UK Capital Formation and the Death of Capitalism
Chris Dillow produces this graph:
…and makes a rather grand claim:
You can read this chart as a refutation of neoliberalism. Neoliberals thought that if only taxes could be cut and labour’s bargaining power weakened, that capital spending would rise and economic growth follow. This has not happened. And it is, surely, unlikely that the corporate tax cuts Osborne announced in the Budget will significantly turn things around.
The graph Chris uses is confusing; it is hard to distinguish between cyclical movements in (private non-financial) corporate income (or retained earnings, gross saving) and movements in corporate capital formation. Here’s a graph of the two series in nominal terms:
I would hesitate to pull out any divergent trend between these series except at around 2002/3. This is curious, because for the UK economy as whole, gross capital formation has stayed roughly at 16-18% of GDP for a while, if we are permitted to count the late 1980’s as a cyclical boom and 2008 onwards as a cyclical slump:
The sectoral breakdown of capital formation does back the case that Business Investment was going sideways since around 2000. But total capital formation keeps growing. This is the graph of the volume of capital formation broken down by sector – sadly the ONS do not have data before 1997:
Housebuilding will contribute to PNFC income but not (greatly) to PNFC capital formation, because new houses are allocated to the household sector’s capital account. The growth in housebuilding might explain to a small extent the divergence between corporate gross saving (retained earnings) and corporate capital formation which Chris is looking for. I have not attempted to analyse that further, but it may well be an insignificant effect, for example if the UK housebuilders were distributing most of their income rather than saving it.
This story does offer up a possible explanation for the lack of PNFC capital formation: the real resources required for capital formation were scarce, and UK housebuilders simply outbid other firms. It wasn’t possible to build a lot of new houses and a lot of new factories, in other words.
This argument could be extended to the concurrent expansion of government investment; a simple “crowding out”, though the scale of expansion in fiscal investment spending is less significant prior to 2007 . Absent the expansion of deficit-funded fiscal spending under the Blair/Brown government, the Bank of England would have cut interest rates to keep nominal spending and inflation in line, a point Mervyn King has made before. Lower (real) interest rates could have encouraged more investment spending, ceteris paribus.
The causation could go the other way, of course, as Chris might claim; a lack of domestic capital investment opportunities freed up resources for housebuilding etc. Food for thought, anyway.