WHY INDUCING INVESTMENT AND CREATING JOBS ARE PROVING TO BE SOOO DIFFICULT?

High and stable investment levels create growth and jobs in an economy. Consumption, in itself, does not, unless it is perceived to be strong and permanent. So, there lies the problem with Keynesian policies. In a milieu of high public debt levels, the entrepreneurs will not perceive an increase in open-finance public spending as permanent. They will increase their capacity levels rather than spend on new investment. Of course, the increase in capacity will create some jobs and growth but those will not be of a permanent nature. The multiplier will be low. (Oh sorry, you can “theoretically” raise taxes for the rich to finance the deficit. Please be my guest and try to do that in the politically captured and globally diversified economies of the West!)

Monetary policy, on the other hand, is already proven to be even more futile and transient. Today’s entrepreneur is no fool. Wihout seeing a strong and permanent rise in consumption, she won’t just simply lured by low (or even negative) real interest rates into investment. She needs to see a strong rise in purchasing power of the masses. And, the ephemeral (or shall we say “virtual”) increase in the value of financial assets or real estate does not provide that.

The other sensible option is the balanced-budget multiplier. Here, you make income tax cuts and future-finance them by the increase in VAT and ultimately in corporate tax receipts thanks to a surge in economic activity. In medium term, the public debt levels wil not go higher, and everyone should be happy and more well-off. But, there are a couple of problems with this course of action as well.

First, in order for tax cuts to be effective on consumer demand, they have to be highly regressive in nature (ie. low income groups who are much more prone to spending must benefit way more than high income groups). Needless to say, that is also a sensible policy in terms of income distribution (per Piketty). But, most developed countries’ governments are already captured by the 1% who will ask for the bigger piece of the cake. Also, similar to interest rates, there is a zero lower bound on taxes and it is not, by the way, zero. If people think that the cuts will be followed by commensurate rises in time, the propensity to spend will be very low indeed. (See Japan’s VAT cut-and-raise policy.) That leaves us with more experimental “basic income” policies which will be resisted by even not-so-rich classes as well, I reckon.

The other problem (in terms of investment creating jobs) is a more structural one. Both high wages, but maybe technological advances more so, severely limit both the desired scope and scale of new investments. The scope is limited because less labour-intensive investments are prefered. Scale is limited because, in our digital world, you don’t really need big ticket investments at all. A case in point may be Mojang. A company less than 5 years old with only a couple of dozen employees, it was recently sold to Microsoft for a price of $ 2.5 billion. It represents a huge labour productivity, but very little employment alas. (In the process, its owner, Mr. Persson turned into a member of useless 1% overnight as well.)