Senator Marco Rubio released a report titled: American Investment in the 21st Century: Project for Strong Labor Markets and National Development. The report was released as Rubio’s role as Chairman of the U.S. Senate Committee on Small Business and Entrepreneurship.
The report outlines a key concern echoed by many economists and policymakers in the United States and Europe. Why are aggregative business investment levels at historic lows?
Declining investments puzzles economists. For example, British economist Jonathan Haskel and Stian Westlake recently published Capitalism Without Capital: The Rise of the Intangible Economy to explain declining corporate investment. The book notes the uncertainty inherent in the innovation economy and the challenges associated with applying traditional accounting practices to innovation.
Rubio’s question is important for many reasons. First, declining investment seem counter-intuitive given how much notoriety venture capital, startups, and innovation receives.
Second, declining investment poses a rising geopolitical threat. If a country or economy fails to invest in innovation, they could risk losing their global standing as other countries become more innovative.
Not only are aggregate levels of investment at all-time lows, but there are substantial imbalances between investment and borrowing in key sectors of the economy.
Rubio is writing from a limited Government perspective and acknowledges that the progressive left would take the position that Government should scale up their borrowing efforts through policies such as the Green New Deal.
Rubio argues that investment from private, non-financial corporate business, instead of Government, will maximize resources for the real economy. In the below graphic, Government and Foreign trade are the net “investors” or borrowers in the economy instead of private business.
Nonfinancial corporates are not an investor in the real economy, but a consumer of financial assets.
Rubio agrees with the Progressive left that shareholder value is an ideology and leads to corporate short-termism and disinvestment from managers.
Short-termism occurs when managers are disincentivized to make long-term investments in innovation that could secure the national interest and build real assets. Instead, the non-financial corporate sector is more incentivized to invest in financialization.
Disinvestment and scaled-back innovation can deteriorate national economic leadership in the innovation age.
Rubio rightly argues that nonfinancial corporates must invest in the real economy as their duty in securing the national interest.
However, nonfinancial noncorporate business, i.e. small business, could also play an increasing role in investment. Here’s why small business is important:
- Small business accounts for a higher percentage of net new job creation.
- Small business is a testing ground for new ideas.
- Small business generates local impact especially in small to mid-size cities. They are a source of community well-being.
As rising powers innovate through top-down Government investment, America can offer a clear alternative led by bottom-up investment from small business.
Rubio’s call for nonfinancial corporates to invest more in innovation and the real economy is important. But we might also look to increase nonfinancial, noncorporate business as a key driver of American innovation.
We must trust in American decentralization.