Economics ministers around the developed world say that they want to “rebalance” away from speculative finance and build up a more productive “real economy”. Yet this plan overlooks just how sick the real economy has become. It also ignores that we need high-quality finance – not just large quantities of it – in order to regenerate it.
Indicators of real economy weakness are everywhere. Fortune 500 companies have spent $3tn on stock buybacks in the past decade, with many leaders in information technology and life sciences spending more on them than on investments in long-run growth areas such as research and development, which economists widely agree are crucial drivers of long-run growth.
The often-heard justification of such short-termism is that companies face a “lack of opportunities” for investment. But if this is true, why are some parts of the public sector across the world investing heavily in new opportunities? Bloomberg New Energy Finance calculates that, in 2012 alone, state development banks financed $109bn in renewable energy, energy efficiency, and electrical transmission and distribution, with the private sector sums not coming close to a third of that. Even in the US, which is usually sold as the “market model”, it is the government that is pouring money into high-growth areas such as the life sciences: $31bn was spent by the US National Institutes of Health on the knowledge base fuelling biotechnology and pharmaceuticals in 2012 alone.
Lawrence Summers, the former US Treasury secretary, has warned about “secular stagnation” in the rich world – a future of slower growth. But there is nothing natural about this prospect. Rather, it is the result of a lack of productive investment in the future. Indeed, the real problem today is not a “lack of finance” but its lack of direction and low quality. Quantitative easing has not nurtured the productive economy, because most of the money created has ended up in bank coffers rather than being lent. And large private companies are not short of finance. They are enjoying record surpluses – more than $1tn in the US alone.
Even venture capital, designed in theory to provide high-risk finance for innovative companies snubbed by risk-averse banks, has become increasingly risk averse. The sector is focused on making an early “exit”, usually through an initial public offering, in about three years; while innovation takes 15 to 20 years. So it is impatient finance and a financialised private sector that makes secular stagnation our unfortunate future. Yet Professor Summers himself, by supporting the deregulation of finance when he was in government in the 1990s, helped make that happen.
In the UK, Mark Carney, governor of the Bank of England, is right to want to steer the economy from a (consumer) debt-driven one to a (productive) investment-driven one. But it is naive to think this growth will come from small businesses, as he and many others often assume. Most small enterprises are not very innovative and produce little net job generation once job losses are factored in.
In the UK, for example, only 1 per cent of new enterprises have sales of more than £1m six years after they start. Indeed, figures from David Storey at Sussex university show that the median sales of a six-year-old company are less than £22,320.
It is not about company size (which, evidence shows, does not matter for growth) but about what kind of finance companies, of any size, need to invest in difficult long-run areas. Growth and innovation require the kind of patient, long-term, committed finance that generated high-growth companies in Silicon Valley, and that today is generating companies such as Huawei in China (number one in worldwide telecoms equipment).
In the US, it is public agencies such as Darpa, the Defense Advanced Research Projects Agency, that provide this finance – indeed the latest big Silicon Valley export, Tesla Motors, benefited from a $500m guaranteed government loan. In China, it is the China Development Bank that is funding developments in IT and clean technology – with the US ignoring its own provision of public support when it calls the CDB “anti-competitive”. But of course, the public sector cannot act alone. What is also missing today are private companies that invest alongside the public sector in big productive opportunities, as Xerox Parc and Bell Labs did in the past.
These lessons suggest policy makers need to refocus the debate not on the quantity of finance but on quality. They should concentrate on how to join up reform of the financial sector, definancialisation of the real economy and innovation policy so that productive (not speculative) investment is nurtured in companies of all sizes.
Until that happens, complaints about “secular” stagnation end up justifying the lack of investment rather than challenging it in both the public and private sectors.
The writer is a professor of economics at Sussex university, and author of ‘The Entrepreneurial State: Debunking Private vs Public Sector Myths’
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