US labour productivity - response to comments

Once again thanks for all your helpful comments. I set out below my response to comments posted.

Mademaski. (i) Thanks for the compliment – there always welcome. (ii) I have been able to find data similar to that for the US for Germany, Japan and the UK, but not so far for France. I set out these out in a Table, which have posted as an image above.

GDCC. It seems clear to me that investment decisions by companies’ managements can be affected by a host of factors, which include (i) the cost of capital. (ii) tax (iii) expectations and (iv) management incentives.
At any one time all these are no doubt influencing individual decisions and thus the total invested, whether or not these can be categorised as exogenous factors and root causes. Management incentives have changed dramatically and as the purpose of incentives is to change behaviour we should not be surprised that they have done so. The evidence which I have sought to set out in The Road to Recovery, is that the change in management incentives has had the impacts that we should rationally expect. These have taken the form of higher profit margins, lower investment and more volatile published profits, than would otherwise have been likely. I don’t think these changes can reasonably be attributed to a reduction in competition – a point I discuss in The Road to Recovery. This could explain higher profit margins, but neither the fall in investment nor the rise in published profit volatility. I agree that by a failure to resist the change in management incentives Anglophone governments have been lax in fighting rent-gauging and I would like to see this change.

Paul A. Myers. Thanks for this clear summary with which I agree. The aim, as you correctly write should be to end the perverse incentives which favour buy-backs over investment. In a paper by John Donaldson, Natalia Gershun and Marc P. Giannoni “Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts”, Federal Reserve Bank of New York Staff Report No. 531, December 2011, the authors remark that “Practically speaking this means that convex contracts (i.e. those with large bonus and option elements) may induce the self-interested manager to adopt investment policies that drive his firm’s equilibrium capital (i.e. equity) stock to zero.”

RDD I will pass this on to Martin Wolf as it’s about his article not my blog.