Today I published my latest piece for the Institute for Government*, on the UK’s continuous failure to grow business investment.
The straw man I often imagine myself attacking is a policy wonk with a mental picture of the economy like a boardgame, where the Wonk gets to choose how much Investment to do. Then the investment happens, and he/she gets growth, at some kind of cost. (however it isn’t entirely a fanciful portrayal of policymaking; leaf through the memoirs of various postwar spads and ministers -I recommend Sam Brittan’s “Steering the Economy”, also anything by Alec Cairncross, the memoirs of Denis Healy, Roy Jenkins perhaps …- and you find that ministers genuinely felt they could control investment. The limiting factor was the state of the external balances; gold draining away when they ran demand too hot. But it was also bad investment, often. A topic for another day. )
Anyway, my fundamental gripe is that people think investment is easy, that doing more of it is a slam-dunk, and how to do more of it is, if not trivial, then at least not one of the harder topics. Lower the tax on investment, subsidize the financing of it, cut interest rates, it will just happen. The trouble is, for long periods we have done some combination of that and it hasn’t happened, including long periods like 1997-2007 when the economy was in a pretty enviable shape. And from my other experiences in life – former adviser to the PM and before that the Business Secretary; as a writer for the Lex column at the FT – this lack of appreciation undermines good policymaking.
Unfortunately, this leads to my policy recommendations being somewhat bitty. Encouraging more business investment is an *outcome* of good policy – it is not a policy lever in itself. My ideas are frustratingly close to sounding like “do your job better, government, and stop ****ing about!”. Each investment decision is a sharp and risky move, to some extent. It uses money that shareholders would usually prefer to have back. On the Lex column the boss used to tell us: “your job is to look at the CEO’s latest plan to invest the surplus cash on his balance sheet, and if he isn’t making a very strong case, tell the clown to give the money back”.
The fundamental insight that most miss out or pass over is this: investment is hard. Most of the ideas to put money into new goods, in order that those goods can create even more goods in future, are going to be bad. Finance directors demand a projected internal rate of return of 10-15% for a reason – getting it right is difficult, you need a large margin for error. And this is the same reason the Treasury doesn’t just sign off everything that comes along, shrugging that you win some, you lose some. If they didn’t provide actual, sceptical scrutiny – remember, we are in government offices here, there is no market to discipline you – then you lose some, you lose some more. You don’t want your investment screening technique to be “did a Spad like this?”
The bland assumption that all investment is good – because at a high economic level, more K means more Y (output) – makes for simple-minded policymaking, shared on Left and Right. The K needs to happen for a good reason. The government’s job is to assemble the array of those reasons, including factors as diverse as the state of the macro-economy, the health of the jobs market, skills, financial stability, and countless micro-conditions specific to the business and its project. Sometimes, as in energy, healthcare, transport and other areas, the government’s actions create the investing environment, and there is no shortcut to the advice needed to make that work better. I helped create the Grand Challenges under Theresa May to start on this approach. It was ceaseless work
This is why Brexit caused such harm to investment – it simultaneously threw a spanner into the works of a thousand intricate calculations. These thoughts are also related to my intuitions about why it is hard to raise economic growth rates (read this). Our current growth rates require the constant, market- and Treasury scrutiny of £400bn or so of annual capital investment. The historical return on capital you witness is only as high as it has been because of that scrutiny. If you *were* able to act like the Policy Wonk playing Economic Growth, the Boardgame, and just make investment happen like a medieval emperor, that investment would be bad. It would be cathedrals and fine art and gold washbasins and chariots, or a Senate Launch System. And while that is the argument ad absurdam, acts that distort in favour of more investment than we currently see will shift to more and more marginal projects. A fifth hotel where you only need four. That sort of thing.
Better, in my view, to make the objective reasons to invest more solid. Improve your policymaking! Stabilize the macro economy and business environment. Introduce mechanisms to deal with the missing markets and technological valleys of death. And so on and so on.
*it is, I think, the fifth since 2019: something on Bailing out for a No Deal Brexit, then how to think about Covid bailouts, then Industrial Policy, a breakdown of our productivity collapse, now this.