Socializing investment

Philip Hammond promised this week “to renew and expand Britain’s infrastructure”. This might represent a return to Keynesianism in more ways than one.

The obvious sense is that he’ll be using fiscal policy counter-cyclically, supporting the economy during a time of Brexit-induced uncertainty; economists expect real GDP growth of only 0.7 per cent next year, well below long-term averages.

But there’s another sense. Keynes also looked forward to “a somewhat comprehensive socialisation of investment.” Hammond might push us in this direction.

 My chart, taken from ONS and OBR data, puts this into historical context. It compares business investment to public sector investment. You can see that in the early 70s the two were similar. Then during the 1979-97 Tory government public sector investment declined markedly. From the late 90s until 2010 however the gap between public and business investment narrowed, until Osborne’s austerity and a pick-up in business investment widened the gap again. 

It’s possible that the next few years will see a resocialization of investment, to the extent that Hammond raises public sector investment at a time when Brexit uncertainty, as well as secular stagnation, holds down private sector investment.

In truth, though, there’s another force which might resocialize investment – relative prices. Infrastructure spending is prone to an element of Baumol’s cost disease. Because construction tends to have relatively slow labour productivity growth, its relative cost rises over time. However, to the extent that business investment comprises spending on IT, it benefits from Moore’s law and so sees a fall in relative prices. These trends alone would tend to raise the share of public investment in GDP over time, and depress that of business investment: my chart shows ratios of investment to GDP in current prices.

And herein lies a problem. It’s widely agreed that better infrastructure would raise productivity: better roads and broadband would make us more efficient. But there’s a downside here. A greater share of infrastructure spending in GDP, and smaller share of business investment, would tend to depress productivity growth because of brute maths – because a sector with low productivity growth accounts for a bigger share of GDP.

I like to think that the former effect will prevail – and it probably will initially. Over the very long-run, however, this might be more doubtful.

Comments

[Edward Harkins]

Considerable risks here in a possible trend towards using additional infrastructure investment as some sort of short-to-medium term instrument. There is a deal of self-serving interests (from the CBI to trade unions) all chanting the mantra of 'more infrastructure investment'. Fair enough in itself, but not if it is actually a lobbying for additional infrastructure (public) *spend*. That would be spend as a supposed tool for short to medium term economic recovery. There is no proven case in all economic history where additional infrastructure spend has led such recovery. The undoubted significant benefits of infrastructure investment lie in the farther future; in the form of raised productivity. But that is only *if* the domestic economy can exploit the new assets to the optimum level.

[brendan darcy]

are we sure that productivity trends n the past will continue? what about robotics? check out this robot laying bricks to build a house:
http://www.businessinsider.com.au/video-a-one-armed-australian-robot-can-build-a-house-four-times-quicker-than-a-brickie-2016-7

[David]

@Brendan
and...... no steel or cement required... apparently...
Certainly economical in the short term!
David.

[Phil Stokoe]

Oh Chris, you've not just done this have you? Drawn some conclusions from a long run time series of U.K. Public sector investment?

This time series is hugely impacted by privatization - in 1980 the U.K. Public sector included British Airways, British Steel, British Telecom, British Gas, electricity generation and distribution, water and sewage companies, widespread council housing and a host of other state owned entities all of which would be sold off.

It massively distorts the log run public sector investment numbers (and all public sector aggregates like public sector employment or total revenue.

When I worked for ONS I had to tick off a younger colleague for this error (too young to really remember privatization, I expect better from you. Put up a general government investment graph, and we can talk again!

[RC]

What happened in 2005 to make business and govt investment start being the inverse of each other?

[Kaleberg]

If you are measuring the productivity of building a road or installing cable without including the efficiency gains of the users, you are missing the whole point of investment. R&D is notoriously inefficient with entire armies of highly educated, well paid people basically sitting around thinking, but it can have a big payoff.

Building a bridge over a river might be an inefficient process, but any realistic accounting would have to take into account the value of time saved by the crossing, the increased value of real estate as a result of the crossing, the value of new businesses enabled by the crossing and so on.

We have gotten ourselves into our current slow growth state by thinking of building infrastructure as low productivity.

The private sector glosses over this, but Moore's Law actually works against them. As soon as any system is installed its value starts falling as its replacement cost drops. Worse, the big costs aren't the hardware, they are the software, and building software is not all that different from paving a road with bricks by hand. Granted, companies can argue for software by including future benefits, something that the government is no longer allowed to do.