Critics of the Trump tax cuts claim the idea behind them is a failure because business investment hasn’t risen since the tax cuts were implemented. This is, perhaps, a nice example of political partisanship superseding reasoned economic analysis.
That business investment has fallen is true. Not a great deal else about the complaint is.
Look at it from the macroeconomic viewpoint. As Keynes pointed out, it is largely changes in business investment that drive the economic cycle of boom and bust. This is driven by the “animal spirits” of the businessmen themselves. So, trade wars and rumors of recession — think this might have had more effect than changes in tax law? Could be and economists would tend to agree too.
It’s possible to look at microeconomic issues. Things like buying planes, they’re business investment. And what is one of the things to know about them at present? Boeing is having a hard time selling at least one model on the basis that the planes may fall out of the sky. Yes, this is a large enough number too and can even be seen in the trade figures, let alone durable goods and investment.
Further delving is possible too. Friedrich Hayek had a point in his Nobel lecture on the pretense of knowledge. That center, the bureaucracy or the government, it’s never really possible for it to have the detailed information it would require to take reasoned decisions in anything like real time. Which is why planning doesn’t and cannot work. A counter to this would be, well look, business investment is down! Hah!
At which point, a little gentle explanation is necessary. Business investment is, by definition, spending upon those things that are depreciated. That’s actually how it’s totted up in fact. If it’s something that’s going to last more than one year in productive use, then the cost doesn’t get written off (forget tax law here, think accounting) on the day of purchase. Those things that are get called current spending. Those that get depreciated over time are investment. Which is how the number is arrived at — what has business bought that is being depreciated, that’s investment.
This provides us with certain definitional problems. Buying a Microsoft Office site license that lasts a few years is investment — it’s depreciated over the life of the license in the corporate books. Buying Office 365 on a monthly subscription is current spending and doesn’t count as investment. And yet, the business is spending the same amount, more or less, on a system which loses emails with equal efficiency. Our corporate and national accounting records a lowering of investment, though.
Microsoft is pretty big, but not so big that this one program alone will lower U.S. corporate investment numbers notably. But the idea, software as a service, that is big enough. As a matter of interest, investment in software is about 1.6% or so of GDP. Call that $300 billion in a $20 trillion economy, just as a back of the envelope calculation. Spending on software as a service is what? Quite, that proves that the calculation of business investment in software is a complete crock, doesn’t it?
Which is the real point to get to. As Hayek proved, no one ever does have the information to be able to do any detailed planning of something as complex as an economy. The sands keep shifting under our feet — what used to be investment in software is now current spending upon it, meaning our measure of business investment has gotten away from us.
If detailed planning is impossible, then stop trying to do detailed planning, obviously enough. Instead, retreat to general principles and thus do the best that is possible. Who is going to spend money the best? You or your teenage children? Business or Uncle Sam, if we can ever staff that behemoth with people as parsimonious as our own offspring?
The purpose of tax cuts is to deny money to the bureaucracy. Therefore, as Milton Friedman pointed out, always and everywhere be in favor of cutting taxes. The justification is the Adam Smithian one that money should fructify in the pockets of the populace, not whatever might be said about business investment to get the idea through Congress.
Tim Worstall (@worstall) is a contributor to the Washington Examiner‘s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
