SMITH BRAIN TRUST — Is “quarterly capitalism” a problem for the American economy? Hillary Clinton hopes to make the alleged short-term focus of corporations an issue in the 2016 presidential campaign. In a speech at New York University on Friday, she offered several proposals that would “reward farsighted investors and companies that seek to build up value.” In turn, that might lead to more corporate profits showing up in the paychecks of workers, Clinton and her economic advisers said.
One proposal is to raise the tax on capital gains — for people in the top income bracket — earned in the first five years that an investor owns a stock. (Current tax law treats earnings from stocks held longer than one year the same.) Other proposals include a two-year tax credit for employers that share profits with their workers, as well as unspecified restrictions on “hit and run” shareholder activists.
Coined by a global managing director of McKinsey & Company, in a 2011 article in the Harvard Business Review, the phrase “quarterly capitalism” and the idea we have to do something about it have something of a centrist pedigree.
But Phillip L. Swagel, an academic fellow with the Center for Financial Policy at the University of Maryland’s Robert H. Smith School of Business, and a professor of public policy, is doubly skeptical: First, he doubts that quarterly capitalism poses a great threat to our economic system. Second, even if it were a threat, he doubts that the Clinton proposals would change corporate behavior much.
“The higher tax rate on short-term capital gains is a solution in search of a problem,” he says. “It’s valuable for society to have both short-term and long-term investors. After all, long-term investors eventually sell their holdings and the presence of short-term investors, even high-speed traders, ensures market liquidity that is beneficial for the long-term investors. Market liquidity is also beneficial for society, since it means lower financing costs — it’s easier for a business to raise money — and thus more investment and job creation. Raising capital gains taxes is harmful for growth, period.”
Swagel, who served as assistant secretary for economic policy at the Treasury Department from December 2006 to January 2009, does not dispute that some companies act irrationally in the short term to meet analysts’ expectations, or to boost managers’ compensation, or for other reasons. “But there are mechanisms for those companies that act irrationally to be punished: Investors will sell.” Indeed, that observation renders ironic the Clinton proposal to financially punish people who sell a stock after a relatively short period, he suggests: “Imagine that you buy stock and then discover that the management is terrible? Why would you want to have people locked in?”
In making the case that Clinton was describing a significant problem, the website Vox contrasted the bold activity of Google, whose stock is controlled by its founders, who take a long-term view, with that of Verizon, an entirely public company that acts far more staidly yet pays a steady dividend to investors. Wouldn’t it be “better for America” if more companies acted like Google, Vox asked?
But Swagel responds: “I think anybody who invests in Verizon understands the nature of Verizon’s business, and anyone who invests in Google understands their strategy. They both seem like reasonable ways to invest capital in our society. The bigger-picture view is that there’s no reason to think a political candidate will make better decisions than investors themselves.”
As for tax credits for companies that give workers a stake in the business, Swagel points out that employee-ownership plans “are perfectly legal and feasible now.” The tax breaks “would add a little juice to the package, but it’s modest.” Moreover, although that proposal would shift to some degree the form of employee compensation, from wages to equity, it is unlikely to change productivity, which is the ultimate driver of compensation gains.
The proposal may gain some support in corporate boardrooms, Swagel suspects, where activist shareholders are viewed as bogeymen. “Corporate management doesn’t like being pressured,” he says. “They don’t like ‘corporate raiders.’ And there is a sense in which some activist shareholders do harm and promote short-term thinking.”
But he adds: “I suspect there are many more examples of the opposite — of management doing a poor job and getting pressured effectively.”
“The overall theme of encouraging shared growth and long-term thinking is worthy of public discussion,” Swagel says. “I’m just dubious that minor targeted tax breaks will have a meaningful, or even measurable, impact on the ultimate objectives of stronger and more broadly shared growth. I’m dubious on both objectives: I don’t think the Clinton policies would move the needle on either growth or fairness. They are symbolic.”
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