The “Short-termism” Myth

 

A number of pundits, including Ricochet’s own James Pethokoukis, have picked up Hillary Clinton’s “short-termism” meme and run with it. Clinton is claiming that U.S. CEOs are looking no further than the next quarter or two and — instead of making long-term investments in research and capital equipment — are repurchasing company shares, buying up other companies, or paying higher dividends to shareholders.

The hidden assumption is that there are lots of long-term investment opportunities out there to which the nation’s CEOs are blind. Individual companies often make mistakes, and those that make them too often usually don’t stay in business for long.  If there truly are profit opportunities just waiting to be snapped up by entrepreneurs, then you’d expect lots of people to be taking advantage of them. Yet the country’s economy remains moribund. When most companies are retrenching rather than expanding, the explanation may be “animal spirits,” mass delusion, or shared stupidity as Clinton and Pethokoukis seem to be implying. However, before reaching for such vague reasons for large-scale trends, I tend to look for systemic causes — and “systemic” all too often translates into “government.”

Yesterday’s IBD op-ed makes a good case that Dodd-Frank is the culprit. But why limit ourselves when we’re in the middle of a perfect storm of anti-business legislation and regulation? In addition to Dodd-Frank, businesses have been saddled with:

  • Obamacare, which increases the cost of employment
  • Rising minimum wages (ditto)
  • Exploding EPA regulations
  • New regulatory agencies
  • New taxes
  • Higher existing taxes
  • An unstable currency
  • Regulations requiring banks to make bad loans to minority home buyers
  • Government agencies that have been co-opted for political purposes

Given the anti-business climate that Obama has so carefully constructed, it hardly seems necessary to resort to explanations such as the “new normal,” malaise, income inequality, or “short-termism” to explain the country’s economic ills. The Left, of course, must offer up such inanities to exonerate their own policies.  But why do conservative pundits like Pethokoukis feel the need to ignore the obvious and jump on the left’s bandwagon?

There are 18 comments.

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  1. Guruforhire Member
    Guruforhire
    @Guruforhire

    Or Mature industries are in fact mature.

    • #1
  2. user_278007 Inactive
    user_278007
    @RichardFulmer

    True, but immature industries are, in fact, immature.  And it’s young companies that provide most new jobs and are also less able to deal with regulation (which is why mature companies often favor more regulation).

    • #2
  3. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    Like.

    • #3
  4. user_278007 Inactive
    user_278007
    @RichardFulmer

    “The new normal” is another non-explanation that has been making the rounds.  Rather than providing a cause for the current slump, it’s just a label – a label implying that the economy is the way it is because, hey, it’s just the way it is.  No one’s fault, really, it’s just supposed to be that way these days.

    Again, the point is not to provide an explanation or a path to a solution, but to get Obama off the hook for bad economic news.  Note that the press doesn’t float this kind of pap when Republicans are in the White House.  Instead, the MSM diligently probes every silver cloud for a dark lining and rediscovers homelessness.

    As with Hillary’s “short-termism” trope, all too many Conservatives are all too willing to promote the “new normal” idea as if it really means something.

    • #4
  5. J Climacus Member
    J Climacus
    @JClimacus

    I think an important factor here is the lawlessness of the Obama Administration. Businesses need to plan for the future, but when the future is not inscribed in law (i.e. the text of Obamacare) and is instead dependent on the whim of the Emperor (Obamacare means whatever Obama says it does on any given day), how is a business supposed to plan? Who knows what Obama will make up next?

    A similar problem holds with the Federal Reserve. Our economy is barely hanging on with the Fed holding interest rates at essentially zero, which raises the question of what the Fed will do if the economy heads south. So it will have some bullets in its gun, should that happen, the Fed keeps talking about raising interest rates, which would probably kill whatever recovery we have. The Fed is in a pickle that it is difficult to see will end well. If you are a business, why put your capital on the line now? Better to keep your powder dry until we are in a better national situation, both financially and politically.

    • #5
  6. drlorentz Member
    drlorentz
    @drlorentz

    Richard Fulmer: The hidden assumption is that there are lots of long-term investment opportunities out there to which the nation’s CEOs are blind. Individual companies often make mistakes, and those that make them too often usually don’t stay in business for long.

    I read Mr Pethokoukis’s post with great skepticism. He presents weak evidence that short-termism is an issue. If companies are not making long-term investments, it’s probably because there are none to make. It’s surprising to me that Mr Pethokoukis has not considered this possibility seriously. Beyond that, there may some incentives that are promoting short-term behavior as noted in the post and in comments.

    Mrs Clinton’s ‘fix’ would be more social engineering on top of the extensive edifice of regulations and incentives that form the current, possibly dysfunctional, environment. Sticking another band-aid on it does not seem wise, and it’s certainly not free-market: more tuning of the tax code with more unintended consequences. And anyway, we already have differential tax rates for long term vs. short term capital gains that will “…reward longer-term investments that create jobs, more than just quick trades.”

    Sometimes I wonder about Mr Pethokoukis.

    • #6
  7. Arizona Patriot Member
    Arizona Patriot
    @ArizonaPatriot

    It’s not just high taxes that contribute to a short-term mentality — it is also the risk of high taxes.  When making any long-term investment, there is a substantial added risk of a major, unfavorable change in tax polity between the decision and the payout.

    Thus, by merely raising the issue of significant (unfavorable) tax-code changes, Hillary (and other Democrats) promote short-term thinking.

    • #7
  8. iWc Coolidge
    iWc
    @iWe

    drlorentz: Sometimes I wonder about Mr Pethokoukis.

    He is not a conservative in any way that I can measure.

    But that is OK. It is good for Ricochet to have reasonable-sounding liberals on the site.

    • #8
  9. drlorentz Member
    drlorentz
    @drlorentz

    iWe:

    drlorentz: Sometimes I wonder about Mr Pethokoukis.

    He is not a conservative in any way that I can measure.

    But that is OK. It is good for Ricochet to have reasonable-sounding liberals on the site.

    I’m not sure he’s a liberal – more like a hard-to-characterize mix.

    • #9
  10. Owen Findy Member
    Owen Findy
    @OwenFindy

    anonymous: As usual, when you find a lot of very smart people doing the same very dumb thing all at the same time, the odds are it’s an unintended consequence of a stupid government policy.

    A-frakkin-men.  And the “short-termerism” is not new.  I remember an essay in one of Ayn Rand’s newsletters in the 60’s or early 70’s explaining it as an effect of government meddling.  Nearly half a century ago.

    • #10
  11. user_51254 Member
    user_51254
    @BereketKelile

    I think it’s also doubtful that the premise of “short-termism” is even true. The narrative goes: CEOs think only about good quarterly earnings reports and when they leave they’re no longer interested in the long-term effects of their decisions. My understanding is that CEOs actually retain their stock holdings for several years after they leave their jobs. If this is true then we don’t actually see this purported problem occurring anywhere. The WSJ actually has a piece about this today and I think the author makes a great point when he says that a bigger problem is “a generally depressed investment mood that has businesses of all sizes pushing earnings back to owners rather than building factories and developing new products.”

    • #11
  12. John Hanson Thatcher
    John Hanson
    @JohnHanson

    I have had trouble believing Mr. Pethokoukis is conservative at all, at most a middle of the road Keynesian.  But then I want a small Federal Government, with very little regulation, and actually try conservative economics, something close to the Austrian school, and that is not his approach.  His solutions are always a lot too liberal leaning for my thinking, but then what do I know, I am a right wing radical, who believes in individual freedom and property rights.  He may fit with what we call “establishment” Republicans, who seem to think the answer is just go slower and manage a big government better.

    • #12
  13. drlorentz Member
    drlorentz
    @drlorentz

    Owen Findy:

    anonymous: As usual, when you find a lot of very smart people doing the same very dumb thing all at the same time, the odds are it’s an unintended consequence of a stupid government policy.

    A-frakkin-men. And the “short-termerism” is not new. I remember an essay in one of Ayn Rand’s newsletters in the 60′s or early 70′s explaining it as an effect of government meddling. Nearly half a century ago.

    Right. The press and politicians have been lamenting the short-term outlook of companies for decades. Clinton and Pethokoukis think they have discovered something new. It’s not new at all. Doesn’t anyone read stuff that was published before last month?

    • #13
  14. drlorentz Member
    drlorentz
    @drlorentz

    John Hanson: He may fit with what we call “establishment” Republicans, who seem to think the answer is just go slower and manage a big government better.

    That’s how we got into this fine mess.

    • #14
  15. Guruforhire Member
    Guruforhire
    @Guruforhire

    The long term is made up of an awful lot of short terms.

    • #15
  16. Big Green Inactive
    Big Green
    @BigGreen

    John W – I always enjoy your posts and am interested in your point of view.  However, I think you missed the mark here in making certain unproven assumptions and you don’t understand how most executive compensation packages are structured today.

    First, I am still waiting for specific verified evidence that this alleged “short-termism” problem exists (whether government induced or not).  I have seen none.  I haven’t seen evidence of a positive NPV project (short or long term) that has been eschewed by a company in favor of value killing short-term attempts to goose the stock price.

    Second, most c-suite compensation packages provide a combination of base salary, annual bonus (hitting specific targets), long-term incentive (generally at least 5 years), restricted stock (quite often with vesting over a period of 3-7 years and, sometimes, pure cliff vesting) and stock options.  The relative proportion of these packages purely based on short term metrics is quite small.  The value tied up in long term pay generally overwhelms the short term portion.

    • #16
  17. Big Green Inactive
    Big Green
    @BigGreen

    (cont’d)

    Now, I have issues, when a shareholder of a company, with some of these packages in terms of total size and composition, but if performance based pay inherently leads to short term thinking, what is the point of aligning interests of shareholders and management?  I can assure you that if the $1 million tax cap is lifted, you will see only a modest increase in base pay, if any, and the composition of pay packages will change little.

    Third, I can’t understand this knee-jerk negative reaction to stock buybacks and, frankly, Mr. Drake’s piece is misleading and off the mark in some respects.  A stock repurchase has absolutely no impact on the stock price in the short-term.  Mr. Drake ignores the value of cash on the balance sheet.  He dismisses this, but I can assure you shareholders do not.  Balance sheet cash (or “net debt”) is a clear input when calculating the equity value of a company.  If a company uses that cash to repurchase stock, EPS does indeed increase but the balance sheet cash decreases by the amount used to repurchase shares.  In other words, the company’s P/E will decrease slightly.  Now, I agree with his point about whether or not it is a “good” investment for the company to make but his analogy with buying a government bond is outright silly for obvious reasons.  I personally prefer dividends for certain reasons but there is really no difference between the two.

    • #17
  18. Pete EE Member
    Pete EE
    @PeteEE

    Echoing JC, Arizona and Findy.

    It is a bad idea to get into a business where you can’t control your success. It is a fool’s game to rely too much on the future if someone else controls that future.

    If you want long term thinking from economic leaders, assure them that they can make long term plans.

    • #18
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