Sen. Elizabeth Warren, D-Mass., has some visions of how she’d like society to be. It’s fine, of course, for a politician to have thoughts about how to better the world. But plans about what should be should always have to be based upon what is. And that leads me to former Treasury Secretary Larry Summers schooling the good senator from Massachusetts in a column last week.
Warren is insistent that American business is just all too short-termist. So much so that she’s drafted the Accountable Capitalism Act (OK, floated the idea as part of the politicking up to the midterm elections) to make things more long-term. This approach has a number of problems. One of which is that if a company does pay out its profits, that doesn’t mean the money’s lost to the economy, just that someone else now assumes the decision about whether to invest or spend it. Conceptually all companies paying all their profits in dividends and buybacks could make no difference whatsoever to the general level of investment in the economy.
But apart from the theoretical problems with Warren’s idea is a point Summers made in the Financial Times last week, though he didn’t mention her by name. The senator’s analysis of where we are now is not a reflection of reality. If stock markets only valued short-term cash flows and profits, not long-term investment, then how on earth did Amazon get financed? Why do we have all these unicorns around with billion-dollar valuations, tiny cash flows, and, for most of them, still gargantuan losses? We can even look at that idea of quarterly reporting. We all generally agree that private equity and private companies look longer-term than the public markets — or at least that’s a claim Warren and the like make. But those private companies all want detailed monthly reports on corporate activity. How demanding monthly information is more long-term than demanding quarterly information? That’s unknown.
Summers notes how reality directly contradicts that short-termist argument: “[M]any studies have now confirmed that companies where cash flows are highest relative to stock prices earn the highest returns. If, as the short-termism thesis suggests, these companies were over-valued, one would expect them to earn abnormally low returns rather than unusually high ones.”
There’s nothing at all wrong with having a vision of how things should be. We can all examine and debate that vision. I’m obviously going to disagree with anything Warren proposes, including uses of the word “and” and “the.” You might be more fairminded about these things. But can we all agree on this one rather important point? As we begin to chart the path to the achievement, we have to start from where we actually are, meaning that anyone’s analysis of our current position that’s at odds with observable reality has to be rejected.
American capitalism isn’t short-termist, and that’s why Warren’s assertion fails.
Tim Worstall (@worstall) is a contributor to the Washington Examiner‘s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
