Where is the business investment?

The relative economic strength of the last eight years has for me contained one abiding mystery: why isn't there more business investment?

Paul Krugman's current lecture series emphasises the contribution of a housing boom (exacerbated by cheap secured home loans); there's a consensus that debt-financed consumer spending has been the other driver of growth. Worldwide saving has fallen and, with it, investment.

And yet, as Martin Wolf points out today, returns on physical capital have been excellent - above 13% for several years. So why aren't more people investing?

A shallow answer is that consumers are focused on the short term and prefer the instant gratification of consumption to the long-term returns of investment. But this isn't really a question for consumers. The mystery is why savers have accepted miserable returns on consumer, mortgage and government debt instead of earning more that twice as much money by investing.

You might think that there are few valid business opportunities - perhaps because of excess capacity after the dot-com and telecoms boom of the late 90s. But if that were the case, shortage of supply would make the few opportunities which do exist into highly desirable investments, and the equity risk premium which Wolf highlights (his fourth feature) would be eliminated.

George Osborne yesterday (via Robert Peston and Stephanie Flanders) outlined a policy to change the taxation of debt interest relative to equity dividends, to encourage less debt and more equity investment. Probably a good step - though companies which take on genuine operational debt such as overdrafts will suffer collateral damage - but I'd rather have an understanding of where this preference comes from in the first place.

I think the answer may be to do with loss aversion but more thought is needed.