To Build Prosperity, Britain Should Not Copy America's Failing Corporate Model
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What the UK economy needs is an approach to economic policy that focuses on co-ordinated and concerted investments for prosperity by governments, households, and businesses. As the Labour party develops its policy programme for 2015 and beyond, the role of investment for prosperity needs to be confronted head on.
Fundamental to the achievement of economic prosperity are investments in physical infrastructures and human capabilities. These investments are essential to generate well-paid, employment opportunities in the domestic economy and competitive advantage in the global economy. In a world of changing technologies and emerging markets, a nation that fails to invest for the future on a continuing basis can look forward to long-term economic decline.
Investments for prosperity are not solely the responsibility of the business sector. Governments and households have to invest as well. Governments invest in physical infrastructures – for example roads, schools, and defence – that have the character of public goods as well as in society's "knowledge base" consisting of a generally educated labour force and specific expertise in science and technology. Households invest in the development and sustenance of a capable labour force, relying heavily on government investments in education and physical infrastructures.
With government and household investments as essential foundations, businesses invest in processes of production and distribution to transform physical and human inputs into goods and services that customers want to buy at prices that they are willing (or can afford) to pay.
Prosperous economies are ones in which investments by governments, households, and businesses – or what I call the "investment triad" – reinforce one another in building innovative capabilities.
Of course, investments for tomorrow require access to financial resources today. Governments need taxes, households need wages, and businesses need profits. Each actor in the triad can leverage this internal finance by taking on external debt. Ultimately, however, it is internal finance – taxes, wages, and profits – that must be sufficient to both service the debt and invest for the future if the prosperity of the economy is to be sustained.
So what is the weak link in the UK investment triad? Conservatives would have a tough time answering this question because they believe that we can rely on unregulated markets to allocate the economy's resources. The problem is that it is organisations – governments, households and businesses – not markets that invest for the future. A failure of an economy to invest in the productive capabilities that are the bedrock of sustainable prosperity is an organisational failure, not a market failure.
Governments can fail, and there is no doubt that Labour's programme for prosperity must reconsider the effectiveness of the national and local governments in investing in the UK's physical infrastructures and the nation's knowledge base. Households can fail, and there is a pressing need to probe deeply into whether Britain's households have access to the resources and stability required to develop the next generation to be productive members of the labour force.
For rebuilding Britain, however, the real challenge for the Labour party is its approach to business failure. I am not talking primarily about businesses that fail to make profits and possibly go bankrupt. I am referring to some of the nation's largest and most profitable businesses that pay out far too much to shareholders instead of investing for the future. For the period 2001-2010, 86 of Britain's largest companies that are included in the S&P Europe 350 Index made €882bn in net profits of which 63% was paid out in dividends and another 26% to buy back their own shares.
This development, the financialisation of British business corporations, has them hot on the heels of their American counterparts. For the decade 2001-2010, 459 companies in the S&P 500 Index, almost all of which are US-based, expended $1.9 trillion, or 40% of net income, on dividends, and $2.7 tn, or 54% of net income, on share buybacks, leaving only 6% of profits to potentially be invested for the future.
In the United States, I have called for a ban on share buybacks in particular and a major reform of corporate governance in general. Neither US political party shows any real interest in heeding the call. The American people are paying the price for this inaction, and will continue to do so long into the future. In the UK, the Labour party has the opportunity to take investment for prosperity seriously. Rather than emulate the declining US economy, Labour can formulate a new "Anglo-Saxon" model to rebuild Britain that recognises how governments, households, and businesses can work together as an investment triad that forms the foundation for equitable and stable economic growth.