No Recovery Until America Invests Again

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While most Americans are familiar with the broad ups and downs of the economy and the job market — the stuff of daily headlines — the deeper story of the continuing recession can be found buried in the statistical appendix to the 2010 report of the president’s Council of Economic Advisers.

That story: a devastating decline in investment spending.

The government’s data reveal that, contrary to popular belief, consumer spending held up fairly well during the recession, falling less than 2% from the fourth quarter of 2007 to the second quarter of ’09.

Most of this decline was erased during the third and fourth quarters of 2009, so by the final quarter of last year real private consumption spending was less than 1% below its previous quarterly peak.

Although the drop in private consumption spending obviously contributed to the recession, the drop in private investment spending — primarily business purchases of structures, equipment, software and additions to inventories — was far more significant.

Gross private domestic investment peaked in 2006. Between the first quarter of that year and the second quarter of 2009, it fell precipitously, by nearly 34%.

During the second half of 2009, investment spending increased by only 10%, so that late last year it was still (when measured at an annual rate) running 29% below its early 2006 level.

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Robert Higgs [send him mail] is senior fellow in political economy at the Independent Institute and editor of The Independent Review. He is also a columnist for His most recent book is Neither Liberty Nor Safety: Fear, Ideology, and the Growth of Government. He is also the author of Depression, War, and Cold War: Studies in Political Economy, Resurgence of the Warfare State: The Crisis Since 9/11 and Against Leviathan: Government Power and a Free Society.

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