Britain Needs A Genuine Public Investment Bank

As things stand, the banks are the permanent government of the country, whichever party is in power. (Lord Skidelsky, House of Lords, Hansard Citation, 31 March 2011, c1359)

 

In a recent piece, Robert Skidelsky and Felix Martin called for President Obama to establish a National Investment Bank (NIB).[1] If the argument makes sense for the United States, it makes even more sense in the UK. Indeed, there is already serious support for some form of national investment bank; a Government Commission on banking reform chaired by Sir John Vickers has endorsed the notion in its interim report.[2] But the ensuing ‘Green Bank’ recently announced by Nick Clegg falls far short of what is needed.[3]

Like the US, Britain has slipped into what Keynes called a ‘liquidity trap’; ie, a situation where interest rates are already so low that they cannot be cut further to stimulate the demand for new investment. In Britain, the situation is made doubly difficult by Osborne’s policy of fiscal retrenchment which further dampens private investors’ incentive to invest—or ‘animal spirits’ to use Keynes’s phrase. The current share of  investment in UK GDP is about 15%, lower than the historical average which even in boom times was too low and too skewed towards residential investment. What is worse, although the earnings of the UK business sector have recently risen, only half of retained earnings has gone to investment.  The share of capital spending out of retained earning in Q4 of 2010 was only about half its historical average—or the lowest since records began in 1987—and seemed no better in Q1 of 2011.[4]

As we approach the end of 2011Q2, Mr Osborne continues to argue that public investment ‘crowds out’ private investment; ie, that cutting the former will result in a proportional rise in the latter— although there is little evidence to support this hypothesis, particularly when the economy is depressed. The recession ended six quarters ago but private investment shows little sign of recovery.

The reluctance of firms to invest is bad news for the ConDems on several counts. Not only does investment drive growth but it drives wages: it embodies new technology which stimulates productivity growth, particularly in manufacturing, an area in which Britain has fallen behind. The fact that firms are holding onto a growing proportion of their retained earnings also means that the ‘hole in government finances’ cannot be closed. This is true by definition simply from the national income identity which says that, ceteris paribus, a rise in private savings must be reflected by a fall in public savings (a larger deficit). In the absence of an export boom, both sectors cannot increase their savings without national income falling—which is likely to make business even more reluctant to invest its savings! And indeed, with no export-led boom in sight, national income is at best stagnating.

What could a British Investment Bank (BIB) do? The answer is threefold. It could help to ‘green’ the economy by helping to expand renewable energy sources and to increase energy efficiency. Chris Huhne would be happy since his under-funded ‘Green Bank’, unable to borrow until 2015, would gain a new lease of life. Secondly, a BIB could help rebalance the economy by concentrating on new investment in manufacturing. Since most of what Britain manufactures is exported, this would help Britain’s external balance as well.

Thirdly, a BIB would be tasked with renewing Britain’s poor economic and social infrastructure, everything from new schools and social housing to high-speed rail transport. Britain’s new housing starts have fallen away to nearly nothing, a major reason why house prices are rising again; Britain spend half as much per capita on schools as France, and  Britain has fallen behind quite lamentably in its transport infrastructure. A major investment push in these areas alone (and there are more) would not only create jobs but would help stimulate private investment. Mr Osborne’ belief in the ‘crowding out’ view of public investment has apparently blinded him to its far-more-important ‘crowding in’ effects.

In short, a BIB could help direct funds towards those sectors most in need of renewal, while at the same time providing incentives for complementary private investment. A key feature of the BIB would be the appraisal of investment projects not merely on the basis of private profitability but, most importantly, on the basis of wider national profitability. The BIB could act as a powerful instrument for offsetting negative externalities (cases of market failure) and promoting positive externalities.

How much would it cost? Clearly, the Treasury would need to provide its initial capital, but having done this, the BIB would mobilise resources in two ways. First, like its European counterparts—the Luxembourg-based European Investment Bank, the Nordic Investment Bank in Finland or the Kreditanstalt für Wiederaufbau (KfW) in Germany—it would be able to raise capital in the market—where the cost of capital is at historically low rates. (Germany’s KfW raises nearly 90% of its capital in the market.) Secondly, the BIB would draw in private sector investors as partners in particular projects. Moreover in accomplishing the latter objective, the BIB would benefit from the leverage provided by having its own resources. It need not resort to PFI-style bribing of the private sector with elaborate contractual promises guaranteeing an unending stream of future super-profits.

In the present context, the idea of creating a BIB is hardly radical. Britain already owns a sizeable chunk of banking real-estate which comes with a well-healed management. In the words of George Magnus of UBS:

A national infrastructure bank that facilitates and channels the excess money in our economies towards, say, new and alternative energy technologies, and the type of infrastructure that might revolutionise manufacturing processes is a worthy pursuit.[5]

The longer the UK economy stagnates, the greater will be the pressure on Mr Osborne to formulate a Plan B. The BIB idea has already been advanced in several quarters and carefully discussed.[6] An under-funded ‘Green bank’ headed by Sir Adrian Montague, the City grandee, and unable to invest effectively until 2015 is not the answer. It’s time to act—quickly and on a broad front.


[1] See Skidelsky, R and F Martin (2011), ‘For a National Investment Bank’ New York Review of Books, 28 April-11 May.

[2] See Richard Stevens: http://www.progressonline.org.uk/columns/column.asp?c=528; for the interim report see http://s3-eu-west-1.amazonaws.com/htcdn/Interim-Report-110411.pdf

[3] See http://www.progressonline.org.uk/columns/column.asp?c=528

[4] See Chris Dillow, ‘Investment dearth’:  http://www.investorschronicle.co.uk/Columnists/ChrisDillow /article/20110329/b23bd066-59ef-11e0-8113-00144f2af8e8/Investment-dearth-worsens.jsp

[5] See http://duncanseconomicblog.wordpress.com/2010/10/26/the-deficit-currency-wars-global-imbalances-the-social-democrat-solution/

[6] See for example Gerald Holtham, ‘A National Investment Bank Can Raise our Growth’, Financial Times, 27 October 2010; http://www.ft.com/cms/s/0/ab0d79a4-e1fc-11df-a064-00144feabdc0.html#axzz 1NSdUEIpM; also see Robin Balckburn http://www.radicalphilosophy.com/ default.asp?channel_id =2187&editorial_id=29358; Lord Hollick in House of Lords; http://www.theyworkforyou.com/lords/?id= 2011-03-31a.1346.4&s=speaker%3A13222#g1396.0; on Europe’s lead, see Anatole Kaletsky ‘Creative Europeans 4, Anglo-Saxon Cutters 0’, The Times, updated 25 May 2011.

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