The OECD can’t just talk about climate change: its governments have to invest in tackling it

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I noted that the OECD published a comment from the Dutch Prime Minster on its web site yesterday. He was writing in his capacity as the Chair of the 2015 OECD Ministerial Council Meeting.

He set the scene for a recovery of OECD economies, which is dependent upon increased investment, quite accurately, noting that:

In advanced economies, private-sector investment has declined by 25% on average compared with pre-crisis forecasts. And in some of the countries hit worst by the crisis, it has declined by as much as 40%. These are serious falls. Moreover, investment remains weak, and is only slowly beginning to pick up.

He went on to justify this:

One reason is that companies are not investing because they think the economic outlook is bleak. Another factor is more structural: OECD economies are increasingly producing services instead of goods, and this may be less capital intensive. We see more digital services, more companies increasingly dependent on research and development or their brand name for their competitiveness, and promising start-ups offering “the next big thing”. Their value is harder to measure, but it is investment all the same.

And then things began to go awry when he said:

Investment will recover when the economy recovers, but we should set the bar higher and support the recovery more actively by making structural changes.

This is a chicken and egg argument: recovery at an OECD level is dependent upon either increased investment, increased consumption or increased government spending (at OECD level we can, broadly speaking, ignore net inter-state flows). By implication he is excluding government investment in making this comment. And business investment is, according to his logic, not going to happen until recovery happens, so he is dependent upon consumers or changed regulation to delivery his recovery. And since most consumers are, at best, seeing very small pay increases he's pinning his hopes on regulation, saying:

We can do that by ensuring that the public and private sectors work together, with the private sector mobilising the necessary investment, while the public sector assures the right enabling environment.

This can happen he says, if:

Governments ... provide smart, not overly burdensome regulation and a stable regulatory environment, as well as guarantee the rule of law and a level playing field. As the OECD’s work has shown, there is plenty we can do to improve our policies, whether they concern the transition to a digital economy and clean energy, or assuring free trade and investment. The OECD calculates that its member countries could expand by up to 10% on average if they undertook a wide range of reforms, so the potential gains are significant. Once there is a stable policy environment, the private sector can pitch in while we make sure everybody contributes to public goals.

Now call me naive if you wish, but to think supply side reforms could deliver 10% growth seems to me to be wildly optimistic. I think Mark Rutte thinks so too, because he almost immediately gives up his own absurd line of argument to say:

The good news is that the conditions for investment are actually quite favourable. Interest rates are at record lows in most countries, which is a boon to investment. OECD research shows that the severest problems in financial markets have mostly abated, though some small and medium-sized enterprises still face difficulties. Larger companies are becoming more profitable and are holding large amounts of cash, so finance is no longer the constraint it was at the height of the crisis. In addition, companies increasingly see the business case for sustainability. Nowadays, responsible business conduct must be front and centre if companies are to turn a profit. More and more business leaders are adopting this strategy.

But he offers no explanation as to why in this case business is not investing. Instead he says:

Above all, the need for investment has never been greater. There are several challenges, such as climate, energy, innovation, water and development. Where will our energy come from in 2050? How will we deal with the impacts of climate change? How can we ensure enough safe food for the world’s growing population?

And as he adds:

Take climate, for example. Worldwide investment in prevention and adaptation runs into trillions. As a country locked in a never-ending struggle with the sea, we in the Netherlands know what we’re talking about. TheInternational Energy Agency estimates that energy investment in excess of US$ 50 trillion will be needed by 2035 if we are to prevent more than 2°C of warming.

Investment in innovation is urgently needed. With ageing populations, a rise in productivity is required to maintain growth and guarantee the sustainability of pensions, health care and other public services. Furthermore, innovation requires investment in human capital–also crucial yet hard to measure.

What he, however, apparently fails to notice is that such investment has never been lead by, let alone be funded by, the private sector in most OECD countries. Government has always undertaken that task, and rightly so, precisely because the external and uncollected gains from such investment are so high, meaning it makes complete sense for an economy to deliver such projects but not for any one investor to do so. In that case his following comment is an exercise in negligence:

We must make sure that everyone who wishes to help address these challenges is able to do so. This is why we must work together. In the Netherlands this has been our approach to energy, for which, after concerted dialogue with all the stakeholders involved, we drew up a long-term plan. It is too early to predict the plan’s outcome.

And this is in the same vein:

At a global level, the OECD Ministerial Council Meeting provides an excellent opportunity to take the first steps towards international agreements and to exchange best practices in a range of policy areas.

Why is this negligent? Precisely because what it ignores are three obvious facts.

The first is that business is not going to invest now.

The second is that if the only basis for business to invest is a debt driven consumer boom then that, very obviously, is counter to the objective of controlling climate change.

And so, third, what is clear is that government is completely failing in its duty to act on these issues when it is the only agency with the capacity and willing to do so and the only agency also able to capture the benefit of the resulting gains.

To put it bluntly, if $50 trillion is needed only government is going to be able to deliver it. And the best way to do that is green infrastructure quantitative easing.

Talking about vague supply side reforms on investment is wholly inappropriate now when it comes to climate change. It is indisputable that some may help, as will tax measures, but the reality is that spend is what is needed and only government can deliver it. Big politicians would say so. Mark Rutte needs to improve his act if he wants to be in that league.