The Conditions for a Sustainable U.S. Recovery: The Role of Investment

Abstract

The anemic U.S. economic recovery and the threat of a double-dip recession stem from the weakness of investment, due to excess capacity created in the euphoric years of the "new economy" bubble. The current imbalances in the corporate sector (i.e., the all-time-high indebtedness in the face of falling asset prices) are preventing investment from picking up and are laying the foundation for a new, long-lasting expansion. Tax reductions may create a cyclical upturn in the short run and may promote the anemic recovery, but such stimulus to demand is unsustainable in the long run. The root of the problem is the imbalance in the corporate sector, which will take time for correction.