The Competitive Edge -- Are We Investing Wisely for Our Economic Future?

Recent statistics paint a dismal picture of U.S. business investment versus what is needed to continue our success as a world leader in sophisticated capital goods and technology. And there are reasons to worry about the long run as well.

In the last two quarters, investment in equipment and software, key factors in our high-technology industrial economy, fell by 28% and 34%, respectively, at annual rates. Production of industrial equipment has fallen by 21% since its high in 2007, the biggest decline since the 1950s. This contrasts sharply with an investment boom in China, where fixed asset investment already averages more than 40% of GDP and grew by 33.6% in the first half of 2009. India, too, invests nearly 50% more than the United States in terms of the proportion of GDP. In the tough year of 2008, even Germany increased investments in machinery and equipment by 6%.

Granted, much of the investment in China and India, which devote more than 40% and about 25%, respectively, to gross investment, is to catch up with the developed world. And much of that investment likely results in unneeded capacity, especially in areas like steel and automobiles in China. But even that fact is troubling, as these two emerging giants are building capacity to serve their own growing markets, and exporting the surplus to ours. Because of the ongoing deleveraging in the U.S. economy, we need to capture more market share in fast-growing Asia (and elsewhere) to compensate for reduced purchasing power in the developed world.

The massive stimulus bill in the United States was billed as an investment, but the amount going to infrastructure and industrial investment in areas like alternative energy production, amounts to around 0.5% of GDP in 2009 and 2010. Again contrast this with China, where its stimulus package led to increased infrastructure investment of 57% at an annual rate in the first half of 2009, according to economist Ed Yardeni.

With domestic capacity utilization at 65% and demand for products still at a bottom, it is little wonder that businesses are reluctant to invest. Added to this is the massive policy uncertainty associated with pending climate change, labor regulation, and health care legislation, and the potential for massive tax increases. Moreover, because of the already dismal fiscal realities facing the U.S., related to Social Security and retirement programs above all, the potential for better investment incentives related to our industrial economy is severely constrained. According to economist Eugene Steurle, in about 10 years, based on current policy and not assuming expansion of federal health care, every dollar of federal revenue will be committed to mandatory spending programs. This leaves little ability to shift resources into programs such as infrastructure investment or basic and applied research.

July 2009 marked the 40th anniversary of the first American to walk on the moon. We have largely forgotten the tremendous national investment in basic research, totaling 2.5% of GDP at its height, that led to this historic event, and which also contributed mightily to American technological superiority over the next two generations. Federal investment in basic research has fallen to 0.3% of GDP. Now China, India, Japan, Russia and Europe all have active space exploration programs.

If we are to compete with the rising economic powers, and traditional ones like Germany, we must do better in the short and longer run. We need to think more carefully about how we spend "stimulus" dollars and pay attention to the fiscal imbalances that constrain future investments. We must create anew a policy environment that favors investment in technology and productivity-enhancing processes, which are key not only to manufacturing, but also to improving our quality of life.

Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.