Capital Reasons for Extra Public Investment
Davies, Gavyn, The Independent (London, England)
The Government published a rather odd paper last week on the state of capital investment in the British economy. Odd not because of its subject matter, but because it was published by Michael Heseltine, deputy prime minister and the Government's PR supremo, rather than by the Treasury or industry department. Odder still because it was not a work of propaganda, but a cross between a newspaper column and the lecture notes of a third-year undergraduate in economics. But however unorthodox the paper, it did make a political point - that the UK's investment performance was much stronger than it is usually painted by the Opposition.
The paper makes some perfectly justifiable points about Britain's recent investment performance. For example, although the recovery in investment in the current economic upswing has been extremely anaemic by past standards, this is partly because capital spending fell by less than usual in the recession. And the share of business investment in GDP is not too bad by international standards.
Nevertheless, as this column discussed in detail a fortnight ago, I still favour the common sense proposition that additional capital spending is good for the economy, and disbelieve the claim made by some economists that investment is either irrelevant for growth, or otherwise unimportant for government policy. This is not a mistake made by the Heseltine paper, but it is made by many others - for example by Bill Martin of UBS who wrote in the letters column of this newspaper that my comments a fortnight ago "failed to understand" his arguments on the subject. Possibly my grasp of his oeuvre is less than perfect, but if so I am in good company, including that of the deputy prime minister, the deputy governor of the Bank of England, the shadow chancellor, and the US Treasury department, to name but a recent sample of the great unwashed in this respect.
I shall not repeat all the reasons given last time for believing that a high investment propensity is likely to be good for an economy. But at the risk of giving this matter more attention than it deserves, I feel I must comment on Martin's claim that empirical studies have definitively established the absence of a connection between investment and growth. The truth is that plenty of cross-country studies have shown that higher investment is indeed associated with higher output growth in samples which include the experience of emerging countries as well as the old industrialised OECD nations. But I will concede that if we exclude the emerging markets, then the correlation does not seem to have been established for the developed economies alone.
Can we therefore conclude that extra investment is irrelevant for growth in old countries like the UK? No we cannot. Brad de Long, one of the American economists who believe that investment is crucial to the growth process, wrote a letter to the Sunday Telegraph on 19 May explaining why stripping out the non OECD countries introduces a serious bias to the analysis. Essentially, it is because this misses out the very cases which are most instructive - ie the emerging Asian countries where investment and growth has been exceptionally high, and the Latin American economies, where both have been low. As De Long concludes: "I can prove that all swans are white - if you let me throw the black ones out of the sample. It makes as little sense to analyse growth by looking only at the OECD as to analyse unemployment by looking only at people with jobs." Quite.
The Heseltine paper, which gives a balanced account of …
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Publication information: Article title: Capital Reasons for Extra Public Investment. Contributors: Davies, Gavyn - Author. Newspaper title: The Independent (London, England). Publication date: June 17, 1996. Page number: 19. © 2009 The Independent - London. Provided by ProQuest LLC. All Rights Reserved.
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