Washington’s Short Termism
In the Wall Street Journal Vice President Joe Biden comments on "How Short-Termism Saps the Economy". He mirrors similar criticisms from the Democratic presidential candidate Hillary Clinton. They complain that corporate incentive systems are oriented to the short term to the detriment of the long-term best interest of the companies they lead. Shareholders and the economy ultimately suffer. Apparently Biden and Clinton are more reflective of the shareholders’ wishes than the boards they elect.
Biden confesses that the Omnibus Budget Reconciliation Act of 1993 put a limit on cash pay to executives in an attempt to link executive pay to performance, and now criticizes incentive pay oriented toward the short term. The best long-term incentive is to simply own the stock.
Incentives that are tied to short-term shareholder wealth, rather than increasing the asset or market based long-term value of the company, tend to use securities market and financial maneuvers. This is part of the reason for the high level of stock buybacks that are propelling the market and causing Biden some heartburn. This is a problem with laws and regulations trying to nudge behavior without understanding the dynamics of the system.
But there are other reasons for the recent buyback activity. The combination of low interest rates and rapidly accumulating fiscal friction costs makes the buyback activity a rational deployment of resources that is in the best interest of the shareholders. The ACA and the Dodd-Frank bill, with years passing from its enactment to clarification, leave the costs of new investment uncertain. New regulations and the threat of executive orders bypassing legislation make long-term capital commitments risky. Will they find a way to impose the card check bill even after it was rejected in Congress?
Hillary’s campaign proposes a seven-layer array of capital gains taxes, but no matter how often taxes on the wealthy are raised, there is an immediate call to pay more. Their fair share is never articulated, but it is always higher than the current rate. Raising the estate tax as she has proposed is not an incentive for the wealthy to make long-term investments while sacrificing current consumption.
Even a targeted tax cut may have little impact because of the lack of faith that it will remain in place long enough to merit the investment risk. George W. Bush’s tax cut had an expiration date. When the Democrats took the House in 2006 and everything else in 2008 few felt it would remain in place past the expiration.
Executive compensation among the largest companies can appear to be excessive, but the solution to this is not government moral preening and micromanagement, but competition. The hyper-regulation following the recent crash, however, serves to cement the position of established companies and to limit startups and new competition.
Inflation is most pronounced in the parts of the economy with the most government regulation, as Kevin Williamson at National Review wrote in his illuminating article, "Sneaky Inflation". The largest companies have come to see greater returns from the rent-seeking ties to government than by investment in job producing and economy growing capital investment. Rent seeking and hyper-regulation induces short-term behavior.
If such short termism is truly to the disadvantage to the shareholders, then there should be other companies taking the long-term view attracting capital from those unhappy shareholders. There is certainly a competitive market for capital. The reason that there is an emphasis on returning profits to shareholders is that there are too few opportunities for capital investment in an economy subject to ever increasing friction costs, fiscal uncertainty, and social justice warriors whose preferred tax policy is ‘never enough’. Investors would rather see profits reinvested and grow than returned, although there is some demand for a return to compensate for the near zero interest rates on traditional yield instruments.
If there is a problem with short termism it is in government, with the proliferation of three-thousand-page bills, endless regulations from unaccountable and uncontrollable agencies, rent-seeking cronies, executive unilateralism, and various forms of legal shakedowns.
If Joe Biden wants corporate America to take a long term view of business growth perhaps he should start by asking his boss and Congress to do the same.
Henry Oliner blogs at www.rebelyid.com