Edward Conard

Top Ten New York Times Bestselling Author

  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
Upside of Inequality Oxford Unintended Consequences

AI Summary. Capital expenditures net of depreciation for Russell 3000 companies peaked at 6.9% of sales in 1988, averaged 1.8% over the past decade, and fell to 0.5% in 2020. Because depreciation is based on historical costs, rising prices mean replacement spending often exceeds depreciation, and technology can make assets obsolete sooner.

Michael Mauboussin and Dan Callahan Morgan Stanley
Date Posted:
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Capital expenditures net of depreciation for the Russell 3000 peaked at 6.9% of sales in 1988, but has since declined to 1.8% on average in the past decade, highlighting a shift in capital allocation strategies.

Have net capital expenditures declined as a share of company sales?

Core argument: Capital expenditures net of depreciation for the Russell 3000 peaked at 6.9% of sales in 1988, averaged 1.8% over the past decade, and fell to 0.5% in 2020 amid the pandemic.

Capital expenditures net of depreciation for the Russell 3000 peaked at 6.9% of sales in 1988, highlighting a period of robust investment. However, this figure has significantly declined over the years, averaging 1.8% in the past decade and reaching a low of 0.5% in 2020 amid the pandemic. This trend underscores a shift in capital allocation strategies, influenced by factors such as inflation and technological obsolescence. Rising prices, as seen in 2022, mean that capital expenditures to replace equipment often exceed depreciation, which is calculated on historical costs. Additionally, technological advancements can render assets obsolete faster than depreciation schedules account for, potentially overstating an asset's useful life. These dynamics suggest that businesses must carefully consider both current economic conditions and future technological changes when planning capital investments.

Takeaways by Macro Roundup® AI

  1. Capital expenditures net of depreciation for the Russell 3000 peaked at 6.9% of sales in 1988, averaged 1.8% over the past decade, and fell to 0.5% in 2020 amid the pandemic.
  2. Rising prices, as in 2022, mean capital expenditures to replace equipment often exceed depreciation, which is calculated on historical costs.
  3. Technological advances can render assets obsolete faster than depreciation schedules account for, potentially overstating an asset's useful life.

Michael Mauboussin and Dan Callahan shows capital expenditures net of depreciation as a percentage of sales peaked in 1988 at 6.9%. Over the past decade it has averaged 1.8% and fell to 0.5% in 2020 during the pandemic. (200)

Exhibit 25 shows capital expenditures minus depreciation for the population we studied. Using this measure, investment as a percentage of sales peaked in 1988 at 6.9% and bottomed in 2020 at 0.5 percent of sales. The average of the past decade was 1.8%. The two substantial limitations to using depreciation as a proxy for maintenance capital expenditures include inflation and the risk of technological obsolescence. In periods of rising prices (such as 2022), the capital expenditures required to replace new equipment will exceed depreciation because new expenditures reflect inflation whereas depreciation is based on historical costs. Technological obsolescence introduces the likelihood that depreciation overestimates an asset’s useful life.

Michael Mauboussin and Dan Callahan, "Capital Allocation: Results, Analysis and Assessment,"Morgan Stanley, December 15, 2022, https://www.morganstanley.com/im/publication/insights/articles/article_capitalallocation.pdf

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