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August 07, 2011



Rather: there's little certainty in where any acceleration in growth will come from.

Unless the consensus really is that 'peak everything' means we'll regress into another Dark Age.

Or enough boomers are projecting their incipient retirement outwards onto the world at large and forgetting that younger generations still have lives to lead and problems to solve in the coming decades...?


To your points here, I would add higher resource prices as well. Tyler Cowen has explored the argument that innovation is slowing in his "Great Stagnation" book.

Anyway, if investment opportunities are poorer, this suggests that future interest rates will be low and perhaps negative, so the inflation target should be higher than 2%.

Moreover, saying that potential growth has decreased doesn't mean that we're anywhere near potential, especially after considering possible structural adjustments. There's a vast scope for improvement.

Chris Purnell

I've read your critiques on investment for a number of years & they have been uniformally opposed to creative investing. The 'idee fixe' of passive index investing you have promoted grinds out innovative investing by 'mug'(?) investors such as myself. True one remembers triumphs & obliterates failures but at least there have been some triumphs. So remarks about a dearth of investment opportunities come with a generalised risk averse society. When did you last invest in a start-up or even a near start-up?


You may well be right about a long term dearth of profitable investment opportunities. But I would point out this has been claimed before. During the 1930s, similar claims were made: Alvin Hansen (later one of the first Keynesians amongst US academia), for one, promoted the idea that the Great Depression fundamentally reflected some long term decline in growth opportunities.

Luis Enrique

Yes, although the presence of long term problems does not mean short run policy is irrelevant, and many attacks on Osborne for failing to deliver growth amount to saying we'd be better off without such deep cuts, which I guess is true.

Lots of commentators on the left, well some on the right too, want to "rebalance" the economy, bring off shored jobs home, do more manufacturing and less importing etc.

I wonder what it would feel like, if their wish came true - would it feel like this? The reason I wonder is that one way rebalancing could occur would be through depreciation. But i suspect we don't have sufficient export industries in place for that to cause a boom, my guess is that our import and retail oriented economy would experience it as a slump, as rising costs depress demand, retailers shed jobs and so on. We would experience it as a decline in living standards. I think perhaps it would take a long time for everything to adjust domestic production to expand. So I wonder whether this should be added to your list of long term problems: the necessity of global rebalancing, and the possibility that rebalancing, when it happens, isn't going to be any fun. If true, this means a lot of people are going to complain because they are getting what they wishd for.

Or maybe I'm wrong, and it can happen painlessly or even as a boom. I'm ashamed to say my economics education has not left me in a position to know.


Adapting to lower growth? Sounds rather like what the government is trying to do. Lower growth means less money to spend for everyone and lower expectations as to the extent of public service. That means no more "nice to haves". While businesses might not want to invest so that setting them free to do so won't work to spur growth, the opposite needs to be looked at. If they continue to be over-regulated or over-taxed their inclination must be to go further away from investment to retrenchment. Lowering tax and regulation might just be the only way to achieve even modest growth.


I think there's nuances to be added to the corporate investment picture. Nuances which may have political implications.

1) Demand for credit for smaller businesses is high. Effective interest rates are higher than before the crisis. Many analysts forget this reality because they concentrate on Central Bank interest rates which are at historical lows. Then of course there is the reality that banks are able to impose strong conditions on lending beyond the interest rate (security/collateral) which also prevent smaller firms from borrowing.

1) a) Funding for new companies and new ideas in the UK is just low level. If you can't midwife your new business from an existing cash cow, it can be very hard to get money to develop it.

2) Our economy has fractured in two. Large corporations can (presumably) borrow at low interest rates, but they have more cash than they need.

3) It's hard to know if there is a genuine dearth of investment opportunities, or if we have in fact constructed a culture that is blind to them. I have a sense that the latter is underexamined.

An anecdote from a large food company - an idea was turned into a concept, then piloted and projections made. The percentage profit was good, but the total estimated market was assessed to be too small to impact the share price in the next year. So it went no further. The feeling was that if some small company developed this market, they could then be bought and the concept rolled out internationally. The international rollout would be big enough to have a meaningful presence in the company financials...

In the pharmaceutical sector, the large companies have switched from doing research to buying small companies who innovate and taking their products through the FDA trials etc.

So in each case, large corporations pile up profits, but their model for using those profits relies on someone else taking some of the startup risk. Now, to my mind there are a whole bunch of societal and ethical problems with that stance. But let's ignore those and get down to the critical economic effect:

The companies who have the incentive to take the risk cannot get the credit to do so.

The companies that have the cash (or the ability to borrow cheaply) are now geared not to take that kind of development risk.Why are they not taking development risk? Because their incentives are largely short term ones dictated by the investment markets.


Another mechanism at work is that banks have found it is more profitable to dabble in financial markets than make loans to smaller businesses.

Part of this may be about the conditions the businesses face (cue the right wing) but some of it is that the combination of technology and deregulation has reduced financial market transaction costs (cue the left wing.)

This altered balance within the main institution for getting money into business expansion is probably a root cause of the savings glut...


I don't think "confidence" is such a red herring. There were startups all over the place in the 1990s, today they are at a standstill. I don't think there are any fewer ideas in just 20 years, there is however a completely different level of "confidence" that new ideas can be turned into profit.

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