World Economics Journal, Vol. 13, No. 4 Oct-Dec 2012., 1st October 2012
Key points
• Corporate behaviour in the UK and US has changed so that the cash surplus of the business sector has become a structural rather than a cyclical phenomenon.
• This has arisen because managements are remunerated ncreasingly by stock options and bonuses altering perceptions of business risk and pushing profit margins up and investment down.
• A corporate surplus means that reducing the government’s fiscal deficit will plunge the economy back into recession.
• The simplest rebalancing solution is to reduce the foreign sector surplus. Tackling the corporate surplus requires a fundamental change in the way managements are remunerated.
New problems require new solutions. Economic policy today in Japan, the United Kingdom and the United States is failing to produce a recovery. This is not, as is often claimed, because old solutions are being only halfheartedly employed, but because the existence of the new key problem is being ignored. The ex-ante savings surplus in the business sector has become structural. The implicit, though seldom stated, assumption of most Keynesians is that such surpluses are cyclical and will disappear as the animal spirits of entrepreneurs return.
Full article: The Change in Corporate Behaviour by Andrew Smithers [World Economics Journal Vol.13, No. 4]