The FT’s Ed Luce takes a look at the “quarterly capitalism” or “short-termism” issue, concluding that it has merit as well as political legs. He points out that “US investment is at its lowest since 1947″ but that last year “S&P 500 companies spent more than $500bn on share buybacks.” He doesn’t, however, think further raising the capital gains tax rate for short-term investment is an effective solution — as Hillary Clinton wants to do — versus reforming executive pay:
It is doubtful such tinkering would be enough to alter investors’ time horizons. The lure of a bird in the hand would still outweigh two in the bush. Many big investors, including pension funds, are already exempt from taxation. Nor is [Clinton’s] proposal likely to deter shareholder activists, whose gains from holding C-suites to ransom will outweigh any new penalties. As long as chief executives’ compensation packages are set by the share price, little is likely to change.
I am more positive that, at the margin, tax reform can help — as I recently told Ben White of Politico. But generally experts who have proposed similar plans would also deeply cut cap gains rates the longer an investment is held, maybe even to zero for investments held 5 to 8 years or so. Clinton’s approach would raise the ceiling but not the the floor. Of course, cutting taxes for wealthier Americans is anathema to Democrats so she is forced to offer a bizarre version of what could be a pretty good idea.
Now Tyler Cowen questions whether short-termism is really even a thing and cites a couple of studies. I would add to the debate with a new paper, “The Macro Impact of Short-Termism” by Stephen Terry of Boston University, which concludes that short-termism from investor pressure “distorts long-term investments and imposes costs on firms and the broader economy” although “the presence of discipline may provide benefits if managers are motivated by agency considerations such as a desire to shirk or to empire build.”
Also in the FT, McKinsey’s Dominic Barton and Mark Wiseman of the Canadian Pension Plan Investment Board note research that has found “privately held companies, free to take a longer-term approach, invest at almost 2.5 times the rate of publicly held counterparts in the same industries. This persistent lower investment rate among America’s biggest 350 listed companies may be reducing US growth by an additional 0.2 percentage points a year.” I sure would love to see more research on this subject.
Then there is this interesting bit from an Economist story on Silicon Valley on why more startups are staying private longer:
It used to be extremely rare to find a startup valued over $1 billion, but today there are 74 such “unicorns” in America’s tech sector, valued at $273 billion. That is 61% of all the unicorns in the world by number, according to CB Insights, which tracks the private market. Many entrepreneurs view life as a public company, with its quarterly appraisals and activist shareholders, as akin to being the giant effigy at the focus of the annual “Burning Man” gathering in the Nevada desert: yes, you may be quickly built into the biggest thing around, but the experience promises more than a little pain. And drumming up capital without the help of the public markets is unprecedentedly easy. In the face of low interest rates, investors have scrambled to find any sort of yield. Mutual funds such as Fidelity and T. Rowe Price are investing in unicorns in late-stage rounds, as are hedge funds, sovereign-wealth funds and large firms.
Of course, maybe voters would take the issue more seriously if the politicians talking about it were also attacking short-termism in government, which is a far worse problem.
from AEI » Latest Content http://ift.tt/1SKZKxo
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