A week travelling round the country has brought home to me how much attitudes have changed in the last few months. Before the summer break it was deemed in business circles to be not quite proper to criticise the Government's economic policy overtly. Now while it is still possible to find people who support Osborne's deficit reduction plan, it is well nigh impossible to find anyone who believes it is working.
They are of course simply recognising the reality that the plan is now so hopelessly off course that the Government cannot possibly meet the targets it has set itself. So the key question is what George Osborne will say about this in his autumn budget statement due in the first week of December. Will he indulge in fantasy economics to explain away the unpalatable as Gordon Brown was wont to do? Or will he man up and admit that he needs to change course?
Andrew Smithers, one of the most original economic thinkers in the country, weighed into this debate on Thursday but in a way which was seriously depressing because it was so plausible.
His starting point was that the economy was floundering because of inadequate demand. Personal spending is flat for obvious reasons but the real culprit is the companies who are hoarding cash and refusing to invest.
Others have noticed the cash hoarding but explain it away by saying we live in uncertain times and companies will start investing again once they become more confident about the economic outlook. Smithers disagrees fundamentally with this. He says companies are not investing because executives are bonused to deliver short-term profits. Costly spending on investment projects is therefore anathema to them. Investment may deliver long-term prosperity but by that time they will have left the company. It also depresses short-term profits while they are still there.
We have in the last two decades, under the mantra of shareholder value and aligning the interests of management with shareholders, created a new breed of management incentivised to believe that what is good for them is good for the business. They dislike investment because it reduces their bonuses .
They don't invest surplus cash. They hoard it or they use it to buy back their own company's shares.
When the majority of the managements in publicly quoted companies start behaving this way, as they now do, we have a serious problem. They are sitting on cash which is the equivalent of six per cent of GDP. This deadweight of unused resources prevents lift-off and threatens to leave the economy forever trapped in the mire.
Smithers says this behaviour by management is a structural change — meaning it is something which won't go away. It makes this down- turn different from all that have gone before. But it also means we cannot get out of the mess. Specifically, more government spending — the Plan B urged on Osborne — won't work because it will not change executive behaviour. If anything it will simply make the cash piles even higher or spark off inflation.
The longer-term implications are equally depressing because this is a problem confined to Britain and the United States. Management behaviour has not been distorted by bonuses in our competitor countries, where they continue to invest and become ever more efficient in comparison. Thus our quoted companies are on a glide path of relative decline. Bonuses designed to make companies perform better are in fact guaranteeing that they will become progressively weaker. And consigning the economy to a similar path.
There is an answer of course, and that is for government to do something about bonuses. Ideally they should be banned altogether given that they have caused nothing but trouble everywhere they have been applied. But given that the Government and institutional shareholders do not yet even recognise that we have a problem, Smithers recommends a simpler change. He suggests if bonuses are to continue they have to be linked to medium-term increases in physical output and investment. Nothing else.
Coincidentally Vince Cable is debating this issue next Tuesday at a Social Market Foundation fringe meeting on short-termism at the Lib Dem conference.
Don't hold your breath but at least someone up there seems to have noticed what is going on. It is a start.