Hillary vs. the Wisdom of Crowds By Holman W. Jenkins, Jr.
http://www.wsj.com/articles/hillary-vs-the-wisdom-of-crowds-1438125168
“Maybe Republicans should nominate Donald Trump after all. We could have an election that completely fulfills the modern archetypal tendency to select candidates who crave the presidency to satisfy their own needs, not the country’s.”
How will six different capital-gains rates make managements or shareholders any less concerned with quarterly earnings? She doesn’t say.
Hillary Clinton would string syllables together in any order if she thought it would get her to the White House, so it’s with that giant asterisk that we examine the content of her capital-gains plan unveiled in a speech in New York last week.
That Mrs. Clinton found time at the end to notice any imperfections in government—for instance, that it can’t write and execute a budget—came almost as a shock in a speech designed to assure us that ultracompetent government can fix the failings of big business.
Her beef is with “quarterly capitalism,” which she defined as the “very real pressure from shareholders and the market to turn in good, quarterly numbers.” Needed is a heroic policy effort to turn management’s attention back to “long-term growth, not short-term profits.”
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If this critique has a familiar ring, that’s because it echoes an ancient jeremiad, though there’s little academic evidence for the thesis of CEO short-termism. Nor is there much anecdotal evidence except the carping of executives when investors react skeptically to their plans.
After all: The same market that shows zero patience with McDonald’s shows endless patience with Amazon. Isn’t that what we want: Every company to be analyzed differently, treated differently, in light of its particular set of opportunities?
Mrs. Clinton claims “we also know that publicly held companies facing pressure from shareholders are less likely to invest in growth opportunities than their privately held counterparts.”
Uh huh. That sounds like a rigorous claim carefully resting on comparisons of apples and oranges. But if true, won’t the problem fix itself by public companies turning themselves into private companies?
Mrs. Clinton’s solution is to end the current 20% capital-gains tax rate for an investment held one year. She’d replace it with six different rates (as high as 43.4%) depending on whether an investment is held for less than one year or more than six.
How would this change the incentives of management, which would still be concerned with quarterly earnings as long as quarterly earnings were an important test in the minds of investors? Not explained. How would this improve the incentives of shareholders? Not explained.
Suppose a company launched a bold, long-term investment project of the sort Mrs. Clinton approves—then receives a buyout offer from a bigger company that wants to support the project. Should recent investors who were attracted by the bold project nevertheless veto the deal because they’d be taxed at the punitive short-term rate?
Then there’s the secret that’s only a secret to Mrs. Clinton: The biggest beneficiary of today’s cap-gains rate is the U.S. Treasury. Plainly a lower tax rate on investment increases the supply of investment; but it also increases the number of capital-gains transactions that can be taxed because it reduces an artificial disincentive to buy and sell.
Mrs. Clinton would do better to worry about a sharp falloff in new business starts in the past decade, not to mention a generally depressed investment mood that has businesses of all sizes pushing earnings back to owners rather than building factories and developing new products. How does raising taxes on entrepreneurs improve matters? Not explained.
Capitalism will never be heaven, but to imagine that America’s trouble is not enough rules, that the tax code is not complicated enough, that its distortions are not distorting enough, seems insane. Yet Mrs. Clinton wants to go further, imposing a seventh tax rate—a rate of zero—“for certain long-term investments in small businesses, including innovative startups, and hard-hit communities, from inner-cities, to the Rust Belt, to Coal Country, to Indian Country.”
Uh huh. Lobbyists and political fundraisers will be rubbing their hands over the politics of deciding which “certain” investments and “hard-hit communities” will be so favored.
But then don’t we just assume her speech was so much perfunctory blithering. The words and alleged ideas mean nothing, just another campaign ritual until all humiliations and indignities are washed away in the Oval Office.
On the substance, it was enough that the critique be so banal, so overly familiar as to be digestible without thought—which it certainly was. To claim economic problems stem from “short-termism” in the management suite is a moldy-oldie dating back to the mid-1980s. We’ll give one amusing example because it doesn’t involve a politician: Management guru Michael Porter in 1992 derided shortsighted U.S. businesses for investing only 9% of GDP compared with 14% for Germany and 20% for Japan—just as the U.S. was embarking on a two-decade burst of creativity that gave the world the Internet.
On the emotional level, it was enough for Mrs. Clinton to finger the right culprits—CEOs and Wall Street speculators—as cause of America’s economic frustrations.
Maybe Republicans should nominate Donald Trump after all. We could have an election that completely fulfills the modern archetypal tendency to select candidates who crave the presidency to satisfy their own needs, not the country’s.
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