Corporate restraint is not working

Corporate underinvestment in America and Britain perpetuates high unemployment and stifles growth as consumption stagnates because people do not have enough money to spend.

The synchronicity of financial assets is unsustainable. So what is the point of pursuing a policy that keeps asset prices artificially high? The median British house price is about £170,000 and the median income about £27,000. Looked at in these terms, it is clear that people can only afford these assets on ultra-low interest rates. Why is this a good thing?

As ever, the rich are getting richer and the poor poorer; in America, economists refer to “median wage stagnation” whereby the annual incomes of the bottom 90% of American families have risen by only 10% in real terms over the past 37 years. It is little wonder that consumption growth is muted. With credit strained, the only people who can spend are rich already; over the same period the incomes of the top 1% have tripled. Non-government corporate capital investment and new business formation are tracking well below average for this stage in a recovery cycle despite healthy corporate cash balances, because companies are more worried about weak demand than their cost of capital.

With consumption worth more than half the output in many of the world’s biggest economies they are right to be cautious. All industrial profits need a consumer. Until corporate investment increases, employment growth will remain sluggish and consumption growth will stall.