In all the talk of “restoring the better” and creating an economy that is “relevant”, “strategically autonomous” and “sustainable”, there is an unspoken but tragic premise. For decades, most developed economies did not build their future, but languished in an investment drought, the scandal of which is even greater if it is not recognized.
Between 1970 and 1989, the share of gross domestic product devoted to investment in six of the world’s seven largest economies averaged between 22.6 percent for the United States and 24.8 percent for Germany. Seventh place, Japan, falls from 35 percent.
Of the G7, only Canada has maintained this level of investment, with its 22.5 percent this millennium barely down from 22.8 percent then. All others managed to reach the 1970-1989 level of investment on only four occasions: the US in the boom years of 2000 and 2005-06, and France in 2021.
However, these past 20 years have been an era of lower-than-ever funding costs, first because of market gluts and then because of extremely accommodative central bank monetary policy. And what do we have to show for all this cheap credit? Two lost decades for investment. As economics writer Annie Lowry succinctly puts it, “we lost.”
France and the US invested almost two percentage points of GDP less this century than in the 1970s and 1980s; Germany and Italy are about 4.5 points less; Great Britain and Japan are 6 and 10 percentage points less, respectively. These are huge numbers. The annual GDP of the G7 countries is about 45 trillion dollars. Restoring their investment ratios could fill almost half of the global shortfall to the $4 trillion the International Energy Agency calls for annual investments in clean technologies if we are to reach net zero by 2050.
These are general indicators of investment, but a similar story applies to the individual public sector. In the US, net public investment (after taking into account the depreciation of existing public capital) fell by almost two-thirds in the decade to 2014, when it fell to 0.5 percent of GDP.
In the Eurozone, net public investment turned negative in the same year due to tight fiscal austerity in the Eurozone periphery and chronic underinvestment in Germany.
Some will be tempted to say that we should not worry. It’s perfectly fine to invest less as you get richer, one argument goes, because adding to an already large capital becomes more and more pointless. The cost of capital goods has fallen, so the same money buys you more real investments, and others go. Third, today’s economy requires intangible rather than physical capital, and although this is harder to measure, countries seem to be doing better in this regard.
However, such assurances, even if they are true, are useless. No one who looks closely at the physical infrastructure of most Western countries can think it is fit for purpose—not when that purpose is extended to include decarbonizing our industries, energy and transportation systems.
Why have we lived off past investments for so long and failed to make enough new ones? Funding costs were clearly not an issue as interest rates were at record lows. (Eurozone countries hit by the sovereign debt crisis were an exception, but even Spain and Italy outperformed Britain’s investment for decades.)
Most likely, the reason is the lack of demand and cheap labor. Businesses that do not expect sufficient demand to increase production have no reason to invest. And when they are allowed to treat workers as cheap and disposable, they may choose that over sunk capital investment. This is why faster wage growth and so-called “labor shortages” (real competition for workers) are what we must accept if we want to encourage businesses to invest productively.
Something similar could be true for cheap energy in Europe. The 2010s were a time of extremely cheap natural gas, and therefore electricity. This may have undermined the need to invest in both increased renewable generation and geopolitically safe natural gas developments. Oil prices have also been low for most of the decade.
But beneath these economic factors, I believe our failure to invest is deeply political. An increase in the investment-to-GDP ratio, whether by increasing private or public investment, or both, means that a smaller share of GDP is left for consumption. Even if it prepares a better future, today it may seem less. And this is what a generation of politicians across the rich world have feared inflicting on their constituents.
This is true in good times, when transfer payments, tax cuts, and immediate public benefits are politically more attractive than capital investment. (Something similar works in the private sector: Make sure companies choose to return money to owners through share buybacks rather than invest in their own growth.) This was also true in bad times, when investment was the easiest expense on the belt. strengthening governments and companies to reduce.
European countries have regretted how they used the 1989 “peace dividend” to cut defense spending. The same moment pushed the West as a whole to forget the larger idea of short-term sacrifices for a more prosperous future. But this is not inevitable, as exceptions such as Canada and the Nordic countries, which have stable investments, show. Both Western voters and governments have not learned the virtue of delayed gratification. They will have to learn anew, and quickly.
A letter in response to this column:
A green economy means curbing the growth of the financial sector / By Kurt Bayer, former Board Director, World Bank and European Bank for Reconstruction and Development, Vienna, Austria