by Mitch Kokai
Senior Political Analyst, John Locke Foundation
I’ve been trying to make sense of the recent push, from Hillary Clinton and others on the left, against what’s been dubbed “quarterly capitalism,” or the alleged tendency of publicly held companies to act in the short-term interests of speculators rather than in the long-term interests of more patient investors, and indeed the broader economy. The basic concern, as I understand it, is that in the age of activist shareholders, publicly held companies are not investing enough in increasing their productivity or in developing innovative new products. Rather, they are seeking to extract as much value out of the enterprise as they can through stock buybacks and other measures that enrich shareholders, including senior managers. But is this really a problem? Is Corporate America letting us all down by slavishly chasing returns when managers should be investing for the long term?
I should say that I don’t find the notion that quarterly capitalism is a problem absurd on its face. A number of thoughtful people, like the Harvard management theorist Clayton Christensen, have lamented the short-termism of U.S. corporate executives and the shareholders they serve. One irony of the fact that the Left is embracing a critique of quarterly capitalism is that private-equity firms — which, among other things, buy publicly held companies outright to restructure them, with an eye toward making them more valuable — represent one antidote to short-termism. As you’ll no doubt remember from the 2012 presidential campaign, it wasn’t so long ago that private-equity firms were the villain of the day. …
… Essentially, Clinton believes that the way to fix short-termism is to drastically raise taxes on capital gains from investments that last for less than six years, at which point the rate would fall to its current 20 percent. Len Burman of the Tax Policy Center offers a detailed critique of Clinton’s proposal, warning that it might lead investors to decide that intermediate-term investments, of five years or less, no longer make sense. Victor Fleischer, writing for Dealbook, has also made the case against Clinton’s approach, and he offers a clever alternative centered on how managers are compensated that I can see getting behind.
If our goal is to encourage firms to invest more and hoard less, there is a fairly straightforward option available to us: We could cut the corporate-income tax. As it stands, the very high U.S. corporate-income tax drives investment from the U.S. to other advanced economies. Furthermore, there is strong evidence to suggest that higher corporate tax rates suppress wage growth. Cutting corporate taxes might not be the kind of policy critics of quarterly capitalism have in mind. But it would go a long way toward addressing their underlying gripes about Corporate America.