Is the world becoming short-sighted? So begins an investigation by Andrew Haldane, the Bank of England’s Executive Director of financial stability. The answer is No! China is now investing for the future. The West, meanwhile, is cannibalising for all that it is worth: a bankrupt system determined to squeeze the last cent out of the system before the party really ends…
Haldane and his colleague Richard Davies presented the evidence for short-termism in a speech in Brussels on May 11. Predictably, they blame the market. When economists can’t figure out what’s gone wrong, they reach for “market failure”.
The evidence is clear that western investors are increasingly opting for short-term profits rather than caring about the future. Europe undertook its long-term investments in infrastructure in the 19th century, to exploit the opportunities delivered by the Industrial Revolution.
But the bias was always in favour of quick profit rather than locking up large sums of capital in the expectation of steady returns over the long-term. The responsibility for this was not “the market”. Incentives were rigged by governments that favoured the short-term speculators. And nowhere were such rewards more encouraged than in the land market.
Encouraging the Speculators
Haldane is correct to warn of the need for investment in infrastructure. The future of the western economy depends on achieving a new level of productivity to compete with low-cost Asia. But who is responsible for constructing such an agenda for economic survival?
According to the rules of the game as legitimised by western capitalism, no one individual is responsible for pursuing the common good. Democratically elected governments are supposed to fulfil that function. And yet, analysts like Haldane and Davies deflect attention away from government-sponsored policies that reinforce effective market solutions, in favour of command economy-type policies. Thus, they suggest that governments should interfere directly in stock markets.
Investors would find ways around the regulatory and bureaucratic strategies of governments. But they could not get around effective fiscal policies that rewards long-termism by altering incentives. The key policy is the one that shifts taxes away from the investment of one’s labour and capital, and funding public services out of the rents that we jointly generate.
No government in the West proposes to adopt this strategy. We should expect, therefore, that economic activity will continue to be biased in favour of cannibalising what remains by way of value in the western economy, creating yet more space for the intrusion of Asia’s entrepreneurs.