COMMENT: Fixing fixed-investment

During my time as the head of the British government’s Review on Antimicrobial Resistance, I had to develop a better understanding of the pharmaceutical industry, and I learned that there is something to be said for microeconomic forces – and for basic common sense.

Consider the future, which always has been uncertain and always will be. And yet the biggest economic busts have happened when businesses were not uncertain enough – when they were sure that the future would be rosy. An overabundance of certainty might explain the 2000-2001 dot-com bubble, and many others.

But if, thanks to the increased availability of so much information (including different viewpoints and opinions), we now know that the future is always uncertain, the behavior of Western businesses (and many in the emerging world) is eminently logical, especially given the current workings of the financial system. Why would business leaders invest in an uncertain world, rather than paying dividends to demanding (but generally risk-averse) investors, or buying back some of their companies’ own shares (thereby improving the price/earnings ratio and, better yet, increasing their own remuneration)?

At the end of the day, the CEOs and the most aggressive investors are all happy with this approach. Unfortunately, the same cannot be said for the company’s employees, past and present, who reap no benefits in their paychecks or pensions (which are actually being eroded by the low yields on government bonds across Western countries).

It is past time for our elected governments to change the rules of the game. For starters, that means updating the tax code to make debt issuance far less attractive, especially when the proceeds are being used to buy back shares. At a minimum, it should be harder to buy back shares than to issue true dividend payments. That way, at least all shareholders, not just senior-executive insiders, will benefit.

Furthermore, those same executives should not be remunerated on the basis of short-term price-to-equity targets. More investors should be demanding that the incentives change to reflect true measures of long-term performance.

To its credit, the Norwegian Sovereign Wealth Fund recently spoke out in favour of such changes. Other large institutional investors and policymakers should follow suit, to give the corporate world a nudge. If we change the incentives, we just might finally see business investment make a comeback.

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Jim O’Neill, a former chairman of Goldman Sachs Asset Management and former Commercial Secretary to the UK Treasury, is Honorary Professor of Economics at Manchester University and former Chairman of the British government’s Review on Antimicrobial Resistance.

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Copyright: Project Syndicate, 2017.