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In recent years, measured TFP growth in the US has declined. We argue that two forces contributed to this decline: the mismeasurement of intangible capital, and rising markups. Markups affect input shares, while intangibles omitted from measures of investment affect measured capital growth, each potentially generating downward bias in measured TFP growth. Most importantly, when both forces are simultaneously present, their effects reinforce each other and amplify the downward bias in measured TFP growth. Using input-output data, we estimate that this mechanism could account for one-third to two-thirds of the decline in measured TFP growth.

In recent years, US investment has been lackluster, despite rising valuations. Key explanations include growing rents and growing intangibles. We propose and estimate a framework to quantify their roles. The gap between valuations — reflected in average Q — and investment — reflected in marginal q — can be decomposed into three terms: the value of installed intangibles; rents generated by physical capital; and an interaction term, measuring rents generated by intangibles. The intangible-related terms contribute significantly to the gap, particularly in fast-growing sectors. Our findings suggest care in a pure-rents interpretation, given the rising role of intangibles. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Recent work on macroeconomic trends has emphasized slowing capital investment, but strong business profits and valuations. The retail sector is a microcosm of these trends, and accounts for a large share of the increase in aggregate business concentration also observed in recent years. We show that, in that sector, weak investment and rising concentration are associated with rising productivity. Additionally, stronger productivity is correlated with intangible investment, both over time and across subindustries. Intangible investment may thus provide a joint explanation for rising productivity, weak capital investment, and increasing industry concentration.

Investment in physical capital collapsed during the Great Recession, and while growth subsequently resumed, the capital stock remains below trend (Hall in Quantifying the lasting harm to the US economy from the financial crisis, NBER Macroeconomics Annual, Bureau of Economic Research, 2014). We explore firm-level data on investment and document that investment fell relative to fundamentals at the turn of the millennium—well before the Great Recession. This downturn in investment coincides with a shift in employment toward services and cognitive skills—the “polarization” described by Autor et al. (Am Econ Rev 96(2):189–194, 2006), as a possible consequence of off-shoring and automation. An analogous sorting of firms into industries shows a shift of investment toward spatially “grounded” industries, such as energy and telecommunications, from which capital cannot be relocated. Investment shifts away from production sectors, such as manufacturing, which can be relocated. While high-tech firms grow in number and value, this growth is associated with a flat share of capital investment. For these sectors, we document a shift toward intangible, rather than physical, capital. The “hollowing out” of investment, like labor, carves out manufacturing and production sectors, leaving grounded industries that are less susceptible to off-shoring and cognitively intensive industries that are growing in intangible, rather than fixed, capital.

The Federal Reserve's current monetary policy framework combines conventional policy that sets the level of the federal funds rate with policies that operate through the slope of the term structure, including forward guidance and large-scale asset purchases. These slope policies are particularly important when the federal funds rate is at the zero lower bound. We assess the performance of counterfactual monetary policies since the Great Recession using a structural vector autoregression, identified using high-frequency jumps in asset prices around FOMC meetings as external instruments. We find that slope policies played an important role in supporting the recovery, but only partially circumvented the zero lower bound. In our simulations, earlier and more aggressive use of slope policies supports a faster recovery. The recovery would also have been faster, with the unemployment gap closing seven quarters earlier, if the Fed had inherited a higher level of inflation and nominal interest rates consistent with a 3 percent inflation target coming into the financial crisis recession.

When investment decisions cannot be reversed and returns to capital are uncertain, the firm faces a higher user cost of capital than if it could reverse its decisions. This higher user cost tends to reduce the firm's capital stock. Opposing this effect is the irreversibility constraint itself: when the constraint binds, the firm would like to sell capital but cannot. This effect tends to increase the firm's capital stock. We show that a firm with irreversible investment may have a higher or a lower expected capital stock, even in the long run, compared to an otherwise identical firm with reversible investment. Furthermore, an increase in uncertainty can either increase or decrease the expected long-run capital stock under irreversibility relative to that under reversibility. However, changes in the expected growth rate of demand, the interest rate, the capital share in output, and the price elasticity of demand all have unambiguous effects.