Global Economy Updates
Sign up to myFT Daily Digest to be the first to hear about news about the global economy.
Politicians love investment. Partly it’s the visual appeal: hard hats and construction projects are a great metaphor for illustrating how they will rebuild the country; a new science campus shows the possibilities of the future; bridges and trains show how they reconnect a disjointed people. But the veneration of investment is a trap many of us fall into: seeing it as the right kind of spending, when consumption, its bigger but less beloved brother, is unsustainable and unproductive. This perception, with its hint of puritanism, is a mistake. A possible consumer-driven recovery from the pandemic is nothing to worry about.
Economists separate spending into two rough categories: investment and consumption. In this context, investing doesn’t mean buying financial assets, but producing real assets – everything from building office buildings and oil rigs to designing a new user interface for a mobile app. These are all goods and services used in production and hence the idea is that having more should ultimately make a country richer. Consumption is everything else from food to furniture. The goal, which goes beyond what is necessary, is to make our lives better in the here and now.
The concern is that for all the pleasure it provides, excessive consumption means societies “eat the corn”, as the saying goes, failing to set aside resources that will maintain living standards in the future. Infrastructure spending or tax breaks designed to boost investment are easier to sell as a way out of the recession than stimulus checks, which can be spent on frivolities.
However, the two categories of expenditure constitute a whole of the good and the bad. Investing in a redesigned headquarters can be just as self-indulgent as tucking into a Michelin-starred tasting menu. The British government’s planned royal yacht is unlikely to increase production capacity. Consumption, on the other hand, includes health and education in addition to entertainment. Vaccines can be “consumed” when fired, but they’re still a down payment for the future.
China’s recovery from the coronavirus pandemic has focused on boosting investment and industrial production, delaying the long-cherished “rebalancing” to consumption. The investment-led growth model has served China well so far, as it has for so many countries going through industrial revolutions. Higher standards of living, for many poorer countries, follow higher investment as the increase in the capital stock gradually improves productivity and wages.
But capital expenditures quickly detract from returns as there are only so many steel furnaces and housing projects a country needs. At that point, growing the economy is more about improving productivity. Investment is still essential – to keep up with technology or to replace equipment – but alone will not lead to a stronger economy. It is no longer about replenishing the stock of seed maize, but about coming up with varieties with a higher yield or better farming techniques.
While there are specific problems that can be solved through targeted investment – Britain’s poor quality and expensive housing, the lack of fiber broadband in Germany, America’s melting bridges, the need to reduce carbon emissions everywhere – post-industrial Rich countries are now at the point where more capital per worker won’t do as much to boost growth as they used to. Among the G7 group of large advanced economies, there is little clear correlation between total investment and economic performance: relatively slow-growing Japan leads the list, spending 25 percent of its national income on capital, while Britain, another lagging behind in terms of growth, is down by 17 percent.
Britain’s low-capital economic model, which reflects the high share of services in the economy, offers an advantage. According to Eurostat, the average Briton consumed about the same as the average Finn in 2019, despite Finland’s national per capita income being 6.7 percent higher. Spending less on factory equipment means the average Briton spends more on leisure and hospitality. Higher consumer demand can increase productivity. As a report from the Institute for Government points out, London’s restaurants are likely to have “higher productivity” than the rest of the country because they have more customers, not better managers.
As Adam Smith said in The welfare of nations, the only reason we produce something is to consume. It is a sign of a successful economy if it provides the material conditions for a good life: the point of setting aside seed corn is that you can eventually eat what you grow.