Financial Times (Letters), 26th July 2013
Sir,
Robin Harding’s article “A mysterious divergence” (Financial Times, Analysis, July 25) shows how the change in the way management is paid has led to high profit margins and low investment. It should not surprise anyone that changes in incentives change behaviour. The result is that UK and US businesses run persistent cash surpluses, whereas cash deficits are the natural balance for companies that finance themselves partly with debt.
As corporate cash surpluses are the main counterpart of fiscal deficits, the change in business behaviour requires a matching change in economic policy. As the surpluses are structural rather than cyclical, they will not be solved by stimulating demand either through fiscal or monetary policy.
The change in behaviour, which favours employing labour rather than capital, also explains the rise in employment, despite weak growth and the abysmal productivity that results. It is often claimed that this is incomprehensible. It is not. It is the natural result of changed incentives. Economic forecasting as well as economic policy needs to adapt to the change in corporate behaviour.
I hope Mr Harding’s article will lead to a serious discussion about economic policy in place of the calls for more stimuli that have dominated your pages and which assume, without apparent thought, that our underperforming economies are suffering from cyclical weakness rather than a structural problem.