Trillions of dollars, pounds, euros and yen are stuck in the global financial system with seemingly nowhere to go.
There are plenty of uses for the surplus funds swimming around in pension funds, sovereign wealth funds or simply languishing on company balance sheets. Hardly an economy exists that couldn’t benefit from more investment, whether on infrastructure or the latest manufacturing processes.
Yet seven years after the crash the funds are frozen in cash accounts, lent to safe-haven countries or diverted into speculative betting on currency fluctuations, junk bond futures and the price of oil in a year or two.
Shadow chancellor John McDonnell held the first meeting of his economic advisory group last week to consider a way of breaking the logjam. The consensus view around the table was that the government needs to step in and take its proper role alongside the private sector to spur investment.
If confidence is the issue, according to the Keynesian storybook, then the government can at least provide a backbone of solid, long-term investment that gives everyone a belief in the future of UK plc.
There is plenty of evidence that without the sustained commitment of public sector funds, innovation dies. Free marketeers can point to car manufacturing and other consumer durable industries as bastions of long-term private investment, but the hard stuff, like healthcare, transport infrastructure, energy, affordable housing and promoting the digital economy, need a public/private partnership at the very least.
McDonnell’s problems, and those of Ed Balls before him, are twofold. There is very little trust among the electorate in public sector bodies to invest sensibly. The catalogue of IT failures under Labour dented the public’s faith. Post-war public housing, rightly or wrongly, is considered a disaster. More recently, the west coast mainline upgrade delays, botched health service reforms and dithering over airport expansion under the coalition have done little to improve the public’s jaded view. These delays and cock-ups are no worse than we see in the private sector, but that doesn’t seem to matter – a trust deficit persists.
Then there is the funding issue. Not that there should one. Governments can borrow cheaply and speculate with some assurance that the returns to economic growth, though difficult to measure, will improve the nation’s competitiveness.
Again the electorate is nervous. And that is understandable when the fragility of the global recovery is writ large in headlines almost every day. How can we make multibillion-pound outlays when there could be another financial calamity around the corner?, they ask. Europe’s refugee problem and the Paris terrorist attacks all fuel a sense of anxiety.
The answer could be to pay cash for infrastructure improvements from tax receipts. However, the same nervousness applies, especially among an older generation who have acquired a decent income and some property and pension assets. They don’t want to pay higher taxes to fund investment spending. It’s one reason why only one in five voters over the age of 65 put a cross in Labour’s box at the last general election.
This leaves McDonnell with little room for manoeuvre, especially when the next government is likely to be overwhelmed with calls for extra spending. If nothing else, the current health crisis will be seen as merely a bitter hors d’oeuvre for the indigestible dish to come. And there will be plenty of other emergencies to soak up public sector funds.
That is not to say George Osborne’s National Infrastructure Commission is worthless. It must be a positive thing that around £130bn will be allocated to the English regions, and more than £30bn will go to Scotland, Wales and Northern Ireland combined under the government’s infrastructure pipeline. The sums are just not enough.
So what about the private sector? Thinktanks across Europe and the US have deliberated on the lack of business investment.
A report by the investment bank UBS in September pointed out that over the past two years US corporations have amassed huge fortunes, only to hand them back to shareholders. Spending on share buybacks in the last two years has climbed 45% in the US, with a 21% rise in dividends. Capital expenditure, by contrast, has climbed just 11%, the report found.
Corporates mainly borrowed to fund mergers and takeovers or, like Apple, to pay a shareholder dividend while the company’s cash remained in a tax haven offshore.
“A recent survey of US loan officers showing that the main reasons for strong credit demand were mergers and acquisitions and debt refinancing: capital investment didn’t even register. To put this in a broader historical context, in the 1970s American companies invested 15 times as much cash as they distributed to shareholders. Now this ratio has sunk to below two,” the report added.
Short-termism is not new to corporate life. For decades analysts have lamented how executives obsess about hitting quarterly targets to please shareholders and secure their bonuses. This is compounded by the shareholder’s representative – the fund manager – seeking to hit their own quarterly targets.
UBS, like most of its cousins in the financial community, wants the government to encourage investment with tax breaks and fewer regulations.
But it also backs a growing enthusiasm for restraining corporate short-term thinking. The Paris-based thinktank, the OECD, examined the dearth of private investment earlier this year and was striking in its support for restrictions on share buybacks as a way to force company owners to invest. It recommends changing the law to “restrain them directly”.
A government needs to step in, they argue, because no boardroom can act alone, especially when the short-term measurement of success is so ingrained in the financial system. All public companies submit to it, and do little to support reform while the personal rewards remain bountiful.
So rather than a knee-jerk tax on the incomes of the rich executive class, better to tackle the source of their bonuses and share plans, built as they are on targets stretching over just two or three years at most.
Without this kind of jolt, corporates will continue to take their cash, often offshore, and find tax-free ways to benefit shareholders. And investment in the long-term health of their businesses, let alone the public realm, will suffer further delay.
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