Apologies for being one day late discussing a Peaple/ Teitelbaum article in Monday's Wall Street Journal called "UK business investment lags." My title is intentionally a bit overstated, but I was struck by the fact that UK business investment is (and consistently has been) lower than in Germany and France. That was not would I would have expected based on the standard "dynamic" Anglo-Saxons, stagnant Continent" storyline.
I don't think anyone doubts that the UK has done more than the big continental European economies to create an American-style flexible labor market. And there is little doubt that UK economy has been a bit more dynamic than others in Europe. Even the food is a bit better than the French think ... London's restaurants have taken off along with London's financial sector and real estate prices. I hear that BP is also profitable these days. And the UK seems to be the center of global petrodollar recycling - gathering the fees associated with bringing spare Russian and Saudi dollars together with American borrowers in need of funds, so to speak. That is a nice little line of business.
The standard story is that if the continent adopted UK style reforms they too could experience UK style growth and dynamism. Specifically, the reward for reform would be higher levels of investment. Why, people ask, invest in Germany and France and take on workers who you cannot fire workers and have to contribute heavily to their national social insurance systems?
Yet, according to Peaple and Teitelbaum of Dow Jones (no link, story was on p. A18 of Monday's Wall Street Journal), despite existing rigidities, business investment in Germany is already well over 12% of GDP - 12.9% of GDP to be precise. Business investment in France is only a bit under 12% of GDP - 11.3% of GDP. While business investment in the UK is only 10% of GDP. And I certainly would not have guessed that business investment in Germany has been around 3 percent points above that in the UK over the past few years.
I have yet to read Olivier Blanchard's paper on what we know about labor market institutions and labor market reforms - and what we don't. But from what Mark Thoma writes, it sounds interesting. "Protect workers not jobs" seems right to me.
And based on a superficial look at the European data, I like Blanchard's call for a bit of humility. There does not seem to have been a strong correlation between labor market "reforms" (or perhaps flexible labor market institutions) and higher levels of business investment in Europe over the past ten years. Now it is possible that greater reforms would lead to higher levels of business investment in Germany, or that absent reforms, investment will fall to a lower level in Germany than the in UK. But it hardly seems like a sure thing.
What has driven the UK economy's better comparative performance? The consumer, propelled until recently by rising housing prices. "The country's relatively strong GDP growth since the mid-1990s has been based largely on consumer demand." Sound familiar?