Hillary Clinton Has a Smart Idea to Fix the Economy. Republicans Should Steal It


Hillary_Strategy_Shutterstock_500x293Bad news for Republican presidential candidates searching for a fresh message beyond moldy Reagan nostalgia and tired anti-Obamaism: Hillary Clinton just stole a potentially powerful theme right from under them.

In her economic policy speech Monday at the New School in Manhattan, Clinton said Corporate America deserves some of the blame for the weak and uneven economic recovery. Big business, she said, suffers from “short-termism” and too often practices “quarterly capitalism” where “everything is focused on the next earnings report or the short-term share price, and the result is too little attention on the sources of long-term growth: research and development, physical capital and talent.”

Now, it’s surely tempting for Republicans to view Clinton’s critique as just another Democratic attack on “job creators,” or as campaign strategery from a centrist Democratic candidate looking to ward off a more liberal rival. But there’s more to it than that, and the GOP should pay attention.

First, short-termism might be an actual problem hurting economic growth and preventing worker incomes from rising faster. Take one aspect of it: companies using cash for stock buybacks rather than new investment in people and machines. Buybacks have risen sharply since the Great Recession. S&P 500 companies bought back some $500 billion of their own shares last year, according to Goldman Sachs, or about a third of their cash and half of their earnings. Meanwhile, business investment remains below pre-recession levels or barely above, depending on the measure. That might partially explain why U.S. productivity growth has stalled out the past five years. Without faster productivity growth, the economy will remain stuck in low gear.

Second, it’s not just Democratic presidential candidates or economic populists raising the issue. Laurence Fink, CEO of investment firm BlackRock, recently complained in an essay that C-suite suits “are rewarding shareholders, which causes the stock to spike. But to the extent that those cash expenditures starve corporate investment, the economy suffers.” Clayton Christensen, Harvard business professor and innovation guru, bemoans today’s “capitalist’s dilemma” where “doing the right thing for long-term prosperity is the wrong thing for most investors.” Worries about short-term results mean bosses would rather invest in incremental innovation to improve existing products rather than riskier experimentation that might fail or disrupt existing business lines. And in his 2014 book Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change, Nobel laureate economist Edmund Phelps writes, “Short-termism is rife in business and finance. In the private sector, CEOs have no long-term interest in their companies, and mutual funds have only a short-term interest in holding the shares.”

Third, arguing against short-termism should be a natural fit for Republicans. When government fails to properly fund pensions and healthcare entitlements, or creates regulations that hamper new business formation, or favors teachers unions over students, that’s a kind of short-termism. The Democrats behind these policies are not thinking about the long-term health of the economy or the country — they’re concerned only with pleasing their constituent interest groups right now. Republicans have long (and rightfully) skewered them for it.

Republicans just need to apply that same concept to the private sector, as well. Of course, some of the possible solutions might be uncomfortable, such as reforming executive pay. But not all of them. Tax and regulatory policies that encourage more startups may also combat short-termism by the big guys. If incumbents don’t innovate against new competitors, they won’t be around for the long-term.

What’s more, both Fink and Christensen think tax policy plays a big role in encouraging short-term strategies by businesses as they respond to activist investors. All an investor has to do to pay low investment tax rates is hold a stock for a year. But what if investors had to stick around for two or three years to gain a preferential tax rate? And what if the longer they held the stock, the lower the rate would fall? Heck, we could even make stock flippers pay a rate higher than the ordinary income tax of 40 percent. Such changes might nudge investors and companies to better tolerate short-term pain for long-term gain.

Clinton hinted at just such an approach during her speech, proposing “a new plan to reform capital gains taxes to reward longer-term investments that create jobs, more than just quick trades.” In other words, Clinton might have figured out a way to deeply cut investment taxes — that’s right, tax cuts for the rich, Republicans — in a way that looks pro-worker. Hubby Bill was great at stealing GOP issues in the 1990s, such as welfare reform and balanced budgets, and making them his own. And now it looks like Hillary is picking Republican pockets all over again.

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  1. Misthiocracy Member

    If a company thinks its stock is undervalued, would it not make sense to buy back the stock for resale later?

    It’s easy from the outside looking in to say that a company should invest the money in research/production/talent/etc, but wouldn’t the company itself be in a better position to decide where to invest its resources?

    If the company is correct that the stock is undervalued, and that the price will rise without Hillary’s preferred forms of investment, then it will have more cash on hand later on with which to make those preferred investments.

    • #1
  2. Larry3435 Member

    Stock buybacks are the result of a deranged tax code that favors capital gains over dividends.  The lack of business investment is the result of a regulatory climate that makes any investment risky and expensive, because of the very real possibility that government will crush any innovation.  With the Fed giving away free money (interest rates below the rate of inflation), there is no doubt that companies would make any investment that foresee as being profitable.

    Clearly what is needed is more government meddling.

    • #2
  3. user_138562 Moderator

    Why fool around with using the tax code to encourage this and discourage that?  Since government knows best, maybe they should just nationalize all the companies and run them directly.

    • #3
  4. Big Green Inactive
    Big Green

    Larry3435:Stock buybacks are the result of a deranged tax code that favors capital gains over dividends. The lack of business investment is the result of a regulatory climate that makes any investment risky and expensive, because of the very real possibility that government will crush any innovation. With the Fed giving away free money (interest rates below the rate of inflation), there is no doubt that companies would make any investment that foresee as being profitable.

    Clearly what is needed is more government meddling.

    Current tax code does not favor long term capital gains over dividends (at least qualified dividends which is generally the case when buying individual equities and most mutual funds or ETFs).

    • #4
  5. Fricosis Guy Listener
    Fricosis Guy

    Is it really the tax code that’s driving this behavior? And what is Hillary’s plan for this again?

    • #5
  6. Big Green Inactive
    Big Green

    James – I generally like your writing as it makes me reconsider my views.  That said, this is a very suspect piece.  It is basically a dressed up way of saying “companies are bad, workers are good” as if the economy is some long drawn out morality play.

    Now, in my career I have seen short-termism have a negative effect on the overall prospects of a company but those situations are very, very few and far between.  I also don’t understand stock buybacks are viewed in a negative light in some circles but dividends are not.  From a purely financial and capital structure perspective, there is no difference.  There are reasons companies are buying back a lot of stock – concerned about long term investments in the US and the really crappy US corporate tax code, very low interest rates for as far as the eye can see, and, to some extent, the emegrence of institutionalized activist investors (which you note).

    These things are always interesting to talk about in general but the specifics matter.  Which companies are engaging in too much short-termism?  Larry Fink’s firm owns 5-6% of virtually every company in America and in most instances is one of the 2 or 3 largest shareholders.  If he really believes this, he should use his firm’s clout to change company behavior if he thinks it is long term detrimental to the company and its shareholders.

    • #6
  7. jetstream Inactive

    Sorry Jim, but none of this is really new. All of this was true during the Reagan Revolution. What’s different is the macroeconomic environment. If the 1982  macroeconomic environment is reestablished, Reagan Revolution 2.0 will begin.

    • #7
  8. TG Thatcher

    How about, instead of talking about establishing “tax and regulatory policies that encourage more startups,” we talk about eliminating tax and regulatory policies that discourage startups?

    • #8
  9. Ricochet Member

    Yes, lack of competition and expected challenges from start ups, new entrepreneurs and  different twists on similar products can keep management looking a little further down the road.   Burdensome regulations most often written with a little help from big corporations and finance fall most heavily upon small, medium and brand new business both directly and on their potential lenders and venture partners.   Moreover, stock investors’ focus on capital gains and cash flow and indifference to management salaries was also a product of the new administrative state when dividends netted 3 cents on a dollar of pre tax profits for the top bracket.   While the  confiscatory taxes that changed the relationship between investors and management have been improved, cultures  require another competitive shock to get back to a situation where investors and professional managers pay closer attention to each other.  We don’t share the issue with Hillary.  Indeed we lay it at her progressive feet.  It’s a product of the administrative state, k street and Washington corruption and the distorting  of accountability in product and capital markets through remote unaccountable regulators and tax writers.  What we need are very simple clear laws and taxes not thousands of pages of regulations and tax code.  The trick is to fix accountability where it belongs.  Can we sell simplicity and accountability?   Well we certainly can lay crony capitalism,  k street, and general rot at the feet of the administrative state which Hillary and her party champion.

    • #9
  10. user_278007 Inactive

    Clinton is blaming companies for rationally responding to Obama’s anti-business policies and James Pethokoukis’ only complaint is that Republicans didn’t  do it first.  The answer is not to “fix” American business, the answer is to stop Obama’s anti-business policies.  Stop subsidizing favored companies; stop doubly taxing profits; stop piling up mountains of regulations; stop the constant anti-business rhetoric; stop creating uncertainty by constantly circumventing the rule of law, by undermining the underpinnings of private property, and by manipulating our currency; stop requiring banks to give home mortgages to people who can’t afford them; and for God’s sake stop using government agencies to attack political enemies and reward political friends.

    • #10
  11. user_11182 Member

    Buying back stock makes perfect sense if that is the optimal use of the cash.   I.e., if managers can find no other investments they expect to yield higher returns.   Buybacks are (usually) also more rational from the shareholders’ point of view b/c gains are taxed at lower rates than dividends and taking gains is optional for shareholders (they don’t have to sell their shares), whereas dividends are not optional.

    • #11
  12. user_11182 Member

    Oops!    Sloppy writing on my post re tax rates.   L-T CG and qualified dividends are taxed alike.

    While I’m here, Let me add that lengthening the holding period wouldn’t make much difference to buybacks.   BBs are simply one way to return cash to shareholders who have the option to take the cash (sell their shares) or not.   Of course, they have this option every trading day.

    • #12
  13. civil westman Inactive
    civil westman

    A business in this country today – up until 50 years ago or so – plans long term at its peril. Should your business become politically incorrect, not obtain government/regulatory support obtained by competitors, be sued for personal injury or “harassment” or some other minuscule affront, you have had it. Any of these can destroy a life’s work and can occur at any time to any but those who are set in crony concrete. That is to say – short termism is a rational strategy for many businesses in the anti-business environment which is this United States.

    • #13
  14. captainpower Inactive

    Would appreciate a history lesson.

    How did this quarterly hyperfocus arise? When did it arise?

    Is government to blame?

    Can it be undone by undoing some government policy?

    Or is it just the free market at work?

    I have no idea and this article didn’t really shed light on it.

    • #14
  15. Z in MT Member
    Z in MT

    My thought has been that the tax code should be changed to allow the cost basis of capital investments to be readjusted for inflation + prime. Why should you pay capital gains on the portion of investment returns that aren’t really investment returns? It would be a pretty easy calculation too, the IRS just publishes what the cost basis inflator is every year.

    • #15
  16. Guruforhire Member

    So what projects are there that are welfare enhancing, increase their return to investors, and are irrationally not being pursued?

    How should these projects be valued?

    • #16
  17. SParker Member

    The premise of free markets is that none of us knows what we’re doing.  We figure it out or don’t as we go along.  So how does adding the wisdom of uninterested third-party kibitzers, uninformed on the particulars of an enterprise, bring to the party? Research and development, for example, may be a large and necessary expense for Intel and a gigantic rat-hole for Nordic American Tanker (and any number of failed tech firms for that matter).  Let them decide the thing; they’re responsible for the result.

    As well, what’s the purpose of a trader?  Only to provide liquidity (ultimately making original equity issuance possible–because there’s a market for it).  Does jacking up the capital gains holding period increase or decrease liquidity?  I’m guessing decrease.

    “Short-termism” seems like a shibboleth.  It might be a better idea to go the opposite way and require total payout of earnings to shareholders.  That at least solves the long-standing problem of determining the income of equity owners fairly.  And open the possibility of eliminating the corporate tax.

    • #17
  18. Snirtler Inactive

    On political messaging, if the purpose is to put forward fresh and powerful themes, Clinton’s critique of short-termism and “quarterly capitalism” is hardly fresh. It sounds like a rehash of the mid-90s debate in International Relations departments on which model would prove to be superior: Anglo-Saxon, Rhine, or Japanese capitalism.

    Presumably, Clinton (or whoever invents her message for her) takes the side of those who argued the superiority of the Japanese and German models. They were supposedly marked by long-termism–seen, for example, in industrial policy and government subsidies of civil R&D–and a preference for consensus and close relationships–as seen in the structure of the labor market and bank, rather than equity, financing of corporations–over individualistic and arms-length transactions.

    I don’t want to gloss over US economic problems, but the Japanese model led them into a decade-long malaise. Germany’s impressive economic performance since the mid-2000s entailed the adoption of reforms and moving away from its earlier brand of capitalism.

    • #18
  19. Barfly Member

    I’ve always suspected that (short-term) manipulations of the system crowd out (long-term) focus on productivity, but that’s just my personal bias. Obviously, people who think about making things rather than taking them from someone else (usually by gaming “the system” rather than direct theft) are going to agree with James’ argument a little ways.

    We part company with that argument, of course, when we hear language like “reforming executive pay” and “policies that encourage more startups.” A productive’s immediate response is “Just who do you think you are, who has the right to reform anyone’s pay? Nasty little regulator. What’s wrong with you? Can’t make anything yourself?”

    We suspect the larger problem, of which short-term manipulations are a symptom, is the set of unquestioned (because they’re so ugly) notions behind those phrases.

    So ditto captainpower #14. James, where can we read a cogent analysis or history of the conflict between productive economic activity and working the system?

    • #19
  20. user_278007 Inactive

    Hillary and James both need to learn something about running a business before they try to tell business owners – who have their own livelihoods at stake – how to run their companies.

    • #20
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