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/.

Photo: Getty
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The Home Office made Theresa May. But it could still destroy her

Even politicians who leave the Home Office a success may find themselves dogged by it. 

Good morning. When Theresa May left the Home Office for the last time, she told civil servants that there would always be a little bit of the Home Office inside her.

She meant in terms of its enduring effect on her, but today is a reminder of its enduring ability to do damage on her reputation in the present day.

The case of Jamal al-Harith, released from Guantanamo Bay under David Blunkett but handed a £1m compensation payout under Theresa May, who last week died in a suicide bomb attack on Iraqi forces in Mosul, where he was fighting on behalf of Isis. 

For all Blunkett left in the wake of a scandal, his handling of the department was seen to be effective and his reputation was enhanced, rather than diminished, by his tenure. May's reputation as a "safe pair of hands" in the country, as "one of us" on immigration as far as the Conservative right is concerned and her credibility as not just another headbanger on stop and search all come from her long tenure at the Home Office. 

The event was the cue for the Mail to engage in its preferred sport of Blair-bashing. It’s all his fault for the payout – which in addition to buying al-Harith a house may also have fattened the pockets of IS – and the release. Not so fast, replied Blair in a punchy statement: didn’t you campaign for him to be released, and wasn’t the payout approved by your old pal Theresa May? (I paraphrase slightly.)

That resulted in a difficult Q&A for Downing Street’s spokesman yesterday, which HuffPo’s Paul Waugh has posted in full here. As it was May’s old department which has the job of keeping tabs on domestic terror threats the row rebounds onto her. 

Blair is right to say that every government has to “balance proper concern for civil liberties with desire to protect our security”. And it would be an act of spectacular revisionism to declare that Blair’s government was overly concerned with civil liberty rather than internal security.

Whether al-Harith should never have been freed or, as his family believe, was picked up by mistake before being radicalised in prison is an open question. Certainly the journey from wrongly-incarcerated fellow traveller to hardened terrorist is one that we’ve seen before in Northern Ireland and may have occurred here.

Regardless, the presumption of innocence is an important one but it means that occasionally, that means that someone goes on to commit crimes again. (The case of Ian Stewart, convicted of murdering the author Helen Bailey yesterday, and who may have murdered his first wife Diane Stewart as well, is another example of this.)

Nonetheless, May won’t have got that right every time. Her tenure at the Home Office, so crucial to her reputation as a “safe pair of hands”, may yet be weaponised by a clever rival, whether from inside or outside the Conservative Party. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.