{"title":"The Legacy of the Financial Crisis","authors":"Andrew Smithers","doi":"10.1093/OSO/9780198836117.003.0001","DOIUrl":"https://doi.org/10.1093/OSO/9780198836117.003.0001","url":null,"abstract":"The reputation of liberal democracy has fallen not only internationally but even within the UK and the US, which on current policies risk a decline in living standards and an even worse outcome should more to populist policies be implemented. Weak growth followed the financial crisis but was not caused by it. Holding otherwise is an example of the ‘post hoc fallacy’. Weak growth was caused solely by adverse changes in demography and poor productivity. Addressing both economists and the wider audience of those concerned with our economic and political future, this chapter shows that the adverse changes in demography and productivity have causes which predate the financial crisis by many years. The financial crisis was due to poor theory which led central banks to ignore the risks of high asset prices and excess debt. Poor theory today inhibits policy makers from recognizing that bonus culture policy has stifled growth.","PeriodicalId":134328,"journal":{"name":"Productivity and the Bonus Culture","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127843919","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Description of My Model","authors":"Andrew Smithers","doi":"10.1093/OSO/9780198836117.003.0010","DOIUrl":"https://doi.org/10.1093/OSO/9780198836117.003.0010","url":null,"abstract":"The volume of the capital stock is defined as the original cost at constant prices of all tangible capital that has not been scrapped. Due to the poor data available for the UK my calculations and testing have had to be limited to the US. The volume of labour is defined as civilian employment. Quality improvements for both labour and capital are defined as being part of TFP. TFP is under conditions of full employment and must therefore be measured over long time periods. All growth comes from TFP, changes in labour and NTVs. The change in the volume of capital less the change in the volume of labour equals the change in NTVs and the balance is that from changes in technology (TFP). NTV is exogenous in aggregate. The value of the capital stock, but not its volume, is mean-reverting.","PeriodicalId":134328,"journal":{"name":"Productivity and the Bonus Culture","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125895574","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Testing the Proposed Model","authors":"Andrew Smithers","doi":"10.1093/OSO/9780198836117.003.0012","DOIUrl":"https://doi.org/10.1093/OSO/9780198836117.003.0012","url":null,"abstract":"Changes in NTV can be calculated from two independent data sources, first from the differences between the growth rates of employment and the volume of capital and secondly from the changes in the constituents of NTV. Their independence allows the model to be tested. The significant correlations between the two are evidence for the robustness of the model and thus for the validity of the conclusions derived from it. Due to data limitations, changes in NTV for companies are compared with those for the economy as a whole. The correlations are strong for profit margins and leverage throughout the whole period from 1946 to 2016 and for the period 1966 to 2016 are strong for all constituents of NTV except interest rates. The proposed model should therefore be preferred to the current consensus model. It is testable and robust when tested while the standard approach appears to be untestable.","PeriodicalId":134328,"journal":{"name":"Productivity and the Bonus Culture","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124934597","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Two Models of Growth","authors":"Andrew Smithers","doi":"10.1093/OSO/9780198836117.003.0008","DOIUrl":"https://doi.org/10.1093/OSO/9780198836117.003.0008","url":null,"abstract":"In order to devise an appropriate policy to boost growth it is essential to understand its causes, which in Solow’s accounting framework depend on changes in capital, labour, and technology. Both the model discussed here and the standard consensus interpretation follow Solow, but differ significantly with regard to their results and the appropriate policies they indicate. The one set out here is more optimistic: it shows that growth can be advanced through additional investment not just from changes in technology. This chapter argues that the consensus approach is unscientific because untestable and that, in, contrast, the model set out here is testable and robust when tested and should therefore be preferred. The two key differences in the models which produce this divergence are the way in which capital volumes are calculated and the influences other than technology which determine the level of investment and the volume of the capital stock.","PeriodicalId":134328,"journal":{"name":"Productivity and the Bonus Culture","volume":"90 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123456978","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The Problem of Income Inequality","authors":"Andrew Smithers","doi":"10.1093/OSO/9780198836117.003.0007","DOIUrl":"https://doi.org/10.1093/OSO/9780198836117.003.0007","url":null,"abstract":"Living standards change in line with GDP per head only if the distribution of incomes is unchanged. If incomes become less equally distributed the living standards of most people will fall even if GDP per head is stable. The Gini Coefficient is the most widely used indicator designed to measure the distribution of income. UK inequality, on this measure, has risen since 1977, stabilized since 1987, and fallen in recent years. In the US there has been a long-term increase in income inequality. Unless this US trend for increased income inequality halts, it is quite likely that even if GDP per head rises in the US, the living standard of the average voter will fall. The recent data suggest that changes in income inequality pose less of a threat to living standards in the UK then they do to those in the US.","PeriodicalId":134328,"journal":{"name":"Productivity and the Bonus Culture","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128427155","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The Cause of Poor Productivity","authors":"Andrew Smithers","doi":"10.1093/OSO/9780198836117.003.0004","DOIUrl":"https://doi.org/10.1093/OSO/9780198836117.003.0004","url":null,"abstract":"The decline in productivity was preceded by a marked slowdown in the rate at which additions were made to the capital stock. As investment has weakened the growth in the capital stock has slowed, and this has clearly been the reason why productivity has been so poor. The model used for calculating GDP was changed in 2013, by treating R&D as final rather than intermediate output. The fall in tangible investment was thereby disguised through the increase in intangibles. The key message from the data is that tangible investment had been weak for many years before the recession of 2008 and that because of the measured increase in the investment in intangibles the extent of the decline has been often overlooked.","PeriodicalId":134328,"journal":{"name":"Productivity and the Bonus Culture","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126602029","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The Added Impact of Misinformation","authors":"Andrew Smithers","doi":"10.1093/OSO/9780198836117.003.0015","DOIUrl":"https://doi.org/10.1093/OSO/9780198836117.003.0015","url":null,"abstract":"Growth has suffered from a rise in hurdle rates, due to the change in management incentives, probably amplified by misleading publicity about the cost of equity capital, which is commonly claimed to be a multiple of the real cost. The bonus culture encourages managements to misrepresent RoEs, so in bad times companies publish abysmal rather than merely bad profits, with the result that subsequent profits are overstated. The swings from understated to overstated increase published profit volatility. After being similar for fifty years, published profits have since 2000 become four times more volatile than national account profits. Claims that low investment and high margins are due to increased monopoly are shaky. The bonus culture is a better explanation as, among other things, it also accounts for the different levels of investment by quoted and unquoted companies and for the increased volatility of published profits.","PeriodicalId":134328,"journal":{"name":"Productivity and the Bonus Culture","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121928683","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Implications for Growth","authors":"Andrew Smithers","doi":"10.1093/OSO/9780198836117.003.0016","DOIUrl":"https://doi.org/10.1093/OSO/9780198836117.003.0016","url":null,"abstract":"Without policy measures to offset the negative impact of the bonus culture, investment, productivity, and growth are likely to remain depressed. Given the slow growth of the working age population, the UK’s trend growth rate will thus be 1 per cent and that of the US 0.87 per cent, unless productivity improves. An alternative method of estimating US trend growth from the value data for tangible capital stock provides a slightly better rate of 1.1 per cent per annum. The prospects for the UK and US are so poor that policy measures to stimulate growth are vital. All growth is the result of changes in either TFP or NTV, so one or other must improve to avoid stagnation. There is no way to improve the former, but changes in NTV can be brought about through a lower hurdle rate, which requires the damage from the bonus culture to end.","PeriodicalId":134328,"journal":{"name":"Productivity and the Bonus Culture","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130487713","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The Economic Consequences of Higher Investment","authors":"Andrew Smithers","doi":"10.1093/OSO/9780198836117.003.0024","DOIUrl":"https://doi.org/10.1093/OSO/9780198836117.003.0024","url":null,"abstract":"Increased investment is essential to restore growth, but this will require higher savings as well as higher investment. Subject to the limited amount of help likely from rising current account deficits, domestic savings will need to rise at the expense of consumption. This will be unpopular. Those who claim that high corporate cash holdings mean that additional investment can be financed without more savings are confusing stocks with flows. Equally at fault are those who think that additional public sector investment will be painless because interest rates are so low. Companies in the US are the only major sector which is a habitual buyer of equities. Additional corporate investment will lead to fewer buy-backs, lower share prices, and higher household savings. This will narrow the savings gap, but fiscal deficits are highly correlatated with corporate net savings, so rising taxes are likely to be needed if investment rises.","PeriodicalId":134328,"journal":{"name":"Productivity and the Bonus Culture","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126911429","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Investment and the Stock of Capital","authors":"Andrew Smithers","doi":"10.1093/OSO/9780198836117.003.0009","DOIUrl":"https://doi.org/10.1093/OSO/9780198836117.003.0009","url":null,"abstract":"Investment in intangibles does not increase the volume of the capital stock nor is it designed to do so. The aim is to increase the efficiency of tangible investment. The volume of the capital stock must therefore be represented by tangible capital; intangible assets such as those that arise from investment in research and development and other forms of intellectual products must be excluded. A large tax credit in the US for R&D was introduced in 1981. Before that private sector spending on IP averaged 12 per cent of total investment and has since risen to over 30 per cent. Over the same period TFP, as measured by either the consensus model or mine, has deteriorated, investment in R&D is either ineffective or mismeasured. Measuring the volume of capital exclusively in terms of tangible assets thus has the additional advantage of excluding data of dubious accuracy.","PeriodicalId":134328,"journal":{"name":"Productivity and the Bonus Culture","volume":"48 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123892340","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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