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The Crucial Role of Capital Formation in Economic Growth

In a recent op-ed published in RealClearMarkets, Erica Richardson, Chief of Staff and Chief Strategic Communications Officer at the Investment Company Institute (ICI), highlighted the fundamental importance of capital formation for stimulating economic growth. Families across the nation are reeling from the financial strain exacerbated by pandemic-era inflation. With persistent high prices and elevated mortgage rates, many communities are struggling to attract the investment required for growth. Richardson emphasizes that while cost-of-living concerns are rightfully at the forefront for Congress and the administration, the best path to sustainable relief lies in strengthening the long-term economic engine underpinning these costs: capital formation.

When businesses invest in new technologies, cities upgrade their infrastructures, and innovators launch new products, the ripple effects enhance the economy in ways that can positively impact everyone. Increased productivity emerges as one of the most dependable strategies for gradually alleviating household costs over time. Moreover, vibrant local businesses are crucial for job creation and professional opportunities, which in turn underpins household well-being. It is with this in mind that the bipartisan capital formation package known as the INVEST Act warrants urgent attention. Approved by the House, this significant legislation aims to facilitate companies in raising capital while expanding opportunities for savers and retirees, thus fostering growth throughout the economy.

The INVEST Act seeks to capitalize on one of the United States' unique strengths: the robustness of our capital markets. A substantial portion of household savings is funneled into these markets through regulated investment vehicles, such as mutual funds, ETFs, and money market funds. Currently, approximately 76 million U.S. households own these financial instruments, which are critical for financing business expansions, municipal improvements, and fostering innovation across the nation. With regulated funds now managing over $45 trillion on behalf of American investors, such magnitude does not merely represent a statistic; it fundamentally shapes the real economy.

For instance, these funds collectively hold around one-third of U.S. corporate equities, approximately one-quarter of corporate bonds, and over 25% of municipal securities. This interconnectedness means that when a manufacturer enhances its production capabilities or when a community constructs a school, the affordability of financing often hinges on the stability and depth offered by such investment vehicles. The outcomes are tangible; bond funds have attracted upwards of $1.4 trillion in inflows over the last five years, effectively managing borrowing costs for both businesses and governments. Moreover, with over $7.7 trillion in assets, money market funds provide essential support for a liquid and reliable short-term debt market, allowing institutions the ability to manage cash efficiently—ultimately supporting economic conditions favorable for households.

Other types of regulated funds play a significant role as well. Unlisted closed-end funds and business development companies have experienced rapid growth, directing resources into private credit markets that were once predominantly controlled by major institutions. These innovative vehicles have more than tripled in size since 2020, channeling vital capital to small and mid-sized businesses that often encounter hurdles in securing adequate financing.

The strength of capital formation is reflected in its direct benefits for American families as it converts household savings into productive investments. A solid connection between savings and investments fuels business expansion, job creation, wage growth, and the overall improvement of community living standards. The INVEST Act is constructed on bipartisan efforts aiming to broaden investment opportunities, enhance retirement plan options for non-profit organizations, and modernize disclosure practices to ensure investors receive timely and relevant information. These reforms are essential for fortifying a regulatory framework that emphasizes transparency, accountability, and investor protection.

As global competition for capital intensifies, the United States must reinforce its leadership role. While capital formation represents one of the nation’s greatest advantages, it necessitates ongoing vigilance to ensure effectiveness, efficiency, and accessibility. Markets thrive when investor protections are in place, and legal regulations are updated to reflect evolving economic conditions. Congress is charged with the responsibility of amending these laws as required, which the INVEST Act aims to achieve.

The hurdles that American families face are significant. Amplifying the flow of capital to businesses and communities stands as one of the most effective strategies policymakers have at their disposal to address these concerns. The Senate must act promptly to advance the bipartisan INVEST Act to the President’s desk, paving the way for stronger economic growth, increased resilience, and a secure future for American families—a goal that can garner support from both political parties.

Erica Richardson currently serves as Chief of Staff and Chief Strategic Communications Officer at the Investment Company Institute.