Why Is Investment Spending Unstable?

Investment in real estate and construction is volatile and sensitive to the business cycle.
Investment in real estate and construction is volatile and sensitive to the business cycle. (Image: PhotoObjects.net/PhotoObjects.net/Getty Images)

Coverage of the housing crisis, the financial debacle of 2008 and the recession fills news sources. Newspapers, television programs and electronic media sources bombard us with the latest statistics, human interest stories about people losing their homes and jobs, and opinion pieces on how to fix things. One of the continuing themes is the importance of investment in aiding recovery and spurring the economy on to a new era of growth and expansion.

Investments and the Economy

Economic investment is a monetary output that will, hopefully, eventually deliver a positive outcome. In finance the result might be monetary gains from security sales. The outcome of government investment might be additional jobs or infrastructure such as roads and schools. Businesses generate new jobs, factories, research and development, and new products. Individuals invest in savings and retirement accounts. The consequence of all these investments is money moving around the country and the world producing economic activity. Economic activity creates jobs in all sectors of the economy. Investment is a vital key to economic growth and prosperity.

Economic Instability

Economies are not smooth machines running at one constant speed. They are complex systems dependent on numerous factors that at times spur expansion and at other times lead the country into economic slowdowns and recessions. Investment spending impacts the economy and contributes to economic instability and volatility. One example, residential and commercial real estate investment spending, is volatile. At the first sign of an economic slowdown, individuals delay purchasing homes and businesses postpone expanding facilities and buying properties. Government spending is capricious and dependent on the whims of Congress. The value of the U.S. dollar greatly affects the economy and contributes to instability. A cheaper dollar makes U.S.-produced products cheaper and may increase exports, but imports become more expensive. This affects just about everything people buy every day, including gas for cars and oil to heat homes.

Variable Investment Spending

Large investment expenditures spur the economy and contribute to growth and expansion. The lack of investment can lead to job losses and recession. The housing crisis of the 2000s resulted in a catastrophic drop in home sales and new construction. The biggest investment most people traditionally make is their home. Home values plummeted. People owed more on their mortgage than their homes were worth. The foreclosure rate soared. Construction jobs disappeared. People did not purchase new appliances, curtains, carpet and other items for their new homes. Homeowners did not invest in home improvements. The resulting halt in housing investment contributed to the recession.

Economic Theory and Investments

John Maynard Keynes, the famous economist of the first half of the 20th century, believed that the government needs to invest in public works and hire the unemployed when the economy is in a slump. This is what the U.S. government did during the Depression of the 1930s. Keynes’ theory promotes deficit spending during economic downturns to sustain full employment. Either government or business needs to invest in the economy to maintain steady growth. When the private sector once again recovers and invests in capital improvements, the government can reduce its spending. The combined demand of consumer, government and business short-term consumption, investment, and government long-term spending on capital expansion and infrastructure should work in tandem to maintain a sound economy. Unfortunately, neither government nor business spending is secure, predictable or stable.

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