Pandemic response should liberate flawed investment policy

Andrew Smithers
Financial Times - Letters, 17th March 2020, 17th March 2020


It has been said that you can make a parrot into an economist by teaching it the two words supply and demand. Twice in recent years most economic comment has failed to appreciate the distinction which suggests that today a parrot who understands the difference would be an unusually competent economist.
The drop in demand set off by the financial crisis did not cause the weak growth that followed. This was a supply problem caused by the bonus culture which discouraged business investment for nearly a decade before the crisis arrived. Brexit will hit supply but has barely done so yet and the forecasts of its impact on demand have damaged several reputations.
The pandemic will hit both supply and demand but the response could free us from the current policy, which Keynes called pushing on a string. Fiscal policy should now take over from the weak stimulus of monetary policy, with its attendant damage of excessive debt and overblown asset prices. Both fiscal and monetary policy boost debt, but excessive private debt is more dangerous than public, so policy should not favour the weaker tool with its greater attendant dangers.
Whether itís in the public or the private sector, rising debt is only a temporary solution. We need another way of stimulating demand, which also boosts supply, and this can only be through more business investment.
The economically perverse incentives of the bonus culture have shifted the decisions of corporate managements towards short-term profit and away from investment. If investment increased short-term profit, the bonus culture would favour more investment and this could be achieved by a tax credit for investment. It is important to understand that this is not the same as accelerated depreciation. With the latter published profits do not rise in line with the fall in tax, because there is an increased liability for future tax. For the same cost in terms of current revenue, a tax credit for investment would cause the incentives of the bonus culture to favour rather than inhibit investment, accelerated depreciation will not do this.
Andrew Smithers
London, W8


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