Sunday, July 09, 2006
Investing in the building blocks
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

One swallow doesn’t make a summer and one statistic doesn’t make a trend. But I was taken with figures from Britain’s official numbers machine, the Office for National Statistics (ONS), the other day.

Just as we’ve got used to failures in the sporting arena, so there is general recognition that Britain is not world-class when it comes to certain things to do with economic combat.

Few can beat us on consumer expenditure, as the England footballers’ wives and girlfriends ably demonstrated to the reluctant spenders of Germany.

Investment, however, appears to be another story. Businesses in other countries always seem to find a reason to invest. British firms are good at finding excuses not to, whether it be the growing burden of company pensions, UK stock-market short-termism or rising taxes and red tape. Many is the time I have lectured business people that we — they — are not investing enough.

After rising very sharply during the 1990s, business investment was flat between 2001 and 2004. Firms had either spent too much ensuring they did not succumb to the millennium bug or were resting on their laurels for other reasons.

This was at a time, moreover, of rising profits. UK corporate profitability last year reached its highest level since 1998, measured by the rate of return on capital. Other countries also suffered a post-millennium hangover. The investment boom of the 1990s left many sectors with overcapacity, a situation of excess supply that was reinforced by the rapid build-up of productive capacity in China.

In Britain, however, the dawn of a new century appeared to leave businesses groggier than elsewhere.

So the good news that attracted my attention was that, on revised official figures, business investment grew by 1.7% in the first quarter, and was 4.6% up on a year earlier.

This is a long way from boom time; in the late 1990s growth rates of 20% were being recorded. It was, however, nearly three times as strong as consumer spending, up by 1.7% over the same period. For the first time in a while, corporate spenders are putting households in the shade.

Not only that, it could be that British business, without shouting about it too much, has been quietly investing more than the official figures suggest.

John Hawksworth of Price Waterhouse Coopers, in his firm’s latest UK Economic Outlook, looks at whether businesses have been as stingy about spending as the statistics imply. The numbers suggested that until its recent pick-up, investment was at a 40-year low as a share of Britain’s gross domestic product in cash terms.

There are good reasons, however, why this may be understating the true picture. One is that prices of capital equipment, particularly anything IT-related, have been falling faster than consumer goods. Business gets more for its cash than it used to.

The bigger shortcoming of the figures is that they were relevant to an economy in which manufacturing was king and investment meant buying in new welding machines, lathes and production lines. What we mean by investment in Britain’s service-based economy of today is rather different.

The ONS has started to include, for example, software investment, and intends to go further. But even on the limited basis so far included in the statistics, software investment is up 34% over the past two years.

Hawksworth also cites research by Carol Corrado and other economists on the amount of “intangible” investment by businesses. This includes not only spending on software but also research and development, “brand equity” (building and maintaining the company’s brand), training and organisational change — all the things that modern “people” businesses would regard as investment. Applying estimates for all these, they suggested that in America business investment was some 85% higher than the official figures had us believe.

There’s also the “puzzle” about inward investment. On the one hand, UK business complains of being overtaxed and overregulated, and struggling to compete with low-cost countries, with good reason. On the other, inward investment continues to be quite healthy.

Figures from the Department of Trade and Industry (DTI) last week showed that inward investment had been boosted by the boom in foreign acquisitions of UK businesses, up 42% in 2005-6 over 2004-5. Even so, the flow of direct investment remains reasonably healthy. The DTI claims 34,077 jobs were created and 55,789 safeguarded by inward investment, a combined total up by 19% on the previous year.

Surely, however, the proof of the pudding is in the eating. If true investment has been higher, why hasn’t the UK’s productivity performance been better? Official figures show output per worker rising by a feeble 1.5% in the past year.

Again, there is a potential measurement problem. Proudfoot, a consultancy specialising in productivity at company level, got Professor Nick Crafts of the University of Warwick to analyse its survey data from around the world. His encouraging conclusion was that business-sector productivity grew faster last year in Britain than in France and Germany.

Less encouragingly, the analysis also suggested that UK productivity growth was weaker than our main European competitors over the period 2003-5, and that wasted time remained the curse of British business, costing the economy £70 billion a year in lost output.

So good news and bad news. There is a strong argument that Britain is investing more than official figures say. But, so far at least, we’re not using that investment very productively.

PS The most eye-catching claim of the book Freakonomics was that a big explanation for the fall in US crime in the 1990s was the legalisation of abortion in the 1970s.

Legalised abortion meant fewer unwanted babies, unwanted babies are more likely to become criminals, so abortions led to lower crime.

The theory, based on an earlier paper by Steven Levitt, the main author of Freakonomics, has come in for criticism in America from other economists. Does it work in Britain? According to a paper presented at the recent conference of the European Society of Population Economists in Verona, by Leo Kahane, David Paton and Rob Simmons, there is no evidence it does.

Britain’s abortion laws were liberalised in the 1960s, five years ahead of America, yet recorded crime — using data from the 42 police forces in England and Wales — began to fall about the same time as it did in the US. They conclude that while there is strong evidence to link crime to levels of unemployment and social deprivation (the number of children in care homes), it isn’t possible to prove a link between abortion and crime.

That, to me, seems eminently sensible. About a fifth of dependent children in Britain are brought up in single-parent households and they account for 70% of anti-social behaviour, the stepping-stone to crime. Fewer than a quarter of the 185,000 abortions carried out annually in Britain are on pregnant teenagers. There are huge moral and ethical issues here, but on the narrow point of whether abortion has been a crime-stopper, I doubt it.

The Verona conference, some of which is summarised on the New Economist blog, attempted to answer an even older question: Do good-looking people get on in life through talent or beauty? Students in a university economics department were assessed on their looks and this was compared with their results in oral exams, where those looks were on show, and in anonymous, written papers, where they were not. The beautiful people, it seemed, did better in both. Doesn’t it make you sick?

From The Sunday Times, July 9 2006


house prices. are they going to fall soon? if so will the stock market go down with them? if so what is best area of investment?thanks

Posted by: dave at July 17, 2006 02:40 AM

sorry my previous post was in wrong place.
ok now science and manufacturing.
do you kow of any local schools where all the science and maths teachers are subject specialists in the sense of having a first degree in their subject? this is an essential step towards revitalising science engineering manufacturing. subject specialists have (often) the advantage of being able to give a focus to a course and to explain complicated material in an easy to understand and interesting way (or at least they often can).
however, is it not the case that the shortage of scientists and engineers may lead to their income being boosted in a price driven society due to scarcity value???

Posted by: dave at July 17, 2006 02:47 AM