My chart shows what I mean. It shows non-financial companies’ spending on capital and inventories as a percentage of their disposable income - that is, income after tax and dividends. You can see that this ratio has been trending downwards for years. At the peak of the boom, in 2007, companies spent just 85.3% of their income. That compares to a 1988-2006 average of 107.5%.
In other words, companies’ propensity to spend was falling even before the recession.
Now, this might in part be because corporate profits were inflated by oil companies - though these are taxed quite heavily, and high oil prices are bad for the non-oil economy. And it might be because capital goods prices have fallen, so a given expenditure goes further these days - though this raises the question of why the price-elasticity of demand for capital is so low.
But these might not be the whole story. Instead, the figures support Ben Bernanke’s theory - the dark side of his “savings glut“ hypothesis - that western economies were suffering from a “dearth of domestic investment opportunities” even before the recession.
And herein lies a problem for the left. You might think there’s a simple solution to this - to engineer, via the tax system or minimum wage laws, a redistribution of incomes from companies to people, and especially to the low-paid. This would transfer cash from people with a low propensity to spend to those with a high propensity. It would therefore raise aggregate demand. And this would benefit companies as well as the low-paid. Yes, they’d have lower post-tax profit margins. But with demand high, the return on capital would be decent because high volumes would compensate for low margins. And this return on capital would encourage capital spending and growth. Everyone wins. This is the “co-operative capitalism” practiced by post-war Keynesian governments as described by in Marglin and Bhaduri’s classic paper.
But is this possible these days? Two things (at least) suggest not.
First, in a globalized economy, firms might respond to such policies by relocating overseas. Such relocation, any individual firm might figure, will give us the best of both worlds: we’ll gain from high demand in the UK, but we can produce in a low-cost country. Of course, for all firms this would be self-defeating, as if many relocated, there would be no high demand in the UK.
Secondly, high aggregate demand is just not enough to generate full employment. As I’ve pointed out, even at the peak of the boom there were four million under-employed - more than one-in-eight of the workforce.
I infer from this that equality - of a form acceptable to social democrats - and full employment are just not possible under capitalism. But, hey, I’m an unreconstructed Marxist.