Government is hardly the solution to short-term bias

Hillary Clinton’s latest campaign salvo attacked “quarterly capitalism,” the supposedly irresponsible corporate focus on short-term results at the expense of long-term growth. She promised government fixes. But she is short on logic and history.

Is there too much short-termism in business firms? Look at participants’ incentives.

Shareholders own the present value of their pro-rata share of net earnings, not just present earnings. They do not discard good investments which raise that expected present value. Good short-term results raise stock prices not because of short-termism, but because of their implications for the likely future course of net earnings.

Share prices are a primary metric for managerial success and basis for their rewards. That makes their time horizons reflect those of shareholders, far beyond the present. Bondholders, who want to be paid back, incorporate future repayment risks into their choices. Worker and supplier relationships also reflect firms’ future prospects.

Beyond misinterpreting share price responses to short-term results, Clinton’s main evidence was increased stock buybacks, supposedly sacrificing worthwhile investments by returning funds to shareholders. She ignores that those funds will largely be invested elsewhere. But she also ignores that the buyback binge reflects the Fed’s long-term artificial cheapening of borrowed money, leading firms to shift toward debt financing. But a firm substituting debt financing for equity controls no fewer funds for investments.

Confusing business responses to Fed interventions as business short-termism only begins the list of such government-created biases. For example, constant proposals to raise corporate tax rates and worsen capital gains treatment reduce the after-tax profitability of investments. Regulatory mandates and impositions pile up, with more coming, doing the same. Energy policy threatens cost hikes, reducing investment returns. And so on.

That government will put more emphasis on the future than the private sector is also contradicted by political incentives. Owners bear predictable future consequences in current share prices, but politicians’ incentives are far more short-sighted.

An election loser will be out of office, and capture no appreciable benefit from efforts invested. So when an upcoming election is in doubt, everything goes on the auction block to buy short-term political advantage. And politicians’ incentives drive those facing the D.C. patronage machine. That is why so much “reform” meets Ambrose Bierce’s definition of “A thing that mostly satisfies reformers opposed to reformation.” The mere passage of bills in the political nick of time, even largely unread ones, can be declared victorious legacies, with harmful consequences never effectively brought to bear on decision-makers.
There is also a cornucopia of examples of government short-termism at the expense of the future, whose magnitude dwarfs anything it promises to reform.

Unwinding Social Security and Medicare’s 14-digit unfunded liabilities will punish future generations, caused by massive government overpromising to buy earlier elections. Other underfunded trust and pension funds threaten similar future atonement for earlier short-term “sins.” Expanding government debt similarly represents future punishment for short-term political payoffs. Foreign and military policy have similarly turned away from dealing with long-term issues. But serious long-run issues like immigration escape serious attention because “public servants” are afraid of short-run interest group punishment.

Political attacks on short-termism, and reforms to fix it, are beyond confused. They ignore financial market participants’ clear incentives to take future effects into account. They are clueless about what provides evidence of short-termism. They treat private sector responses to government impositions as private sector failures. They ignore far worse political incentives facing “reformers.” And they act as if the most egregious examples of short-termism in America, all government progeny, didn’t exist.
There is little to Clinton’s criticism and alleged solutions beyond misunderstanding and misrepresentation. We should recognize, with Henry Hazlitt, that “today is already the tomorrow which the bad economist yesterday urged us to ignore,” and that expanding government’s power to do more of the same is not in Americans’ interests.

Gary M. Galles is Professor of Economics at Pepperdine University