Economy
Why aren’t companies speeding up investment? A new theory offers an answer to an economic paradox
David Ikenberry discusses the paradox of slow corporate investment despite record profits and cash reserves. He attributes this to excess capacity and structural economic rigidities, challenging traditional assessments like Tobin’s Q and highlighting the need for understanding demand issues in economic policy.
David Ikenberry, University of Colorado Boulder
For years, I’ve puzzled over a question that seems to defy common sense: If stock markets are hitting records and tech innovation seems endless, why aren’t companies pouring money back into new projects?
Yes, they’re still investing – but the pace of business spending is slower than you’d expect, especially outside of AI.
And if you’ve noticed headlines about sluggish business spending even as corporate profits soar, you’re not alone. It’s a puzzle that’s confounded economists, policymakers and investors for decades. Back in 1975, U.S. public companies reinvested an average of 25 cents for every dollar on their balance sheets. Today, that figure is closer to 12 cents.
In other words, corporate America is flush with cash, but it’s surprisingly stingy about reinvesting in its own future. What happened?
I’m an economist, and my colleague Gustavo Grullon and I recently published a study in the Journal of Finance that turns the field’s conventional wisdom on its head. Our research suggests the issue isn’t cautious executives or jittery markets – it’s about how economists have historically measured companies’ incentives to invest in the first place.
Asking the wrong Q
For decades, economists have relied on a simple but appealing ratio – Tobin’s Q, named after the famous economist James Tobin – to gauge whether companies should ramp up investment.
They calculate this by dividing a company’s market value – what it would take to purchase the firm outright with cash – by its replacement value, or how much it would cost to rebuild the company from scratch. The result is called “Q.” The higher the Q, the theory goes, the more incentive executives have to invest.
But reality hasn’t conformed to fit the theory. Over the past half-century, Tobin’s Q has gone up, yet investment rates have gone down sharply.
Why the disconnect? Our research points to one key culprit: excess capacity. Many U.S. companies already have more factories, machines or service capability than they can use. By not correcting for this issue, the traditional Tobin’s Q will overstate the incentive that companies have to grow.
To see this, consider a commercial real estate company that owns a portfolio of office buildings. In recent years, with the rise of e-commerce and remote work, many of their properties have been running well below capacity. Now suppose a few new tenants start paying rent and begin absorbing a portion of that empty space. Stock prices will rise in response to seeing these new cash flows, which in turn will lead Q to rise.
Traditionally, this increase in Q would suggest that it’s a good time to invest in new buildings – but the reality is quite different with idle capacity still in the system. Why pour money into building another office tower if existing ones still have empty floors?
This key idea is that what matters isn’t the average value of all assets – it’s the marginal value of adding one more dollar of investment. And because capacity utilization has been steadily eroding over the past half-century, many firms see little reason to invest.
That last point may come as a surprise, but the U.S. economy, with all its factories and offices, isn’t nearly as abuzz with activity as it was after, say, World War II. Today, many sectors operate well below full throttle. This growing slack in the system over time helps explain why companies have pulled back on their rate of investment, even as profits and market values climb.
Why has capacity utilization fallen so much over the past half-century? It’s not entirely clear, but what economists call “structural economic rigidities” – things such as regulatory hurdles, labor market frictions or shifts in cost structure – seem to be part of the answer. These factors can drag businesses into a state of chronic underuse, especially after recessions.
Why it matters
This isn’t just an academic debate. The implications are profound, whether you closely follow Wall Street or just enjoy armchair economic policy debates. For one thing, this dynamic might help explain why tax cuts haven’t spurred investment the way supporters have hoped.
Take the 2017 Tax Cuts and Jobs Act, which slashed the top corporate tax rate from 35% to 21% and introduced full expensing for equipment investments. Supporters promised a wave of new investment.
But when my colleague and I looked at the numbers, we found the opposite. In the four years before the tax cuts, publicly traded U.S. firms had an aggregate investment rate, including intangibles, of 13.9%. In the four years after the tax cut, the average investment rate fell to 12.4% – in other words, no evidence of a bump.
Where did those liberated cash flows go? Instead of plowing this newfound cash after the tax cuts into new projects, many companies funneled it into stock buybacks and dividends.
In retrospect, this makes sense. If a company has excess capacity, the incentive to invest should be more muted, even if new machines are suddenly cheaper thanks to tax breaks. If the demand isn’t there, why buy them?
Even with the most generous tax incentives, the core challenge remains: You can’t force-feed investment into an economy already swimming in excess capacity. If companies don’t see real, scalable demand, tax breaks alone aren’t likely to unlock a new era of business spending.
That doesn’t mean tax policy doesn’t matter – it does, especially for smaller firms with real growth prospects. But for the large, well-established firms that make up the lion’s share of the economy, the bigger challenge is demand. Rather than trying to stimulate even more investment, policymakers should prioritize understanding why demand is sagging relative to supply and reducing economic rigidities where they can. That way, the capacity generated by new investment has somewhere useful to go.
David Ikenberry, Professor of Finance, Leeds School of Business, University of Colorado Boulder
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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News
Money Management: The Importance of Financial Literacy
You may have mastered the core subjects like math and grammar in school, but financial literacy – or understanding the basics of money management in order to help you make better financial decisions – often goes overlooked before adulthood. It’s not so much a course of study as it is a plan of action. When you understand how to earn, save, spend and invest wisely, you aren’t just building a stable future for yourself, but your family and community as well.
(Feature Impact) You may have mastered the core subjects like math and grammar in school, but financial literacy – or understanding the basics of money management in order to help you make better financial decisions – often goes overlooked before adulthood. It’s not so much a course of study as it is a plan of action.
Financial literacy in the United States has remained stagnant at generally low levels for several years, according to research from TIAA Institute and the Global Financial Literacy Excellence Center, with even lower levels among Gen Z. Yet greater financial literacy – including key aspects such as goal-setting, budgeting, saving, credit management and investing – is strongly linked to better financial outcomes, including lower rates of debt constraint and financial fragility.
While emboldening yourself to understand financial terms can be a little overwhelming at first, once you have a grasp of basic concepts you can begin to get a handle on your money and make better financial decisions. Simply put: When you understand how to earn, save, spend and invest wisely, you aren’t just building a stable future for yourself, but your family and community as well.
From nonprofit partnerships to volunteer-led programs and fee online resources, Schwab and its employees help millions of people every year build the knowledge and confidence to take charge of their financial futures by serving as board members, mentors, role models and educators.
Because financial health is a lifelong journey, the earlier people learn vital money skills, the better. That’s why the financial advisory services provider develops education programs geared toward kids that continue into adulthood, helping people no matter where they are on their journeys.
Talk Money
It’s never too early to start a conversation about financial literacy. Having teens identify goals that are important to them – such as concert tickets or a first car – can kickstart coversations about money. Working with your child (and a financial advisor, if necessary) on a plan for saving to realize those goals can serve as a jumping off point. After achieving some success, their enthusiasm may grow, which is a powerful motivator to keep saving.
Support School Initiatives and Programs
Outreach programs that empower young people to make smart financial decisions is key to a bright future. Programs like Money Matters – Schwab’s flagship financial education program utilized by the Boys & Girls Clubs of America – gives young people hands-on experience with all aspects of money and investing.
This example, and others, don’t just include program funding – they build partnerships that create impact and opportunity with national collaborations that reach more than 17 million youth annually, empowering young people with the tools and confidence to make smart financial decisions for life.
Spread the Financial Love
Championing financial literacy empowers everyone – individuals, families and communities. By serving as a board member, mentor, role model or educator to help bring financial literacy to others in your community, you can supply the tools and knowledge to lead programs that focus on giving back, empowering future generations in countless ways.
To learn more about financial literacy and find resources to empower your local community, visit SchwabMoneywise.com.
Photo courtesy of Shutterstock
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SUVs and EVs Take Center Stage at the 2026 New York International Auto Show
(Feature Impact) The 2026 New York International Auto Show is shining a spotlight on the latest in automotive innovation, from advanced technology to the growing shift toward electric vehicles. One automaker, Kia, is using the show to highlight two versatile SUVs designed to offer more space, capability and flexibility for modern drivers.
Watch this video to learn more
The all-new 2027 Kia Seltos has grown in size, offering a roomier interior with additional legroom, headroom and cargo space. It also adds a hybrid powertrain, making it the only vehicle in its class with three powertrain options. The SUV comes packed with advanced safety features, a more capable all-wheel-drive system and premium interior touches, including dual 12.3-inch display screens and an available panoramic sunroof.
The automaker is also showcasing the all-electric EV3, a compact SUV designed to make electric vehicle ownership more practical. With an estimated range of up to 320 miles, fast-charging capability and optional all-wheel drive, it balances performance, technology and everyday usability. Its intuitive features and flexible design make transitioning to electric simpler for a wider range of drivers.
Both models represent Kia’s commitment to providing options that blend capability, innovation and style. To learn more, visit Kia.com.
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Welcome to the Consumer Corner section of STM Daily News, your ultimate destination for savvy shopping and informed decision-making! Dive into a treasure trove of insights and reviews covering everything from the hottest toys that spark joy in your little ones to the latest electronic gadgets that simplify your life. Explore our comprehensive guides on stylish home furnishings, discover smart tips for buying a home or enhancing your living space with creative improvement ideas, and get the lowdown on the best cars through our detailed auto reviews. Whether you’re making a major purchase or simply seeking inspiration, the Consumer Corner is here to empower you every step of the way—unlock the keys to becoming a smarter consumer today!
Economy
Feeding the Economy Report Says U.S. Food, Agriculture Add $10.4 Trillion
The 2026 Feeding the Economy report says U.S. food and agriculture industries generate $10.4 trillion in economic value and support 48.7 million jobs.
New Feeding the Economy Report Highlights Food, Agriculture Industry Strength
America’s food and agriculture industries generated more than $10.4 trillion in economic value in 2026, accounting for nearly 20% of the U.S. economy, according to the 10th annual Feeding the Economy report released by 35 food and agriculture groups. The new farm-to-fork study also found the sector supports 48.7 million jobs nationwide, including 24.3 million direct jobs across farming, food manufacturing, processing, distribution, retail, and foodservice.
The report points to continued resilience despite inflation, trade uncertainty, and ongoing pressure on farmers and producers. It found food and agriculture generate more than $3 trillion in wages and $1.35 trillion in tax revenue, while U.S. exports totaled $177.3 billion. At the same time, the study flagged softer areas to watch, including flat direct employment in production agriculture and food manufacturing, along with a year-over-year decline in exports. For the food and beverage industry, the report reinforces just how deeply agriculture remains tied to jobs, supply chains, and broader economic stability.
Source:
Tenth Annual “Feeding the Economy” Report Demonstrates Strength and Resilience of the American Food and Agriculture Industries Amid Ongoing Economic Pressures — Feeding the Economy via PR Newswire
Further information:
Feeding the Economy
View the original press release on PR Newswire
STM Daily News is a vibrant news blog dedicated to sharing the brighter side of human experiences. Emphasizing positive, uplifting stories, the site focuses on delivering inspiring, informative, and well-researched content. With a commitment to accurate, fair, and responsible journalism, STM Daily News aims to foster a community of readers passionate about positive change and engaged in meaningful conversations. Join the movement and explore stories that celebrate the positive impacts shaping our world.
