First published in the Sunday Times on 3rd April 2016.
Whatever happened to growth? Central bankers have been using monetary policy for years to try to revive the economies of the industrialised world. But despite huge quantitative easing and a prolonged period of low interest rates, strong growth is proving elusive. What is the explanation?
And what is the cure?
Some argue that the financial crisis was so severe, the West is still in shock. They say investors, managers and bankers remain too traumatised to pursue risky ventures. Even though money is extraordinarily cheap, owners of capital would rather stockpile it than make any bets that might lead to a loss.
The economist Tyler Cowen, in his 2011 book The Great Stagnation, suggested that America had reached a technological plateau — it had “eaten all the low- hanging fruit of modern history and got sick”. He theorised that plentiful natural resources, a growing population, and a series of innovations such as air conditioning, internal combustion engines and refrigerators made the US dramatically more productive in the decades leading up to the 1970s. Since then, improvements have tailed off — and so incomes have barely moved.
A similar, much more detailed argument is put forward by another economist, Robert Gordon, in his book The Rise and Fall of American Growth. He believes that the technical advances in the century up to 1970 were unrepeatable, and that inequality, poor education, an ageing population and too much debt will lead to static living standards in the coming years. In other words, the arrival of social media doesn’t really compare with the advent of motorised transport.
I do not believe today’s entrepreneurs lack exciting ideas, or that there are no problems in need of a solution, or that big commercial opportunities are lacking. I think the financial crisis has served as an excuse for many executives to do nothing — because business as usual was already over.
Since the mid-1990s, companies have had to contend with two enormous changes: the rise of China and India, and the digital revolution. These two shifts have inhibited the “animal spirits” of the West’s risk-takers.
China’s embrace of capitalism unleashed vast low-cost production, which has eviscerated large swathes of industry in the West. Simultaneously, the internet has proved hugely disruptive to many industries. Low-cost operators such as Amazon pass on savings to the consumer, and destroy the margins and returns of incumbent rivals. In turn, this shatters the confidence of the existing leadership class. The old assumptions and models are broken — so paralysis develops.
Capital has become more mobile and impatient. Hedge funds, private equity and activist investors now haunt any public company whose shares fail to reflect full value. The tenure of chief executives is shorter than ever. Inevitably capital expenditure plans are curtailed, and bolder projects shelved; only safe expansion is approved.
An example is the pharmaceuticals industry, which appears to have forgotten how to invent drugs. In reality, the companies’ time horizons are now too short, so the real experimentation is being farmed out to academia or biotechs.
Memories of the crisis linger. Organisations have adjusted their mindset to reward conservation rather than innovation. Meanwhile, overheads almost never fall; I sit on the boards of companies where profits have declined by half or more — but no one countenances a pay cut.
Apparently corporate profits are strong. But in businesses that I see, margins are under pressure and markets are more competitive than ever before. Mergers and acquisitions and share buybacks have replaced organic investment as a way to boost returns. But all this financial engineering doesn’t create jobs, lift wages or spur human progress. That happens thanks to R&D and invention.
The rising tide of bureaucracy, regulation, compliance and litigation inhibits modern business. Too many private sector initiatives suffer death by a thousand cuts from the small-minded officials who venerate petty rules and the precautionary principle.
Despite all these impediments, at least record numbers are founding their own start-ups in Britain. But big companies continue to hoard cash, which acts as a drag on any powerful resurgence.
The main effect of all the money printing has been to inflate asset prices, rather than jump-start investment or demand. Unfortunately the developed nations still suffer from weak productivity growth, too much debt, and a shortage of animal spirits.
Policymakers need to incentivise risk-taking, and rethink capital ratios that prevent bank lending. Employment creation should be applauded, not taxed, and fiscal rather than monetary policies should be used to stimulate economic activity.