Realist, not conformist analysis of the latest financial, business and political news

An Interesting Problem With Pensions And A National Investment Bank

A Richard Murphy

There is, in economics, something called “crowding out”. This is where some group or other, some entity, enjoys privilege in some form. When playing in a market this privilege then means that it is able to undercut those who do not enjoy said privilege. That then “crowds out” of that market those who don’t.

That this happens is obvious – it’s inherent in the very definition of privilege. It’s not even a left/right divide, those who agree and those who don’t. That left insists that companies not paying tax because they’re multinationals or whatever allows them to undercut those who do. The privilege of being tax free leads to crowding out. The left, again, insists that those who don’t have to meet environmental, or labour, standards have a privilege in those lower costs and are therefore able to beat those who must meet them. The right says that if someone can swagger into a market with government guaranteed, thus lower priced, capital can outcompete, crowd out, those without such access to cheap money.

Crowding out exists, all agree.

This does then provide a certain amusement when considering certain proposals about investment:

As part of its agenda to “level up” the regions, the Government is considering establishing a national infrastructure bank to pour money into improving transport, hospitals, schools and broadband.

But plans for a public bank to replace funding provided by the European Investment Bank (EIB) following Brexit risk crowding out the private sector, City figures fear.

Well, yes.

Tracy Blackwell, chief executive of Pension Insurance Corporation (PIC), which buys up billions of pounds of company pension funds each year, said: “Historically, public bodies such as the EIB are provided with public money and are given quotas to fill. This means they are simply able to undercut UK investors on price to meet their quota, crowding them out of the lending market.”

Clearly so.

Demand from pension funds for private infrastructure projects is expected to increase in the coming years due to a rise in defined contribution pensions and the trend of companies transferring record amounts of defined benefit pension liabilities to specialist insurers.

An insider at one insurer said: “There is a huge amount of very long-dated money kicking around which could be deployed into the right sort of infrastructure projects.”

Insurers such as PIC, Legal & General and Aviva are more willing to invest pension pots in infrastructure projects than corporate pensions trustees, who tend to adopt a more conservative investment approach, sources said.

Which is what brings us to the amusement.

Consider the pensions insistences of Richard Murphy. On the one hand he insists that in order to gain tax benefits pensions contributions must be invested directly into new and real assets. Investing in the stock market, or secondary bonds and issues, cannot be allowed.

Then he also tells us that there must be a national investment bank, funded by government simply printing money (Green Investment Bonds funded By Green QE as he puts it). To invest in those same new projects in real assets.

Who has the cheaper money? The people spending the results of the Bank of England’s printing press of course. Who will be cheaper? The national investment bank. So, what does that mean for private pension investment in those very same projects? They get crowded out, don’t they?

Of course, we know why there’s this contradiction in his insistences, he only ever looks out of one hole in the stump at a time. This as a result of his latching on to any passing fashionable idea without ever considering the interaction between them.

There is a solution to this conundrum. Which is to jam the lever into the price system at a different point. If it’s climate change we’re worried about then that’s a carbon tax. At which point investments in that infrastructure become profitable, whoever is investing in them. The investment happens, good. We also don’t need a national investment bank because the investment is already happening. Nor do we need any insistences about what pensions funding must do – we can leave the greed for profit to deal with that for us.

There is actually a reason why the Stern Review insists that we don’t deal with climate change through planning.

0 0 votes
Article Rating
Notify of

Newest Most Voted
Inline Feedbacks
View all comments
3 years ago

Doesn’t the claim that multinationals not paying taxes allows them to crowd out those who do, demonstrate that tax makes prices higher for consumers? The multinationals are after all, outcompeting the locals on price, not after tax profit, surely?

Michael van der Riet
Michael van der Riet
3 years ago

In my happy country we have a far better system. 1. Nationalise the entire financial industry. 2. Transfer all assets to the central coffers. 3. Invest fifty per cent or more in assets in Swiss banks via anonymous accounts. 4. Pay social grants out of the rest.

Surprisingly, the beneficial owners of those pension assets are strongly in favour of destroying capitalist colonialist banks, although it’s not quite clear if they support their retirement savings being paid over to politicians and indigents.

Robin Baldock
Robin Baldock
2 years ago

you say that as if it is a bad thing. the private sector needs to be crowded out of areas where it only goes a monoply. and chief amongst those of course is the creation and destruction of money via issuing credit. leading to asset inflation, which a is a distortion of value causing boom and bust.

Nice try, but all you are ding is trying to keep the private sectors crowding out advantage over the entire economy.

Would love your thoughts, please comment.x