Duncan Weldon wonders whether the government should have a target for the share of investment in GDP. I have my doubts.
First, a quibble. The low level of investment in recent years might be in part a success story. Investment has fallen in part because capital goods have fallen in price relative to other goods. Measured in terms of constant prices, the share of investment in GDP doesn’t look so bad.
In saying this, I don’t mean to deny that there is a problem - the question remains of why the price elasticity of demand for investment is low - merely to wonder how severe a problem it is.
Secondly, the only direct means the government has of raising investment is to increase infrastructure investment. But the question of whether to undertake this should be decided by cost-benefit analysis, not by a desire to make up the numbers.
Thirdly, we should ask why investment is not higher than it is. And there is a big distinction here.
One possibility is that investment is low because, although the private sector has lots of investment ideas, it feels unwilling to implement them because of external obstacles - demand uncertainty, availability of finance, poor regulations, whatever. Insofar as this is the case, the solution lies not in an investment target, but in policies to remove these obstacles.
The second possibility is that capital spending is low because there is a dearth of profitable opportunities. If this is the case, then an investment target will either fail - because firms won’t invest anyway - or, if it succeeds, will do so only by tricking firms into making wasteful investments that reduce profits.
This, though, raises a question: how bad would this be? Tidy-minded libertarians will object to the misallocation of capital. And others would fear that lower profits would cut growth and investment later.
There are, though, two other possibilities here. One is that what is wasteful investment for particular firms is not necessarily wasteful for society. In his book Pop!, Daniel Gross points out that speculative bubbles left us with a legacy of useful railway tracks and broadband connections.
The other possibility is that a rise in aggregate investment might prove sustainable, because if all capitalists are investing, then the high demand turns otherwise unprofitable investments into profitable ones - and so we can shift to a stable, high-growth, equilibrium.
I’m not sure how strong either of these possibilities is.
* A note on the chart. That spike in investment in 2005 was a statistical quirk, relating to the way the ONS classified investment in the nuclear power industry.
As you imagine, I put more weight on the chance of:
"The other possibility is that a rise in aggregate investment might prove sustainable, because if all capitalists are investing, then the high demand turns otherwise unprofitable investments into profitable ones - and so we can shift to a stable, high-growth, equilibrium."
I agree what is needed are policies to unlock investment - I think a target though (by which the govt would increase public investment in the absence of business investment) is another way of getting there.
Posted by: Duncan | February 14, 2011 at 12:32 PM
slightly suprised that a socialist would ever say anything like this:
But the question of whether to undertake this should be decided by cost-benefit analysis, not by a desire to make up the numbers.
surely any state-spnsored exercise in i8nvestment is worthwhile by definition, simply because it is the state not thos nastyprivate investors doing it...we all know your cognitive bias.
Posted by: snagglepuss | February 14, 2011 at 10:41 PM