August 30, 2015
Quarterly Capitalism and a Tax on Capital
One fashionable critique of business today is that it is too focused on the short run. One presidential candidate calls it ‘quarterly capitalism,’ implying that the quest for short-run profits spoils the overall economy. This is worth discussing, but not so much because this candidate is likely to be president. Rather, it is because the idea is fairly old. Much like fashion, it is now back in vogue.
For those of you who need reminding, markets for capital (like stock markets) see prices ebb and flow quickly, responding to all sorts of news. Required quarterly profits reports inform investors of the state of business and so impact the price of capital, which is bought and sold in stock markets. The current talking points call for a tax on the transaction of stocks to slow down exchange and force more long-term holding of stocks. Setting aside the practical challenges of such a tax, it is useful to explore whether the ‘quarterly capitalism’ actually exists, and if so, is it a problem.
An interest rate measures how much we value the future. So, each of us can be compared with one another by the interest rate we are willing to pay or charge to borrow or lend money. The size of the debt we accrue, is also a rough measure of how much we value the future. So how do those ‘quarterly capitalists’ compare against other human institutions?
On average, religions and non-profits seem to do well, discounting the future only a little. But how about government? Some governments borrow little and manage debt carefully, but the magnitude and composition of the federal debt suggests our national lawmakers care little about future generations. There’s plenty of talk about strategic thinking, but that is where it mostly ends. We humans and our institutions are not magical forward thinkers.
Against these benchmarks, the typical corporation is a patient steward of the future. After all, CEOs are heavily compensated with longer-term stock options to insure this focus. Moreover, there’s no evidence in the academic research that suggests short-term traders do better than long-term stockholders. The ‘quarterly capitalism’ critique lacks empirical evidence, but far more worrisome are the proposed remedies for this non-problem.
Assume a tax on buying and selling stocks is imposed. This would trap investors in bad companies, sometimes for years. Can this be a wise way to get better corporate leadership? Let us try a thought experiment.
Suppose we were to levy the same transaction tax on labor which we do on capital. So, each company would have to pay a heavy penalty for each employee they decide to fire, no matter what the cause. Can anyone guess what that would do to hiring? It would bring it to a rapid halt. What a silly catastrophe that would generate, yet seemingly serious people suggest exactly the same set of outcomes when they propose to tax capital transactions. What we really need instead is a tax on bad ideas.
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