Paper for the Industrial Strategy Commission.

Andrew Smithers
London, 27th February 2017

1. Summary.
The UK’s key economic problem is poor productivity. This is the result of low investment in tangible assets. The fall in such investment predates the financial crisis and subsequent recession by many years. Its prime cause was the disincentive to invest induced by the change in the way senior management is remunerated (the “bonus culture”). A strategy to improve productivity thus needs to reverse the perverse incentives of the bonus culture. A small improvement should follow if companies were required to publish their UK outputs and hours worked i.e. their productivity. They already have this data and its publication would have a nugatory cost. A greater step would be to empower the competition authorities to approve only those bonus schemes which made improved productivity a condition of payment. Unapproved schemes should suffer seriously disadvantageous tax consequences.

2. Productivity Depends on the Net Capital Stock.
My first hypothesis is that productivity depends on the net capital stock. We do not have long term data to test this hypothesis in the case of the UK but we do have it for the US and I show the ratios of the total and tangible capital stocks to GDP for the US in Chart 1.

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Paper for the Industrial Strategy Commission [Feb 2017]