reviewer goes on about how Akerlof and Shiller have a way of coming up with policy to influence animal spirits in a predictable way. That you link so approvingly also makes me laugh.

    @snarky bastard:

    Sorry, look at your graph again. Yes it is going up, but if you look at earlier recessions you’ll see a break in the patterns regarding the last two recessions. The 2001 recession had a very long recovery time for investment and unemployment lagged significantly behind the expansion in GDP. Looks like things might be even worse this time given that there decline in investment was much more severe.

  39. Steve Verdon says:

    @john personna:

    If Krugman was trying to say animal spirits matter, but you can’t more them, that would be a strange position for an arch-Keynesian. Of course, if he is saying cuts are the wrong way to move them, that would be consistent with his position.

    If animal spirits are irrational, then how do you move them? The idea of having a mathematical formula goes very much against what Keynes was talking about. Further up on the page that quote comes from (162) Keynes notes that mere mathematical expectation is not sufficient. So I find this notion that they can be moved, and in way that is predictable rather silly. If that were the case then I’d argue animal spirits are not irrational.

  40. steve says:

    “I think Dave is on to something here. Part of the problem with the “low demand” argument is that it’s typically made by academics and pundits who have no real experience in the business world, especially in the management side of business. Without any practical experience, it’s not easy for such people to conceive of how a businessperson would react to a simply problem of low demand.”

    Good. Now, whenever you comment on health care I will automatically be right in my responses because I am a doctor.

    Steve

  41. An Interested Party says:

    You could resort to ‘I blame BushObama’ like all the little attack cockroaches.

    Happy to be of help…

  42. john personna says:

    @Steve Verdon:

    Yes, in this paragraph you limit yourself the the spirits of businessmen, and not of the broader, aggregate, communicating, on-line, society.

    WTF does that even mean? That people posting on blogs is going to have an impact, that it is a form of investment or did you omit a few words making it harder to understand?

    Look way up top and you will see Steven Taylor and I asking Doug why he is concentrating on business side concerns, in the context of a demand problem. You seemed to be repeating that cycle, asking why business side concerns don’t matter.

    Right?

  43. john personna says:

    @Steve Verdon:

    If animal spirits are irrational, then how do you move them?

    I’m cursed as a centrist. I can’t believe, like Krugman, that all it takes is enough deficit spending. Neither can I believe, like a Tea, that all it takes is spending cuts.

    I sense that a middle approach, a pragmatic dealing with each problem individually, will build confidence over time. For instance, got a Post Office problem? Fix the Post Office. Then move on the the next problem. Don’t make it in to ideological battle #2353,

    I was just watching the Morning Joe rerun. In it they noted that the debt ceiling debate in Congress produced the second biggest drop in consumer confidence on record. It was a 15% hit. It was twice the 7% hit that came with 9/11.

  44. john personna says:

    @Steve Verdon:

    That you link so approvingly also makes me laugh.

    Actually I thought it was most fair to give a critical link.

    That is also why I said above “I am going to cautiously recommend a book.”