The financial crisis caused widespread misery and the greatest loss of output and employment of the post–war era. The subsequent weak and faltering recovery has prolonged the pain. In The Road to Recovery: How and why economic policy must change, Andrew Smithers shows that both the crisis and the weakness of the recovery are the result of poor policies based on faulty economics.
It is vital that governments and central banks can be persuaded to abandon the misconceptions on which their current policies are based. The Road to Recovery explains, in non–technical language, the major change in our thinking that will allow the world economy to recover and to prevent another financial crisis.
There has been a dramatic change in the way managements are paid in the UK and the US. Incentives have changed and this has naturally led to a change in behaviour. This key problem is being ignored. The current management incentives are not only the reason for the massive gap between high and average pay but also for our economic stagnation. Attempts to generate growth, while ignoring the cause of this inaction, threaten to create another financial crisis.
In his foreword Martin Wolf states that Andrew has an apparently uncanny indeed downright infuriating – tendency to be right . Readers need to understand the errors that are currently being made in order to persuade policy makers to change tack and, in case that fails, to be warned and take action to reduce the costs of the financial and economic troubles that otherwise loom ahead.
Chapter 1 Introduction 1
Chapter 2 Why the Recovery Has Been So Weak 3
Chapter 3 Alternative Explanations for Today s Low Business Investment and High Profit Margins 47
Chapter 4 Forecasting Errors in the UK and the US 61
Chapter 5 Cyclical or Structural: The Key Issue for Policy 69
Chapter 6 The Particular Problem of Finance and Banking 81
Chapter 7 Japan Has a Similar Problem with a Different Cause 107
Chapter 8 The End of the Post–War Era 125
Chapter 9 Misinformation as a Barrier to Sound Policy Decisions 149
Chapter 10 Avoiding Future Financial Crises 169
Chapter 11 The Current High Level of Risk 179
Chapter 12 Inflation 195
Chapter 13 Prospects Not Forecasts 219
Chapter 14 Tackling the Bonus Culture 229
Chapter 15 The Need for Change in Economic Theory and the Resistance to It 237
Chapter 16 Summary and Conclusions 255
Appendix 1 Mean Reversion of US Profit Margins 259
Appendix 2 Goods Output Requires Much More Capital Than Service Output 261
As head of Smithers & Co., Andrew has helped pioneer the application of academic analysis of financial economics to investment management. He is well known for his work on valuing markets, including application of q , for his pioneering studies on the distorting impact of employee stock options on US profits, and for work on showing the understatement of Japanese published profits compared with US ones.