More Nearsighted than Mr. Magoo

Encouraged by midterm results, Senators Elizabeth Warren and Bernie Sanders, along with other progressives, have been floating more proposals for added restrictions on businesses, echoing Hillary Clinton’s 2016 “quarterly capitalism” attack on a supposedly irresponsible corporate focus on short-term results at the expense of long-term growth.

They all, of course, promise that government will fix the problem they imagine. But participants’ incentives undermine assertions that there is too much short-termism in business, that is fixable by government fiat.

Shareholders own their pro-rata share of net earnings into the future, not just present returns. They do not shun investments which raise that expected present value. Good short-term results raise stock prices not because of myopic short-termism, but because they improve prospects for likely future results.

Share prices are also a primary basis for managerial rewards, making their time horizons reflect shareholder interests. Bondholders, who want to be paid back, incorporate similar future payment risks into their choices, as do workers and suppliers.

That future orientation of business is also defended by research. University of Chicago economist Steven Kaplan wrote “Are U.S. Companies Too Short-Term Oriented?” in 2017, which found “little long-term evidence that is consistent with the predictions of the short-term critics.” In a 2018 Federal Reserve discussion paper titled “The Long and Short of It: Do Public and Private Firms Invest Differently?,” Naomi E. Feldman and five co-authors found “robust evidence that public firms invest more overall, particularly in R&D,” which is “inconsistent with the notion that earnings pressure renders public forms so short-sighted that they on net forego long-term investment.”

Such results have been found despite a long history of government policies that would push firms to more short-termism. Under the Trump administration, however, constant proposals to raise corporate tax rates and worsen capital gains treatment have been replaced by corporate tax rate cuts, and accelerating regulatory mandates have been replaced by a focus on deflating government burdens on corporations. That changed environment will make corporations even more forward-focused.

That government can “fix” supposedly myopic corporation leadership is also questionable, if not laughable. The political incentives facing those in government are far more short-term than shareholders, who shares will bear all the predictable future consequences of current choices.

An election loser will be out of office, unable to capture benefits from efforts invested. So when an upcoming election is in doubt, everything goes on the auction block to buy short-term political advantage. And the D.C. patronage machine reflects politicians’ incentives, which is why Ambrose Bierce described “reform” as “A thing that mostly satisfies reformers opposed to reformation.” Instead, the mere passage of largely unread bills shunting all the real decisions to bureaucrats are declared victories because they insulate politicians from accountability.

We must also remember the cornucopia of government short-termism illustrations, dwarfing anything government promises to reform.

Unwinding Social Security and Medicare’s 14-digit unfunded liabilities will punish future generations for massive government overpromising to buy earlier elections. Other underfunded trust and pension funds, as week as expanding official government debt, threaten similar future atonement for earlier short-term “sins.”

Political attacks on corporate short-termism and alleged “reforms” that will supposedly fix it are amazingly off-base. They ignore financial market participants’ clear incentives. They haven’t the foggiest idea of what constitutes evidence of short-termism. They ignore research that directly contradicts it. 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.

We should recognize that, in Henry Hazlitt’s words, “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, handicapped by nearsightedness that would make them envy Mr. Magoo, will not advance Americans’ interests.