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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The Knowledge
Where Does Federal Money Go? The Biggest Costs Behind the Budget
Where does federal money go? Part two of our National Debt Explained series examines the biggest expenses in the 2025 budget and how spending connects to government borrowing.
Last Updated on October 13, 2026 by Daily News Staff
The Knowledge | National Debt Explained, Part 2
When discussing debt, ask: Who borrowed the money? That question helps distinguish a family’s finances from the federal budget. Our first episode explained why your credit card balance is separate from the national debt. Now comes the next question: What does the federal government spend money on?
Much of it pays for retirement benefits, health coverage, national defense, public services, and interest on previous borrowing.
Social Security was the largest individual program in fiscal year 2025, costing approximately $1.6 trillion. But combine the major health care programs—including Medicare, Medicaid, and health insurance subsidies—and their spending reached about $1.8 trillion, exceeding Social Security alone. cbo.gov
The figures below cover October 1, 2024, through September 30, 2025.Major expense FY 2025 spending What it supports Social Security About $1.6 trillion Retirement, survivor, and disability benefits Medicare, net $988 billion Health coverage for older adults and certain people with disabilities Net interest $970 billion Cost of servicing publicly held federal debt, after subtracting interest income Discretionary defense $893 billion Military personnel, operations, equipment, and research Medicaid $668 billion Federal contribution toward health coverage and care for eligible people
These are selected expenses, not the entire budget. Medicare spending is shown after premiums and other offsetting receipts. The combined health care total already includes Medicare and Medicaid, so it should not be added to those rows. cbo.gov
The government also supports veterans’ health care, transportation, education, housing assistance, courts, law enforcement, scientific research, disaster response, and environmental protection. Nondefense discretionary spending totaled approximately $980 billion in 2025, covering many of these services. Some funding for these areas falls elsewhere in the budget. cbo.gov
Federal spending falls into three broad groups:
- Mandatory spending: Payments governed by existing eligibility rules and benefit formulas, including Social Security and major health programs.
- Discretionary spending: Funding lawmakers control through appropriations legislation, including most defense spending and many public services.
- Net interest: The expense of servicing publicly held federal debt, minus government interest income. cbo.gov
Interest deserves attention because it pays for borrowing already undertaken. In 2025, net interest exceeded discretionary defense spending. Congressional Budget Office
A program’s cost does not automatically translate into an equal increase in national debt. Taxes and other receipts finance much of federal spending. Social Security and Medicare’s hospital insurance program receive dedicated payroll taxes, while Medicare also collects premiums.
In 2025, federal spending totaled approximately $7 trillion, compared with $5.2 trillion in revenue. The roughly $1.8 trillion shortfall was the deficit, requiring borrowing. Understanding national debt therefore means examining both what government spends and what it collects. cbo.gov
Explore more explanations behind the headlines at STM Daily News, home of The Knowledge.
Sources for this episode
- CBO: The Federal Budget in Fiscal Year 2025 — Overview of spending, revenue, deficits, and debt interest.
- CBO: Mandatory Spending in Fiscal Year 2025 — Breakdown of Social Security, Medicare, Medicaid, and other benefit programs.
- CBO: Discretionary Spending in Fiscal Year 2025 — Defense spending and services including transportation, education, and veterans’ health care.
- CBO: Overview of the FY 2025 Budget Infographics — Highlights the largest expenses and broader budget trends.
Related reading
- U.S. Treasury: Understanding the National Debt — What federal debt represents and how borrowing works.
- U.S. Treasury: Understanding the National Deficit — Explains the difference between an annual deficit and accumulated debt.
- U.S. Treasury: Federal Spending — Additional context about where federal money goes.
Daily News
Whose Debt Is the National Debt?
The national debt isn’t Americans’ credit card balances added together. This simple explainer separates federal borrowing from household debt and explains the difference between debt and a deficit.
Last Updated on October 11, 2026 by Daily News Staff
The Knowledge | STM Daily News
When you hear “national debt,” do you picture everyone’s credit card balances added together? The name can create that impression, but the national debt and household debt measure different borrowing.
The U.S. national debt is money the federal government owes. Your personal credit card balance is not included.
Federal debt versus household debt
The Treasury defines national debt as the federal government’s total outstanding borrowing accumulated over the country’s history. Household debt covers borrowing by individuals and families, including mortgages, credit cards, auto loans, and student loans.
|Type of debt |Who borrowed? |Examples |
|————–|————————|————————————————–|
|National debt |Federal government |Outstanding Treasury securities |
|Household debt|Individuals and families|Credit cards, mortgages, auto loans, student loans|
Putting a $500 purchase on your credit card increases your personal balance. It does not add $500 to the national debt.
How does the national debt grow?
When federal spending exceeds tax collections and other revenue, the government runs a budget deficit. Treasury sells securities to borrow money to cover the gap.
Consider a simplified, hypothetical example: the government collects $5 trillion and spends $6 trillion in one year. That leaves a $1 trillion deficit requiring financing.
A deficit measures a shortfall over a period, usually a year. Debt measures outstanding borrowing accumulated over time. Repeated deficits generally increase that debt. Interest on existing borrowing is also a federal expense.
Does paying off your credit card reduce the national debt?
Paying off a card reduces what you owe your lender. It does not directly repay Treasury borrowing. Household debt and government debt can influence the same economy, but they remain separate obligations.
When discussing debt, ask: Who borrowed the money? That one question helps distinguish a family’s finances from the federal budget.
Find more explanations of the ideas behind the headlines at STM Daily News, home of The Knowledge.
Sources
● U.S. Treasury: Understanding the National Debt
● U.S. Treasury: Understanding the National Deficit
● Federal Reserve Bank of New York: Household Debt and Credit Report
Last Updated on September 17, 2026 by Daily News Staff
HOLLYWOOD, Calif. — Paramount’s century-long connection to Hollywood could be facing one of its biggest challenges yet, as the entertainment giant reportedly prepares for the possibility of moving major operations out of California amid an escalating legal battle over its proposed acquisition of Warner Bros. Discovery.
Paramount has informed the offices of Los Angeles Mayor Karen Bass and California Attorney General Rob Bonta that it is prepared to formally announce plans to leave California, according to reporting Wednesday from TheWrap. Paramount has not formally announced a relocation, and a company spokesperson declined to comment to the publication.
The potential move centers on Paramount Skydance’s proposed approximately $110 billion acquisition of Warner Bros. Discovery, a deal being challenged on antitrust grounds by California and a coalition of 11 other states, along with a separate challenge from the Writers Guild of America. California Attorney General Rob Bonta argues that combining the two entertainment companies could reduce competition, potentially leading to higher prices and fewer choices for consumers.
A court agreement currently prevents Paramount and Warner Bros. Discovery from completing the merger until June 1, 2027, or until after a court decision on the states’ claims, whichever comes first. The antitrust case is scheduled for trial in March 2027.
Paramount’s Hollywood Future
At the center of the controversy is Paramount’s historic studio complex at 5555 Melrose Avenue in Hollywood, one of the entertainment industry’s most recognizable properties.
The Los Angeles Times reported that Paramount CEO David Ellison has told associates that he would prefer to remain in Los Angeles. However, Paramount’s board has reportedly approved a contingency plan that could move the company’s headquarters out of Hollywood, and Ellison has indicated that the company is prepared to sell its historic studio properties and relocate operations if the merger remains stalled.
Tennessee, Texas and Georgia have emerged in reports as potential destinations should Paramount ultimately decide to relocate.
The financial pressure is significant. Beginning October 1, Paramount faces a roughly $7 million-per-day additional payment obligation tied to delays in completing the Warner Bros. Discovery transaction. Paramount has asked the federal court to require the states and the Writers Guild of America to post a $1.88 billion bond to cover potential costs associated with the delay.
What’s at Stake for Los Angeles?
A Paramount departure could extend far beyond the loss of a famous Hollywood address.
An economic analysis cited by TheWrap estimates that a large-scale Paramount departure could put as many as 57,980 full-time jobs, $21.2 billion in annual economic output and approximately $1.17 billion in state and local tax revenue at risk. Those figures represent an economic-impact scenario rather than a prediction that all of those losses would necessarily occur.
There are competing concerns about the merger itself. Los Angeles County analysis has estimated that completing the Paramount-Warner Bros. combination could also eliminate thousands of entertainment and related jobs because of consolidation. Opponents of the merger, including entertainment unions, have raised concerns about reduced competition and employment, while supporters argue that reaching a settlement could help prevent Paramount from moving operations out of California.
Mayor Bass has said she remains focused on protecting Los Angeles entertainment jobs and keeping Hollywood’s entertainment industry centered in the city. Bonta’s office, meanwhile, has maintained that California will continue enforcing its antitrust laws while remaining open to good-faith discussions. There is still an opportunity for the dispute to be resolved before Paramount makes a final decision about its California operations. Paramount Skydance and representatives for California Attorney General Rob Bonta are scheduled to participate in court-ordered settlement talks on October 14 and 15. The discussions could potentially resolve the antitrust dispute and clear a path for Paramount’s proposed Warner Bros. Discovery acquisition. For now, Paramount has made no official announcement that it is leaving California. The company declined to comment on reports Wednesday that it was preparing to announce a departure. That leaves the future of Paramount’s Hollywood operations — including its historic Melrose Avenue studio — uncertain as the legal and financial pressure surrounding the merger continues to build. Settlement Talks Scheduled
For now, the gates at Paramount remain firmly planted on Melrose Avenue.
Settlement Talks Scheduled
There is still an opportunity for the dispute to be resolved before Paramount makes a final decision about its California operations.
Paramount Skydance and representatives for California Attorney General Rob Bonta are scheduled to participate in court-ordered settlement talks on October 14 and 15. The discussions could potentially resolve the antitrust dispute and clear a path for Paramount’s proposed Warner Bros. Discovery acquisition.
For now, Paramount has made no official announcement that it is leaving California. The company declined to comment on reports Wednesday that it was preparing to announce a departure.
That leaves the future of Paramount’s Hollywood operations — including its historic Melrose Avenue studio — uncertain as the legal and financial pressure surrounding the merger continues to build.uilding around the Warner Bros. Discovery deal, the question of whether one of Hollywood’s most historic studios will continue calling California home has moved from speculation to a potentially consequential decision for Los Angeles and its entertainment industry.
STM Daily News will continue monitoring the Paramount-Warner Bros. Discovery dispute and what it could mean for Hollywood, entertainment workers and the future of film and television production in California.
Source and Related Reading
- California Attorney General — Agreement Halting Paramount/Warner Bros. Merger — Primary source explaining the states’ antitrust challenge and agreement delaying completion of the merger.
- Los Angeles Times — Paramount and Bonta Ordered Into Settlement Talks — Reports the October 14–15 settlement meetings and current state of the dispute.
- Los Angeles Times — Paramount’s Possible Hollywood Exit — Detailed reporting on the relocation contingency, potential destinations and implications for Los Angeles.
- Reuters — DOJ Backs Bond Demand in Paramount-Warner Fight — Covers the $1.88 billion bond dispute, $7 million daily fee and March trial.
- TheWrap — Paramount Preps California Exit — Reports the latest developments surrounding Paramount’s potential departure.
