Recession is upon us, economists seem to agree, and now we need only discuss how to get out of it. One popular solution is to cut interest rates and print money. That has worked in the past for most of the U.S., but it did not work for Rust Belt states and cities such as Michigan, Cleveland, and Buffalo. The Rust Belt was unattractive to new business investment due to its high labor costs, high taxes (many of which were necessary to pay for commitments made decades earlier, either bonds or pensions for public employee unions), and inner-city crime (Detroit). Companies did invest the newly printed money, but they invested it in other regions of the U.S.
The Federal Reserve Bank is cutting interest rates, printing money, and ladling out the public’s cash to mortage speculators. When folks get their hands on this money, will they invest it in things that will cause the U.S. GDP to grow in the long run? Consumers will buy stuff, presumably manufactured items made in China or oil from Venezuela and the Middle East. Companies will invest some of the money, but presumably where they think it is most efficient to invest. In the old days, U.S. companies nearly always invested somewhere in the U.S. China was closed to foreign investment. India was tangled in bureaucracy and regulations. South America was unstable politically.
How does the U.S. stack up right now as a place to invest? Our workers are expensive because the cost of living here is high and their taxes need to be high enough to pay for a lavish government sector and an Iraq adventure that Joseph Stiglitz estimates will cost $3 trillion, a sizable fraction of our annual $14 trillion GDP. Our college graduates are roughly equivalent in ability to other nations’ high school graduates (story) and a lot of our high school graduates could not compete on the world market for any jobs other than manual labor. Our transportation system is comprehensive, but traffic jams can take an hour or more out of a worker’s day. Unlike other countries, we have no plans to implement congestion pricing. In communications, we lag countries such as South Korea in broadband speed and percentage of households connected; we lag all of Europe and most of Asia in mobile phone coverage. Our consumer market is huge, but it is also brutally competitive and most consumers have all of the stuff that they need; emerging middle classes in India, China, and Arab countries represent more of a profit opportunity.
If we handed out $500 billion right now to U.S. businesses and told them to invest it, how much of that investment would happen here in the U.S.?