Book Launch: The Road to Recovery – How and Why Economic Policy Must Change

By Andrew Smithers
Published by Wiley

The world economy underperforms despite massive attempts at stimulus. Governments and central banks have the wrong policies because they do not understand today’s problems. Those who advocate stimulus, whether fiscal or monetary, assume that the problems are cyclical and thus temporary. But recovery in Japan, the UK and the US is inhibited by structural problems, which will not be solved by trying to boost demand.

In each country companies are running huge and persistent cash surpluses in place of their normal deficits. Budget deficits have risen to prevent these surpluses, causing depression. The key problem for Japan is excessive provisions for depreciation, in the UK and the US it is high profit margins and low investment which result from a major change in the way corporate managements are paid and thus in their incentives. Governments, central bankers and the economists from whom they take advice have failed to understand this. Neither Japan, the UK nor the US will be able to achieve stable growth until the cash surpluses of companies change to deficits. In Japan this requires a major reform of depreciation allowances and corporation tax. The UK and the US face the more difficult task of changing corporate incentives. Deficits cannot be reduced until corporate cash surpluses turn to deficits and current policies will not achieve this.