Hillary Clinton’s economic speech this week at the New School argued that one of the main causes of the weak recovery, stagnating wages, and anemic job growth is “short-termism” on the part of corporate executives. She said that big businesses too often practice “quarterly capitalism,” where “everything is focused on the next earnings report or the short-term sale price, and the result is too little attention on the sources of long-term growth: research and development, physical capital and talent.
While some commentators have applauded that portion of Clinton’s speech as ground-breaking, it is worth noting that experts began to raise serious concerns about corporate short-termism about a quarter century ago. Back in 1992, The Century Foundation (then called the Twentieth Century Fund) published a task force report focused on precisely the same issue. It began:
The United States economy and financial system suffer from “short-termism,” an affliction caused by a lack of attention to long-term economic performance. Financial markets put pressure on corporate managers to focus too much on quarterly profits and too little on patient investment for the long haul.
That task force, which included the late Nobel laureate James Tobin and his fellow Yale University economist Robert J. Shiller (who later won a Nobel Prize in economics for his work on speculative bubbles), put forward many proposals for reform that—unfortunately—were never acted upon. Given that the same economic problems of rising inequality and stagnating wages have persisted in the decades since, without any meaningful effort to address short-termism, Clinton and others would benefit from reviewing their recommendations. The following are among the report’s primary proposals:
- Owners of public corporations should provide more active oversight and should participate more in management.
- This goal should be pursued mainly through encouragement of “relational investing.” Large shareholders and fiduciaries (especially pension funds) should become more involved in monitoring corporate management.
- Regulations and tax and accounting rules all should be revised to permit and encourage relational investing. Additional disclosure of executive pay and benefits should prove beneficial.
- “Corporate Democracy” and “Shareholder Rights,” while clearly useful, are not a sufficiently effective approach to the problem.
- The tax on capital gains should be graduated steeply according to holding period. The rate on short-term holdings should be raised and the rate on long-term holdings lowered.
- Debt and equity should be treated equally in corporate taxation. To this end, the deductibility of corporate interest costs should be effectively eliminated and the tax rate on corporate profits should be reduced correspondingly to maintain revenue neutrality.
Additional detail is available in the report itself, including a background paper by Robert J. Shiller, “Who’s Minding the Store?”