Andrew Smithers says:
A major cause of low investment is the incentives created by the bonus culture — the practice (now almost ubiquitous in quoted companies) of paying executives huge bonuses to reward short-term success.
Low investment and short-termism might be due not to misaligned incentives between shareholders and executives but are instead actually in shareholders' interests.
This is because creative destruction is inherently uncertain, and a rational response to such uncertainty should be to curb investment. For example, why retool a factory if future robotization will make that retooling obsolete? Why invest in a new car model if it will be supplanted by driverless cars? Why bother investing in a slightly better tablet if a rival will make an even better one?
Uncertainty should, in many cases, reduce (pdf) capital spending.
You might object that uncertainty has always been with us, so how can it explain low investment now?
Here's a theory. What we've seen since the early 00s is that firms have wised up. They know that, in the past, a lot of investment was driven by irrational overconfidence, by overly optimistic expectations for returns. They have learned from this error, and so have reduced capex.
Remember two important papers:
- William Nordhaus's finding that only a "miniscule fraction" of the total returns to innovation accrue to companies.
- Charles Lee's and Salman Arif's finding that higher capital spending leads to more earnings disappointments - which suggests that capex decisions are swayed by sentiment rather than by an improvement in genuinely profitable opportunities.
The rational response to these findings, surely, would be to become more sceptical about proposed investment plans, and thus to approve fewer of them.
Secular stagnation - in the sense of low investment even at low real interest rates - might therefore be due not (just) to a lack of profitable investment opportunities but rather to a more sober and less overconfident assessment of those opportunities. It is the result of boardrooms being dominated less by buccaneering adventurers and more by rational(ist) accountants.
Perhaps, then, we are at last seeing just what Keynes warned us of:
If the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die.