The Financial Crisis Hurt All Investment, Not Just Housing

November 19, 2014

The financial crisis was most disastrous for housing, but it was terrible for all kinds of investment. After accounting for the wearing out of equipment and buildings, most sectors of the U.S. capital stock are barely being replenished fast enough to make up for depreciation. The U.S. is doing little to expand its capital stock and is instead mostly just holding on to what it has.

The chart below shows net investment, which is all investment in physical capital minus the lost value of previously purchased physical capital due to wear and tear.

The low investment in corporate structures and equipment helps explain why wage growth has been so sluggish. Tax reform, which lowers the cost of capital, could increase investment and grow the economy.

For more charts like this, please see our new chart book, Business in America: Illustrated.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

Depreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment.