In what was billed as a major economic policy speech, Hillary Clinton took aim at what she termed “quarterly capitalism.” That is, the Wall Street culture of profiting off market bets as quickly as possible rather than encouraging long-term investments.
Clinton, the frontrunner for the Democratic presidential nomination, said that “the system is out of balance” while acknowledging that “most CEOs are simply responding to very real pressures from shareholders and the market to turn in good quarterly numbers.” It is that skewed incentive to promote quick turnarounds that Clinton wants to reform, arguing that “real value comes from long-term growth and not short-term profits.”
Popular anger at Wall Street is still a potent force, even seven years after the banking crisis nearly crashed the markets. Just look at the continued success of tea party populism on the right and Bernie Sanders on the left.
But, of course, not everybody agrees with Clinton. Bloomberg View columnist Matt Levine called the speech “silly.” Economist Tyler Cowen said “the standard anti-publicly traded company tropes are not self-evidently true,” citing social science research. And Phillip Swagel of the University of Maryland questioned the Clinton proposals, calling them “symbolic.”
You can be sure that this won’t be the last you hear the phrase “quarterly capitalism” – so what is it?
The problem of quarterly capitalism
The term “quarterly capitalism” was first introduced into the modern lexicon by Dominic Barton, managing director of McKinsey & Company. Writing in the Harvard Business Review, Barton decried “the tyranny of short-termism” and said that “we can reform capitalism, or we can let capitalism be reformed for us, through political measures and the pressures of an angry public.”
The “quarterly” part comes from the quarterly earnings reports publicly-traded companies release throughout the year. These can have a substantial impact on share prices. Take two recent examples: Apple’s solid numbers fell short of analyst forecasts and the company’s share prices dipped, while Amazon’s outdid forecasts and saw its shares jump by 20 percent within 24 hours. That made Amazon bigger (in terms of market capitalization) than Wal-Mart and “generated a huge windfall for CEO Jeff Bezos,” according to CNBC: “At Friday’s early prices, his fortune rose some $8.05 billion.”
Barton’s argument – and the problem cited by Clinton and other critics of “quarterly capitalism” – is that this kind of profit can incentivize businesses to focus on maximizing these short-term gains rather than planning for the long-term success of their company.
As an example of how this short-termism ends up negatively affecting the American economy, Vox’s Matthew Yglesias compares Google, largely driven still by its founders Larry Page and Sergey Brin, and Verizon, a legacy of the old AT&T which is now “highly subject to the whims of the stock market.” Google isn’t as concerned with those whims and so can innovate wildly, even if many of those innovations end up not panning out in the short-term – or ever. Verizon, on the other hand, is very conservative.
That difference makes Yglesias think that “it would be better for America (his emphasis) if telecommunications companies were investing more furiously in improving services and competing with each other.”
Barton, by the way, isn’t the only major business figure to criticize short-termism. Laurence Fink, CEO of asset manager BlackRock, and, somewhat ironically, Carl Icahn, an activist investor known for pressing for stock buybacks, both support Clinton’s arguments.
“You may be surprised by what I’m telling you: I agree with a lot of the things she has been saying,” Icahn told New York Times business writer Andrew Ross Sorkin.
What is Hillary proposing?
Clinton offered a five-point plan to tackle that “short termism”:
- Revamping the capital gains tax to reward farsighted investments that create jobs and discourage short-term trading.
- Empowering workers and giving them a stronger voice.
- Addressing the rising influence of so-called activist shareholders when they focus on short-term profits at the expense of future growth – and shedding light on excessive buybacks that could take resources away from long-term investment.
- Reform executive compensation to better-align the interests of executives with long-term value.
- Breaking out of gridlock and short-term thinking in Washington.
These are somewhat vague, of course – Clinton is still early in her campaign and needs to maintain some flexibility both during election season as well as in the White House if she wins. Especially given a likely Republican majority in Congress, a President Clinton wouldn’t be able to get everything she wants.
But some specifics her campaign offers: an increase on capital gains taxes for those in the top tax bracket (“this will only affect couples making more than $465,000 per year”) graduated downward over time so it incentives long-term investment; eliminating capital gains taxes on small business stock held longer than five years as well as those on “hard hit areas – including manufacturing and coal communities facing the departure of plants and production.”
It’s hard to tell if any of these ideas will actually address the problem Clinton cites, or, at a more basic level if that short-termism is really holding back employment, wages, and innovation to the extent she argues it does.
Writing for the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution, Len Burman says that Clinton has “misdiagnosed the problem and, even if she’s right, the proposal won’t work as she expects.” One problem Burman identifies is that Clinton’s progressive tax may be counterproductive as it lowers the incentive to hold on to investments longer than a year – under current law, the tax rate drops to 20% from 39.6%, but under Clinton’s proposal that rate would not reach 20% under year six. Investors may just decide to take the hit in the first year instead of waiting six or more years, whereas they currently have a bigger incentive to sell after a year. He also points out that this plan would leave untouched the majority of stock investments: “investments held for longer than a year…is less than half of the dollar volume of assets sold in a typical year” and “60 percent of corporate stock is held by entities not subject to capital gains taxation.”
And Reihan Salam, executive editor of the conservative National Review, counters the Clinton plan by arguing for lower corporate income taxes as a better solution. High taxes, in his description, drive the kind of problems attributed to short-termism.
But Clinton’s critique is one that has backers both on the left, her sought-after primary constituency, as well as in the business world. While the policy specifics might change over time, the political fight against quarterly capitalism is likely only getting started.