Green investments can overcome the paradox of thrift

We need real public investment in Green projects now

Few economists will be entirely surprised that the UK is officially back in recession. We are witnessing a classic case of the "paradox of thrift" in which households, businesses, banks and now government are all retrenching simultaneously, cutting investment, shedding labour, restricting credit and storing money.

Government policies have failed to unlock record levels of private sector savings which could revitalise the stagnant economy. Yet if the Prime Minister and his Cabinet colleagues offer a bold strategic vision which restores confidence in the direction and consistency of public policy on the green economy, there will be golden opportunities for investment which could jump-start growth.

Investment has slumped mainly because households, businesses and banks are nervous about future demand, and have responded by forgoing more risky investment in physical capital, such as infrastructure. Instead, companies are squirreling away private saving into "risk-free" assets such as solvent sovereign bonds. As a result, annual private sector surpluses over the past few years have been at record levels, and amounted to £99bn last year, equivalent to 6 per cent of UK GDP.

Desired saving has exceeded desired investment to such a degree that global real "risk-free" interest rates for the next 20 years have been pushed to zero and below. Savings are losing value by the day as pension funds and financial institutions pay real interest to (rather than receive interest from) governments; a truly perverse state of affairs given the need for productive investment. These low rates do not reflect a collapse in the underlying returns to capital, but instead reflect desperately depleted confidence.

And when everyone retrenches simultaneously, fear of recession becomes a self-fulfilling prophecy, sustaining a vicious circle of low demand and low investment that affects the whole economy.

The UK, like many advanced economies, needs to stimulate economic growth to reduce deficits and debt, but growth requires investment, and investment levels have slumped to record lows relative to output. The longer recovery is delayed and capital sits idle, the more skills are lost and the higher the misallocation of resources, making it harder to restore growth.

Fiscal policy is generally constrained by the need to restore confidence in the sustainability of public debt and, with short-term interest rates close to zero, the effectiveness of monetary policy to stimulate growth is reaching its limits.

What is needed to restore confidence is a clear strategic vision with supporting policies to guide investors. A vision to build an innovative, resource-efficient market economy which restores energy security, tackles climate change, and saves consumers and businesses costs in the long run.

Standard macroeconomics tells us that the best time to support low-carbon investment is during a protracted economic slowdown. Resource costs are low and the potential to crowd out alternative investment and employment is small. In addition, although public budgets are stretched, there is no shortage either of private capital available for investment, or of investment opportunities with potential for profitable returns. The current opportunity should not be missed.

This is about more than correcting market failures, such as those associated with greenhouse gas emissions; it is about restoring confidence through mission-driven investment which spurs innovation in a way comparable to, but bigger in scale than, the space race or the struggle to defeat cancer. Policies to encourage low-carbon investment would provide new business opportunities, generate income for investors and would have credibility in the long term because they address growing global resource challenges, while tapping into a fast-growing global market for resource-efficient activities.

The most recent figures published by the Department for Business, Innovation and Skills show that the UK low-carbon and environmental goods and services sector had sales of £122.2bn in 2010-11, growing 4.7 per cent from the previous year and placing us sixth in the global league table.

But the private sector is not investing as heavily as it could in green innovation and infrastructure because of a lack of confidence in future returns in this policy-driven sector. The Government should incentivise such investment by itself taking on elements of this policy risk which it "controls". By backing its own low-carbon policies, the Government can stimulate additional net private sector investment, and thereby make a significant contribution to economic growth and employment.

The Government can do this, for instance, by allowing the Green Investment Bank to operate as a lending institution, offering loans to private companies so that it shares some of the risk of private investments in green infrastructure.

But it also needs the Prime Minister and his Cabinet colleagues to be publicly supportive of the green economy. Whenever the Chancellor conveys the false impression that we have to make a choice between environmental responsibility and economic growth, he undermines the confidence of private sector investments. The Prime Minister helped to repair some of his damage with a speech this week that highlighted the importance of clean energy, but there needs to be a clear vision for "the greenest government ever".

In past global recessions, rearmament, electrification and space races have helped restore investor confidence – this time the vision should be green. The green sector is one of the few vibrant parts of our economy at the moment. It offers a golden chance to generate growth, as long as the Government makes stronger efforts to restore private sector confidence in public policy.

Savings and investment: A bank vault in the US. Photograph: Getty Images

Dimitri Zenghelis was formerly Head of Economic Forecasting at HM Treasury and is currently a senior visiting fellow at the Grantham Research Institute on Climate Change and the Environment at London School of Economics and an adviser to Cisco systems. His paper, A strategy for restoring confidence and economic growth through green investment and innovation is available at http://www.lse.ac.uk/grantham/.

Getty
Show Hide image

Four times Owen Smith has made sexist comments

The Labour MP for Pontypridd and Jeremy Corbyn’s Labour leadership rival has been accused of misogynist remarks. Again.

2016

Wanting to “smash” Theresa May “back on her heels”

During a speech at a campaign event, Owen Smith blithely deployed some aggressive imagery about attacking the new Prime Minister. In doing so, he included the tired sexist trope beloved of the right wing press about Theresa May’s shoes – her “kitten heels” have long been a fascination of certain tabloids:

“I’ll be honest with you, it pained me that we didn’t have the strength and the power and the vitality to smash her back on her heels and argue that these our values, these are our people, this is our language that they are seeking to steal.”

When called out on his comments by Sky’s Sophy Ridge, Smith doubled down:

“They love a bit of rhetoric, don’t they? We need a bit more robust rhetoric in our politics, I’m very much in favour of that. You’ll be getting that from me, and I absolutely stand by those comments. It’s rhetoric, of course. I don’t literally want to smash Theresa May back, just to be clear. I’m not advocating violence in any way, shape or form.”

Your mole dug around to see whether this is a common phrase, but all it could find was “set back on one’s heels”, which simply means to be shocked by something. Nothing to do with “smashing”, and anyway, Smith, or somebody on his team, should be aware that invoking May’s “heels” is lazy sexism at best, and calling on your party to “smash” a woman (particularly when you’ve been in trouble for comments about violence against women before – see below) is more than casual misogyny.

Arguing that misogyny in Labour didn’t exist before Jeremy Corbyn

Smith recently told BBC News that the party’s nastier side only appeared nine months ago:

“I think Jeremy should take a little more responsibility for what’s going on in the Labour party. After all, we didn’t have this sort of abuse and intolerance, misogyny, antisemitism in the Labour party before Jeremy Corbyn became the leader.”

Luckily for Smith, he had never experienced misogyny in his party until the moment it became politically useful to him… Or perhaps, not being the prime target, he simply wasn’t paying enough attention before then?

2015

Telling Leanne Wood she was only invited on TV because of her “gender”

Before a general election TV debate for ITV Wales last year, Smith was caught on camera telling the Plaid Cymru leader that she only appeared on Question Time because she is a woman:

Wood: “Have you ever done Question Time, Owen?”

Smith: “Nope, they keep putting you on instead.”

Wood: “I think with party balance there’d be other people they’d be putting on instead of you, wouldn’t they, rather than me?”

Smith: “I think it helps. I think your gender helps as well.”

Wood: “Yeah.”

2010

Comparing the Lib Dems’ experience of coalition to domestic violence

In a tasteless analogy, Smith wrote this for WalesHome in the first year of the Tory/Lib Dem coalition:

“The Lib Dem dowry of a maybe-referendum on AV [the alternative vote system] will seem neither adequate reward nor sufficient defence when the Tories confess their taste for domestic violence on our schools, hospitals and welfare provision.

“Surely, the Liberals will file for divorce as soon as the bruises start to show through the make-up?”

But never fear! He did eventually issue a non-apology for his offensive comments, with the classic use of “if”:

“I apologise if anyone has been offended by the metaphorical reference in this article, which I will now be editing. The reference was in a phrase describing today's Tory and Liberal cuts to domestic spending on schools and welfare as metaphorical ‘domestic violence’.”

***

A one-off sexist gaffe is bad enough in a wannabe future Labour leader. But your mole sniffs a worrying pattern in this list that suggests Smith doesn’t have a huge amount of respect for women, when it comes to political rhetoric at least. And it won’t do him any electoral favours either – it makes his condemnation of Corbynite nastiness ring rather hollow.

I'm a mole, innit.