The Economic Consequences of Higher Investment

Abstract

Increased investment is essential to restore growth, but this will require higher savings as well as higher investment. Subject to the limited amount of help likely from rising current account deficits, domestic savings will need to rise at the expense of consumption. This will be unpopular. Those who claim that high corporate cash holdings mean that additional investment can be financed without more savings are confusing stocks with flows. Equally at fault are those who think that additional public sector investment will be painless because interest rates are so low. Companies in the US are the only major sector which is a habitual buyer of equities. Additional corporate investment will lead to fewer buy-backs, lower share prices, and higher household savings. This will narrow the savings gap, but fiscal deficits are highly correlatated with corporate net savings, so rising taxes are likely to be needed if investment rises.