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And with one bound he was free – to compel

The investment strike is one the government would do well to bust, writes Michael Burke in the Guardian. When I read the headline I gave him the benefit of the doubt. The Guardian subs do not cope well with nuance. But the headline fairly represents the views of the man:

Since both the cause of the slump and the cause of the deficit are the same, the investment strike by firms, economically the remedy is very simple. Government policy should aim break that strike and release sufficient resources to fund an investment-led recovery.

I bet them fancy-pants government ministers are kicking themselves now they see how easy the solution is. You just redefine thousands of separate people and organisations not wishing to risk their money in the present economic climate as a ‘strike’. Then you break the strike.

Don’t knock Mr Burke’s logic – when the British government redefines pretty much any behaviour it does not like as ‘terrorism’ and then uses anti-terrorism powers to suppress it, the tactic seems to work just fine.

20 comments to And with one bound he was free – to compel

  • Yes, how very typical… when people don’t do what you want, just use the violence of the state.

    This is why I grow less tolerant of statists as the years go by (meaning I think pretty much anything goes when opposing them and indeed even civil behaviour towards them is only justified as a tactic).

  • Tedd

    The investment strike is therefore both the source of the slump and the source of the government’s budget deficit.

    It seems to me that, if the economy is basically sound, then any decline in private investment is “irrational” in the sense that the perception that it’s a bad time to invest (i.e., a good time to save) is self-fulfilling. In that case, the standard Keynsian solution would work. But, if the economy is not basically sound, i.e., if there are significant mal-investments, in Hayekian terms, then the standard Keynsian solution will only make it worse.

    Given that Keynsians always propose deficit-funded government spending to stimulate the economy, does that mean that Keynes and Keynsians reject the whole notion of mal-investments?

  • JohnB

    Ultimately, the natural balance of supply and demand is the only thing that will work.

    All other manipulations and coercions are someone making a play for someone else’s value store.

    As get-rich-quick schemes they can work for a while but only so long as there is stuff to be stolen.
    Over time they destroy wealth, the creation of wealth, and overall well being.

    And I think that is more or less where we have arrived.

  • There is actually a way government could “free resources” to aid the private sector, and that would be by a massive cut in both taxes and government spending – ie a reduction in the size of the state.

  • Paul Marks

    The cause of the slump (as with the cause of all such slumps) was the credit bubble (the expansion of the credit money supply) before it.

    And the cause of the deficit is the Welfare State – for there would be a deficit even if the banks were in good shape.

    As for forceing people to throw yet more money away….

    Yet another reason, for those who can, to get out of this country.

  • Paul Marks

    By the way there were two basic reasons why governments encouraged credit expansion in the years before the crash of 2008 (and the crash of 2013 – oh that has not happened yet, and will be so “unexpected” when it does).

    To make govenrment borrowing cheaper – low interest rates (which is what credit expansion, rather than finaning loans from REAL SAVINGS is all about) .

    And – in the hopes of taxing the phony “boom” (both banks profits and so on directly – and the general “boom” in the economy).

    In this way the fiscal position of governments could be made to look better (more in balance).

    I.E. The Welfare (wha the Americans call the “Entitlement Program” state) could be made to look affordable – which it is not.

  • Sam Duncan

    Wait… what? The cause of the government spending defecit is the lack of private investment in private business?

    Oh, of course: the government decides what to spend and then everyone else has to keep up. So if the rest of us don’t create enough wealth to feed the gaping maw of the corpulent state, it’s our fault. I forgot. It’s like when an alcoholic beats his wife because there’s no booze in the house, right? Look what we made them do now.

    So what’s Gordon Brown’s excuse for 2001-07?

  • Lee Moore

    If firms thought it was likely to be profitable to invest more, they’d invest more. They’re not on strike, they’re just waiting for profitable investment opportunities. Since governments, via their central banks, have engineered negative real interest rates, and since the market will tend to equalise risk weighted returns on all investments (by adjusting the current price of investment assets), investment projects will also tend to have expected negative real returns at the moment. Where’s the mystery ? If governments want firms to invest more they should stop intervening to create negative real interest rates. Once the price of investment assets has been allowed to fall to whatever obtains without government intervention, real interest rates and hence expected real returns on investments will be positive and there’ll be more new investment.

  • An investment strike? Led perhaps by a mysterious inventor? I’ll be fascinated by the Guardian organizing the search for John Galt. To Ayn Rand it was cinematic fiction, but to Michael Burke it seems to be plausible fact and sound policy. . . .

  • Laird

    I only wish that investors were on strike. Unfortunately, I don’t think Galt’s Gulch is suddenly being populated by the “men of the mind”. The more prosaic truth is precisely what Lee Moore said. Not that that will stop the government from expropriating our wealth, of course, if that’s what it takes for them to continue holding onto the reins of power. In the end, something like this is probably inevitable. It will just be one more sign of the impending collapse.

  • RRS

    Whenever some “former” economist for a major banking institution writes about credit origination steming from some intermediation function of agregating “savings” and lending them out – classifying that lending (from that function) as “investment,” that’s enough to assign his piece to the former role of used catalogues in the days before indoor plumbing.

    Such punditry never deals with the underlying issues of how surpluses are created, their necessary redeployment if stagnation or decline are to be offset (or avoided).

    They avoid the issues of what has been done with surpluses; what is being done with current surpluses (profits); how surpluses must have a critical mass (concentration of determination over their dispositions) to effect any expanasions of societies or civilizations.

    In short, they deal in hookum!

  • CaptDMO

    I.E. The Welfare (wha the Americans call the “Entitlement Program” state) could be made to look affordable – which it is not.

    Posted by Paul Marks at August 4, 2012 09:02 PM

    Ooo…feel free to add unrealistic housing “loans”,
    “easy” bankruptsy, “free” health mandates, “easy” non-gubmint Not For Profit status, and Party(D) Line appointed “special exceptions” to “special” mandates against those who actually PAY taxes to the list of entitlements. (as well as delusions of non-existant fill-in-the-blank, hyphen, “rights”, and who exactly is responsable to tolerate/labor/pay for them)

  • That bit about special exceptions to mandates makes me think of France under the ancien régime, whose budget was increasingly strained by the Bourbon kings’ habit of selling tax exemptions to nobles and city councils, and then spending the payments as current income. A smaller and smaller fraction of the French people ended up paying taxes to support everyone else.

  • Has the government tried ginning up a tulip mania? i.e. demand for a scarce product?

    Perhaps they could turn pot prohibition on its head and require everyone to smoke a bowl a day. The ideas does have a British antecedent. Huxley.

  • PeterT

    Once the price of investment assets has been allowed to fall to whatever obtains without government intervention, real interest rates and hence expected real returns on investments will be positive and there’ll be more new investment.

    I have heard this line of reasoning before but am not sure whether it is true.

    Only new investments count. Selling government bonds or using cash savings to buy pre-existing equities or bonds doesn’t count.

    If the government wants to encourage investment it can only do so by subsidising risk taking. I am not sure this is a great idea given how we got into this mess.

    Anyway, it could do so by paying a negative interest rate (i.e. demanding a fee) for reserves placed at the central bank (which will feed through into current accounts). Raising the Bank rate or reversing QE wouldn’t have the desired impact since in either case the yield on the safe asset has increased. Risky assets’ yields would rebalance at some equilibrium level but not necessarily at one where there was more investment.

    Cutting taxes and red tape is probably the best solution. I’m not sure that playing around with monetary policy will have much impact. Its an area of policy where you can do a lot of harm but not much good.

  • Laird

    What a strange mish-mash, PeterT. I agree with the last paragraph but not much of the rest. “Only new investments count. Selling government bonds or using cash savings to buy pre-existing equities or bonds doesn’t count.” ??? Take a moment to think that through. Those “pre-existing” securities are being bought from someone, who in turn has to re-invest the proceeds (presumably because I has in mind what he believes to be a better investment, or he wouldn’t have sold in the first place). So while converting one form of investment (say, government bonds) into another doesn’t, of itself, directly enhance the economy it does so indirectly by freeing up capital for more productive use. Looking at a single transaction within the great buzzing hive of the overall economy makes no sense.

    Anything which takes capital out of the nonproductive sinkhole of government securities and returns it to the private sector is (almost) necessarily a net gain to the overall economy.

  • Laird

    Oops. That should have been “he”, not “I”, in that parenthetical in the middle.

  • Lee Moore

    “Only new investments count” covers a multitude of sins.

    1. Existing investments, eg businesses, require new investment to keep going. Think of houses. If you fail to keep them in good repair, they deteriorate. You can take an existing business and run it into the ground, not spending capital to keep its productive capacity intact, but instead sucking out the maximum of cash. This is a bad thing to do financially if you would make more by investing to preserve or extend productive capacity, but a good thing to do otherwise – which includes the case of there being generally negative real returns on investment.

    2. If returns on existing investments are generally negative, returns on new investments will generally be negative too. This is how the price mechanism works. Again think of houses. If everybody expects the price of existing houses to fall, few new houses will get built, because it is irrational to suppose that a killing is to be made in new houses when old ones won’t sell.

    3. I had not intended to give the impression that the government should be encouraging investment. The government should be minding its own business. All I intended to convey was that, for those who are unhappy with low levels of investment by business, and who look to the government for a solution, the solution – as usual – lies not in the government doing something helpful, but in the government stopping doing something unhelpful, in this case stopping its policy of engineering negative real interest rates.

  • PeterT

    Not yet convinced I am afraid. But happy to be educated if I am wrong.

    I sell a government bond and buy some equities. There is no reason, without further information, to suppose that this has any economic impact whatsoever. There has been no change in economic activity; the only change is that I’ve switched papers with somebody.

    What does matter is whether in aggregate there has been an increase in risk appetite, and this has been translated into investment in some productive asset.

    The increase in risk appetite is expressed in the difference between the yield on the risky asset and on the safe asset. The absolute yield level of the safe asset doesn’t matter and it is only this that the government can control with monetary policy.

    The government could potentially affect the level of risk taking in the economy by:

    a) subsidising risk taking (i.e. deposit insurance).
    b) doing it itself (although the private sector may well adjust in the other direction)
    c) increasing the potential productivity of risky assets by cutting tax, red tape etc.

    Clearly there is a massive amount of scope for doing stuff under item c) A shame the government is not doing very well here.

    I didn’t think you were encouraging government action Lee. Wouldn’t be common on these pages.