There's a problem with Britain's recovery. Everyone knows what it is. While overall GDP growth has been just fine, investment has not. Private-sector investment in the year to mid-2013 was a mere 13.7%.
That's the lowest since the mid-1950s. Take out depreciation, says Liam Halligan in The Daily Telegraph, and it's down to 2.4%. That's a "disgrace". Worse, it shows no signs of picking up.
As Patrick Hosking points out in The Times, it even fell by 2.7 percentage points from the first quarter of the year to the second. "When it comes to forking out for new premises, plant, machinery, intellectual property or IT systems", it seems that British business is "parsimonious in the extreme".
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
This matters. Only real investment in the kind of things that drive wealth over the long term can give us long-term growth (buying and selling houses to each other, just to be clear, can't). So why aren't companies investing? No one is sure.
It could be because there is plenty of spare capacity and they don't need to. It could be because they aren't confident enough to do so yet. It could be because they are having trouble borrowing. It could be because they can't see anything worth investing in.
But there might also be another, much more depressing answer: the incentive packages we allow boards to award themselves. In his latest book, The Road to Recovery, Andrew Smithers notes that low business investment isn't a new problem: instead it has risen hand in hand with the "profound change" in the way executives have been paid over the last 20 years.
His key point is this: thanks to the fact that options on the share price of a firm are now such a huge part of their pay and can make them so very rich the modern CEO runs his company with a view to pushing up short-term profits and hence the share price.
Investing reduces profits (as does paying high wages to staff), so they don't do it. The result? Company heads are "rewarded for extracting short-term rents while running their companies into the ground".
People react to the financial incentives they are given, so until we change those incentives we can't expect to see rising investment or sustainable recovery.
This brings me to RBS. The stunningly awful behaviour of its restructuring division (Global Restructuring Group) towards the firms in its care is a classic of the short-term rent-seeking genre.
There being no gain for the division in creating or attempting to hang on to long-term relationships with customers, it has every incentive to take what Felix Salmon of Reuters calls a "maximally adversarial stance" towards borrowers, causing a nasty amount of human distress, but providing a slug of extra short-term profit (and presumably bonuses along the way).
Again we see people reacting to the financial incentives we give them. Perhaps it is time to come up with some new ones.
-
Water companies blocked from using customer money to pay “undeserved” bonusesThe regulator has blocked three water companies from using billpayer money to pay £1.5 million in exec bonuses
-
Will the Bitcoin price hit $100,000?With Bitcoin prices trading just below $100,000, we explore whether the cryptocurrency can hit the milestone.
-
Inflation may be slipping but there is still plenty of misery aheadEditor's letter Inflation may be a little lower than last month as the prices of petrol and diesel fall back, but it remains structural and long-term, says Merryn Somerset Webb. And there are no painless solutions.
-
Beat the cost of living crisis – go on holidayEditor's letter As inflation rages, energy bills soar and the pound tanks, what’s a good way to save money this winter? Go on holiday, says Merryn Somerset Webb.
-
How capitalism has been undermined by poor governanceEditor's letter Capitalism’s “ruthless efficiency” has been undermined by poor governance, a lack of competition and central banks’ over-enthusiastic money printing, says Andrew Van Sickle.
-
Don't be scared by economic forecastingEditor's letter The Bank of England warned last week the UK will tip into recession this year. But predictions about stockmarkets, earnings or macroeconomic trends can be safely ignored, says Andrew Van Sickle.
-
The biggest change in the last 17 years – the death of the “Greenspan put”Editor's letter Since I joined MoneyWeek 17 years ago, says John Stepek, we’ve seen a global financial crisis, a eurozone sovereign debt crisis , several Chinese growth scares, a global pandemic, and a land war in Europe. But the biggest change is the death of the “Greenspan put”.
-
The wolf returns to the eurozone’s doorEditor's letter The eurozone’s intrinsic flaws have been exposed again as investors’ fears about Italy’s ability to pay its debt sends bond yields soaring.
-
Things won't just return to normal – that's not how inflation worksEditor's letter You might think that, if inflation is indeed “transitory”, we just need to wait and everything will return to “normal”. But this is a grave misunderstanding of how inflation works, says John Stepek.
-
The public may have reached its limit for tax risesEditor's letter The UK tax burden is now at a 70-year high. And, while there may be some reason to hold off on cuts right now, taxes are too high because the state tries to do too much. Perhaps it should do less, says Merryn Somerset Webb.
