It would be easy to say that today’s figures - showing a 24.1% drop in business investment in the last year - show just how savage the recession has been. But there might be more to it than this.
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.
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.
On the second objection – what has been the effect of the influx of 1.5m economic migrants from Eastern Europe in keeping the under-employment figures so high? The slightly unique combination of circumstances in which uncontrolled immigration was allowed from a number of countries with considerably lower living standards than the UK would appear to have had the effect of cementing a higher than expected bedrock of unemployed and underemployed in this country. This might mean that you are being unduly pessimistic about the general capacity for growth to impact upon underemployment.
Posted by: Straus | February 25, 2010 at 01:46 PM
Did you see Evan Davies' programme last night 'The Day the Immigrants Left' (probably available on the iPlayer)?
Its implicit suggestion was that one reason there is a structurally large level of underemployment is the able-bodied but feckless are able to choose not to work by living off benefits. Immigrants simply do the manual jobs the native born don't want to do and don't have to do.
Er, what do you think?
Posted by: Gaw | February 25, 2010 at 03:39 PM
Sorry, but what social democrats are arguing for "full employment", at least the way you've defined it? Well do we know that pushing for that caused inflation. Social democrats understand that we can't push under the NAIRU.
Also, if "co-operative capitalism" is impossible, then how do you explain Scandinavia?
Finally, the Savings Glut problem is mainly caused by high savings in China, Germany, some OPEC countries, South Korea , Japan. Surely you know that the problem from that is caused by the policies/demographics of those countries? It is not the fault of UK policy, or a problem for the left, if other countries are badly organized such that cheap credit flows into these shores (it is though our fault what then happens to that credit).
Something that may help, is Keynes' proposal for an "International Clearing Union", to deal with trade imbalances:
http://en.wikipedia.org/wiki/International_Clearing_Union
I'm sure China won't go along with it, just like the US didn't at Bretton Woods, but surely we can push for this as an EU institution, as Germany is the main problem for us in terms of trade imbalances.
Posted by: Alex | February 26, 2010 at 02:34 AM
I think that things are even far worse than this but a major reason for all this being happening is spending of too much capital in useless wars of Afghanistan and Iraq. These wars are just in vain and economies are sinking due to these stupid wars.
Posted by: David Morson | February 26, 2010 at 10:32 AM