The short-termism myth

From The New Yorker (!): pressure to focus on the short term doesn’t come from “Wall Street” or investors, but from poorly designed CEO compensation packages.

Excerpt from The Short-Termism Myth

[There are] two common but ultimately questionable assumptions. The first is that corporate decision-makers care only about the short term. The second is that it’s the stock market that makes them think this way. These assumptions are widely shared and long-standing, in both business and academe. … Yet when you actually look at the numbers the story gets more complicated. There is reason to think that some companies are investing too little in the future. As a whole, though, corporate spending on R. & D. has risen steadily over the years, and has stayed relatively constant as a share of G.D.P. and as a share of sales…

A 2011 Deutsche Bank study of more than a thousand companies found that those which spent significantly more on R. & D. than their competitors were more highly valued by investors. And a 2014 study of companies that cut R. & D. spending in order to meet short-term earnings goals found that their stocks underperformed after earnings had been announced—hardly what you’d expect if the market cared only about the short term.

Of course, there’s no shortage of investors who are myopic. But the market, for the most part, isn’t. That’s why companies like Amazon and Tesla and Netflix, whose profits in the present have typically been a tiny fraction of their market caps, have been able to command colossal valuations. It’s why there’s a steady flow of I.P.O.s for companies with small revenues and nonexistent earnings. And it’s why the biotech industry is now valued at more than a trillion dollars, even though many of the firms have yet to bring a single drug to market. None of these things are what you’d expect from a market dominated by short-term considerations.

To the extent that companies are underinvesting in the future, the blame lies not with investors but with executives. The pay of many C.E.O.s is tied to factors like short-term earnings, rather than to longer-term metrics, which naturally fosters myopia. That 2014 study of companies that cut R. & D. spending found that the executives responsible saw their pay rise sharply, even though the stock didn’t. If Clinton really wants to deal with short-termism, she’d be better off targeting the way executive compensation works, instead of the way capital gains are taxed. Ultimately, the solution to short-termism isn’t on Wall Street. It’s in the executive suite.

Posted in Economics | 1 Comment

Paradise of the real

More good stuff from Kevin D. Williamson in Welcome to the Paradise of the Real:

We treat the physical results of capitalism as though they were an inevitability. In 1955, no captain of industry, prince, or potentate could buy a car as good as a Toyota Camry, to say nothing of a 2014 Mustang, the quintessential American Everyman’s car. But who notices the marvel that is a Toyota Camry? In the 1980s, no chairman of the board, president, or prime minister could buy a computer as good as the cheapest one for sale today at Best Buy. In the 1950s, American millionaires did not have access to the quality and variety of food consumed by Americans of relatively modest means today, and the average middle-class household spent a much larger share of its income buying far inferior groceries. Between 1973 and 2008, the average size of an American house increased by more than 50 percent, even as the average number of people living in it declined. Things like swimming pools and air conditioning went from being extravagances for tycoons and movie stars to being common or near-universal. In his heyday, Howard Hughes didn’t have as good a television as you do, and the children of millionaires for generations died from diseases that for your children are at most an inconvenience. As the first 199,746 or so years of human history show, there is no force of nature ensuring that radical material progress happens as it has for the past 250 years. Technological progress does not drive capitalism; capitalism drives technological progress — and most other kinds of progress, too.

None of this should be taken as minimizing the problems faced by the poor, in this or any other country. But let’s stay in the realm of the real for a little while: What is it, in terms of physical goods and services, that we wish to provide for the poor that they do not already have? Their lives often may not be very happy or stable, but the poor do have a great deal of stuff. … Poor families certainly struggle to make ends meet, but in most cases, they are struggling to pay for air conditioning and the cable-TV bill as well as to put food on the table.” They also point out that there’s a strong correlation between having boys in the home and having an Xbox or another gaming system.

In terms of physical goods, what is it that we want the poor to have that they do not? A third or fourth television?

Partly, what elites want is for the poor to have lives and manners more like their own: less Seven-Layer Burrito, more Whole Foods; less screaming at their kids in the Walmart parking lot and more giving them hideous and crippling fits of anxiety about getting into the right pre-kindergarten. Elites want for the poor to behave themselves, to stop being unruly and bumptious, to get over their distasteful enthusiasms, their bitter clinging to God and guns. … A second Xbox is not going to change that very much.

What is it the poor actually need? In general, they do not have access to very good education. But our problem with education is not that we spend insufficiently on it. Rather, the problem is that our K–12 system is organized as something between a monopoly and a cartel. Medicaid, the health-care program for the poor, is designed similarly, and, no surprise, the poor receive inferior health care. If they are not often materially deprived, they are very often materially insecure, with little in the way of savings or assets. Even after a lifetime of full-time work, many poor people have retirement options far inferior to those enjoyed by wealthier people, despite having their paychecks garnished to the tune of 12 percent or so for — this should start seeming familiar — participation in a government-monopoly retirement program.

None of those problems facing the poor — and they are the key problems — is an economic problem. All of them are political problems. For progressives, the obvious solution to that is less economics and more politics. The possibilities of economic division will always be limited by what there is to divide — so many houses, so many cars, so many apples and oranges, so many SweeTarts. Progressives don’t care what’s in the bag, so long as they get to be in charge of it. It is no accident that they talk about the “distribution” of wealth and income as though those things were literally distributed, like candy out of an Easter basket, by the distribution fairy.

For the conservative, people are an asset — in the coldest economic terms, a potentially productive unit of labor. For the progressive, people are a liability — a mouth to be fed, a problem in need of a solution. Understanding that difference of perspective renders understandable the sometimes wildly different views that conservatives and progressives have about things like employment policy. For the conservative, the value of a job is what the worker produces; for the progressive, the value of a job is what the worker is paid.

The farther away we move from the physical economy into the manipulation of symbols through public policy, the more progressive ideas make apparent sense. And symbolism is more comfortable for progressives in general, owing to a disinclination to literally get their hands dirty. There is, for example, no environmentally clean way to produce energy, and the really productive ways of producing energy — like fracking for gas in Pennsylvania — give them the fantods. There is no environmentally clean way to build a man a house, either, or provide him with clean drinking water, or to heat that house, or to grow a crop of wheat, or to make that wheat into bread. If you think you can have health care and electric cars without steel mills and oil refineries, you are mistaken. But actually expanding physical production within our own political boundaries, for instance by building more pipelines to connect petroleum producers with petroleum refiners, scandalizes the progressives. Every smokestack is another Barad-dûr to them — even as they bemoan the loss of “good factory jobs,” the largely mythical former prevalence of which provided their political forebears with a deep bucket of solutions to throw at the problem of potentially bumptious poor people. They detest the economic use of undeveloped lands, whether for energy or timber or grazing cattle — as though beef comes from Trader Joe’s. They refuse to understand that if you want more oranges and apples, you have to plant some trees — maybe even cutting down some other trees to make room for them, or, angels and ministers of grace defend us, harassing a tortoise in the process.

Posted in Economics, Freedom, Politics | Leave a comment

Green tactics rely on fear and exaggeration

From The Green Scare Problem by Matt Ridley in the 8/13/15 WSJ:

Making dire predictions is what environmental groups do for a living, and it’s a competitive market, so they exaggerate. Virtually every environmental threat of the past few decades has been greatly exaggerated at some point. Pesticides were not causing a cancer epidemic, as Rachel Carson claimed in her 1962 book “Silent Spring”; acid rain was not devastating German forests, as the Green Party in that country said in the 1980s; the ozone hole was not making rabbits and salmon blind, as Al Gore warned in the 1990s. Yet taking precautionary action against pesticides, acid rain and ozone thinning proved manageable, so maybe not much harm was done…

The measures needed to decarbonize world energy are going to be vastly more expensive. So we had better be sure that we are not exaggerating the problem.

But it isn’t just that environmental threats have a habit of turning out less bad than feared; it’s that the remedies sometimes prove worse than the disease…  the financial, humanitarian and environmental price of decarbonizing the energy supply is proving much steeper than expected. Despite falling costs of solar panels, the system cost of solar power, including land, transmission, maintenance and nighttime backup, remains high. The environmental impact of wind power—deforestation, killing of birds of prey, mining of rare earth metals—is worse than expected. According to the BP Statistical Review of World Energy, these two sources of power provided, between them, just 1.35% of world energy in 2014, cutting emissions by even less than that.

Indoor air pollution, caused mainly by cooking over wood fires indoors, is the world’s biggest cause of environmental death. It kills an estimated four million people every year, as noted by the nonprofit science news website, SciDev.Net. Getting fossil-fueled electricity and gas to them is the cheapest and quickest way to save their lives. To argue that the increasingly small risk of dangerous climate change many decades hence is something they should be more worried about is positively obscene

In short, the environmental movement has repeatedly denied people access to safer technologies and forced them to rely on dirtier, riskier or more harmful ones. It is adept at exploiting people’s suspicion of anything new.

Posted in Politics | Leave a comment

Advertising the negative, hiding the positive

Glenn Reynolds writes that free markets automatically create and transmit negative information, while socialism hides it:

Nassim Nicholas Taleb recently tweeted: “The free-market system lets you notice the flaws and hides its benefits. All other systems hide the flaws and show the benefits.”

This drew a response: “The most valuable property of the price mechanism is as a reliable mechanism for delivering bad news.” These two statements explain a lot about why socialist systems fail pretty much everywhere but get pretty good press, while capitalism has delivered truly astounding results but is constantly besieged by detractors

(M)arkets deliver the bad news whether you want to hear it or not, but delivering the bad news is not a sign of failure, it is a characteristic of systems that work. When you stub your toe, the neurons in between your foot and your head don’t try to figure out ways not to send the news to your brain. If they did, you’d trip a lot more often. Likewise, in a market, bad decisions show up pretty rapidly: Build a car that nobody wants, and you’re stuck with a bunch of expensive unsold cars; invest in new technologies that don’t work, and you lose a lot of money and have nothing to show for it. These painful consequences mean that people are pretty careful in their investments, at least so long as they’re investing their own money.

Bureaucrats in government do  the opposite, trying to keep their bosses from discovering their mistakes.

Posted in Politics | Leave a comment

Bold & inaccurate predictions

In All the President’s Certitudes, Bret Stephens writes that “a more confident leader wouldn’t tar opponents as stooges and idiots.”

Much has now been written on the merits and demerits of the Iran deal. Not enough has been said about the bald certitude of its principal sponsor, or the naked condescending disdain with which he treats his opponents. Mr. Obama has the swagger of a man who never seems to have encountered a contrary point of view he respected, or come to grips with the limits of his own intelligence, or figured out that facile arguments tend to be weak ones, if for no other reason than that the world is a complicated place, information is never complete and truth is rarely more than partial…

One might have thought that, by now, the president and his advisers would be chastened by experience. Al Qaeda is “on a path to defeat” (2012). Bashar Assad’s “days are numbered” (2011). “If you like your current insurance, you can keep that insurance. Period, end of story” (2009). Russia and the U.S. “are not simply resetting our relationship but also broadening it” (2010). Yemen is an example of a counterterrorist strategy “we have successfully pursued . . . for years” (2014).

And so on—a record of prediction as striking for the boldness of its initial claims as it is for the consistency of its failures. Doesn’t Mr. Obama get this? Haven’t his advisers figured out that they have a credibility issue?

Posted in Politics | Leave a comment

India will soon overtake China as the world’s most populous state

This article in The National Interest wonders if China is soon to experience its demographic doomsday:

By 2022—and probably sooner—India will overtake China to become the world’s most populous state, a status the latter has held for at least three centuries and perhaps for all recorded history.

And once the Chinese nation loses its demographic crown, it will fall fast. .. China in its peak year will have 1.42 billion people. By the end of the century, the country will be just a smidgen over a billion—and very, very gray…

China prospered during its so-called “reform era”—the decades following the Communist Party’s historic Third Plenum of 1978—largely because the country was propelled by the “demographic dividend,” the enormous bulge in the workforce caused by Mao’s and Deng’s population policies.

The dividend has already been pocketed, and a shrinking workforce will be wrenching for China for the rest of this century and beyond…  There is almost a sense of entitlement in China, that because of its population it is destined to sit atop the world.

Will Beijing, before suffering decline, try to undermine India to prevent it from realizing its demographic potential? At the end of last decade a number of Chinese security analysts proposed taking on New Delhi while they still had the upper hand. For instance, in August 2009 Zhan Lue, a Chinese strategist connected to the Ministry of National Defense, suggested Beijing try to break up India into as many as 30 independent states…

For decades, Beijing’s policy toward New Delhi has been driven by a desire to keep a possible peer competitor down. The risk for India is that in coming years the Chinese, due to plunging demography, will become even more insecure and ramp up efforts to target the Indian state.

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Previous posts on China:

The risk from China is not economic – Is China in the midst of a despotic boom-n-bust cycle of “a few decades of despotic order followed by uncontrolled corruption, popular uprisings, disintegration into warlord rule, then conquest or consolidation and the start of a new cycle?

Interesting analogy: China as our Antebellum South –  Does Chinese leadership fear that encirclement and time will undo their system in due course, as did Jefferson Davis and the Confederacy?

Think of the US and add 1 billion peasants – China will grow old before it grows rich.

Posted in Politics | 1 Comment

History books can be historic events

George Will on Robert Conquest (RIP), in How Robert Conquest’ History Book Made History.

History books can be historic events, making history by ending important arguments. They can make it impossible for any intellectually honest person to assert certain propositions that once enjoyed considerable currency among people purporting to care about evidence.

The author of one such book, Robert Conquest, an Englishman who spent many years at Stanford’s Hoover Institution, has died at 98, having outlived the Soviet Union that he helped to kill with information. Historian, poet, journalist, and indefatigable controversialist, Conquest was born when Soviet Russia was, in 1917, and in early adulthood he was a Communist. Then, combining a convert’s zeal and a scholar’s meticulousness, he demolished the doctrine that the Soviet regime was a recognizable variant of the European experience and destined to “convergence” toward Western norms.

Hiss still has a ragtag remnant of defenders, historical illiterates who are disproportionately academics. They often are the last to learn things because they have gone to earth in the groves of academe in order to live in an alternative reality.

Conquest lived to see a current U.S. presidential candidate, a senator, who had chosen, surely as an ideological gesture, to spend his honeymoon in the Soviet Union in 1988. Gulags still functioned, probably including some of the “cold Auschwitzes” in Siberia, described in Conquest’s “Kolyma.” The honeymooner did not mind that in 1988 political prisoners were — as may still be the case — being tortured in psychiatric “hospitals.” Thanks to the unblinking honesty of people like Conquest, the Soviet Union now is such a receding memory that Bernie Sanders’ moral obtuseness — the obverse of Conquest’s character — is considered an amusing eccentricity.

Posted in Politics | 1 Comment