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/.

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The economics of outrage: Why you haven't seen the end of Katie Hopkins

Her distasteful tweet may have cost her a job at LBC, but this isn't the last we've seen of Britain's biggest troll. 

Another atrocity, other surge of grief and fear, and there like clockwork was the UK’s biggest troll. Hours after the explosion at the Manchester Arena that killed 22 mostly young and female concert goers, Katie Hopkins weighed in with a very on-brand tweet calling for a “final solution” to the complex issue of terrorism.

She quickly deleted it, replacing the offending phrase with the words “true solution”, but did not tone down the essentially fascist message. Few thought it had been an innocent mistake on the part of someone unaware of the historical connotations of those two words.  And no matter how many urged their fellow web users not to give Hopkins the attention she craved, it still sparked angry tweets, condemnatory news articles and even reports to the police.

Hopkins has lost her presenting job at LBC radio, but she is yet to lose her column at Mail Online, and it’s quite likely she won’t.

Mail Online and its print counterpart The Daily Mail have regularly shown they are prepared to go down the deliberately divisive path Hopkins was signposting. But even if the site's managing editor Martin Clarke was secretly a liberal sandal-wearer, there are also very good economic reasons for Mail Online to stick with her. The extreme and outrageous is great at gaining attention, and attention is what makes money for Mail Online.

It is ironic that Hopkins’s career was initially helped by TV’s attempts to provide balance. Producers could rely on her to provide a counterweight to even the most committed and rational bleeding-heart liberal.

As Patrick Smith, a former media specialist who is currently a senior reporter at BuzzFeed News points out: “It’s very difficult for producers who are legally bound to be balanced, they will sometimes literally have lawyers in the room.”

“That in a way is why some people who are skirting very close or beyond the bounds of taste and decency get on air.”

But while TV may have made Hopkins, it is online where her extreme views perform best.  As digital publishers have learned, the best way to get the shares, clicks and page views that make them money is to provoke an emotional response. And there are few things as good at provoking an emotional response as extreme and outrageous political views.

And in many ways it doesn’t matter whether that response is negative or positive. Those who complain about what Hopkins says are also the ones who draw attention to it – many will read what she writes in order to know exactly why they should hate her.

Of course using outrageous views as a sales tactic is not confined to the web – The Daily Mail prints columns by Sarah Vine for a reason - but the risks of pushing the boundaries of taste and decency are greater in a linear, analogue world. Cancelling a newspaper subscription or changing radio station is a simpler and often longer-lasting act than pledging to never click on a tempting link on Twitter or Facebook. LBC may have had far more to lose from sticking with Hopkins than Mail Online does, and much less to gain. Someone prepared to say what Hopkins says will not be out of work for long. 

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