Financial Times – Letters, 2nd March 2021

In his article “Why once successful countries get left behind” (Opinion, February 22), Martin Wolf’s claim that “there are four conditions for success” is wrong because his list excludes the essential condition of incentive.

He is correct in judging that this century’s slowdown in labour productivity is due to the fall in business investment. However, most of this is made by large, quoted companies whose managements had their incentives radically changed in the 1990s by the arrival of the bonus culture, which altered the way they were paid.

The resulting disincentive to invest is shown by the change after 2000 in the investment response of business to changes in corporation tax, the weakness of quoted companies’ investment relative to unquoted ones and the rise in the proportion of profits distributed to shareholders through dividends, buybacks and debt-financed takeovers.

Wolf’s description of David Sainsbury’s argument in the same article suggests a confusion between innovation and invention. They are not the same.

Innovation requires the embodiment of new technology in physical equipment, which has been thwarted by the bonus culture. The bonus culture’s disincentive to business investment is the cause of the ex ante (intended) net savings surplus in both the UK and the US.

We suffer from an investment dearth, rather than an excess of savings and this is a structural problem misdiagnosed as a cyclical one. Had it been cyclical it would have been amenable to some combination of temporary fiscal and monetary stimuli. But being structural, it requires the stimuli to be permanent, so that debt rises unsustainably in either the public sector if the stimulus is fiscal, or the private sector if it’s monetary, or both.

Chris Giles reports that the “Slow recovery risks exposing stimulus tensions within BoE” (Report, February 22).

We are back in Lilliput with a debate over from which end a boiled egg should be eaten. If they are effective both negative interest rates (Little- Endians) or quantitative easing (Big-Endians) will expand private sector debt, which is a policy that will surely prove unsustainable.

The policy needed to cure the lack of growth and the problem presented by the structural ex ante (intended) net savings surplus will not be introduced until the evidence that it is caused by the bonus culture ceases to be ignored.

Andrew Smithers
London W8, UK