Friday, August 14, 2015

Imposing "Long-Termism" on Tradable Sectors? Big Mistake

More specialists to the rescue? Apparently that's still the hot ticket. Especially given the fact discussions in recent years re decentralized economic possibilities, have gone nowhere. A short FT article from Larry Summers, "Corporate long-termism is no panacea - but it is a start" suggests that what is needed are
...trusted, tough minded investors that will support strong management teams 
As compared to who...what? He continues:
There are not many wholly new areas to open up in economic policy. But in recent months there has been a wave of innovative proposals directed at improving economic performance in general, and middle class incomes in particular - not through government actions but through mandates or incentives to change business decision making. The goal is for companies and shareholders to operate with longer horizons and to more generously share the fruits of their corporate success with their workers customers and other stakeholders.
When the "benevolent wisdom" of one's political leaders isn't sufficient for mutually shared prosperity, the benevolent wisdom of "tough minded investors" will suffice, I suppose. In this well meaning but misguided article, one also finds "mandates to level the playing field". Notice also the stated (good?) intention of improving middle class incomes, as opposed to seeking more sustainable economic flows overall. At least Summers was honest. But further mandates for business directives is not what one wants to do even more of.

The recent mandates that already exist in terms of legal and financial requirements, are making business start ups an endangered species in many areas of the U.S. This leaves job seekers everywhere overly reliant on city markets and older firms for most job opportunities. There needs to be more accessible forms of business formation - not less - so that regions with limited access to international markets will once again have a chance to participate. Is this growing desire to "shore up" the middle class going to mean even more threadbare economic regions? Why not generate simpler and more accessible business formation, instead?

Also, much depends on the resources at stake. For the most part tradable goods sectors are already well structured and capable of benefiting from economies of scale. Even so, tradable goods production has to quickly respond to changes in marketplace conditions around the world. Not every bet that CEOs make can turn out well, as should be all too clear. Consequently, tradable sectors are not well positioned to make broad distributional promises over the long run, when marketplace circumstance can sometimes change in an instant. Timing for this sort of discussion on Summer's part must seem odd indeed, for CEOs of commodities whose prices have been gradually declining.

None of this is to suggest that long term investment issues aren't a problem, especially with growing concerns regarding Social Security and Medicare in the U.S. However, the main issues are mostly due to the lack of flexibility for investment options (time, money and other resources) in non tradables sectors. Where long range outcomes matter most - if indeed discussions about long-termism actually apply - are the places where people work and live.

Local economies have good reason to take part in long term planning, because doing so would provide strategies for not just the investment of resource capacity, but also local educational strategies. Non tradable business formation needs a chance to evolve into decentralized forms of organization, which are capable of including more participants at the outset.

Fortunately I wrote most of this post, before reading John Cochrane's response to Larry Summer's article. It was definitely worth the wait, hence I'm hard pressed to choose quotes to include. Here goes:
But just who other than the government is going to mandate mandates, incentivize incentives, alter behaviors, impose "robust minimum wages," enact the tax incentives to spur profits sharing, do the regulating aspects of pay and so on? 
Oh dear, it just gets better. Cochrane includes the quote where Summers waxes so eloquently about the "cadre of trusted, tough minded investors" that one could easily fall into a swoon. Cochrane responds:
Where is this cadre (!) of investors going to come from? How are these wise people going to impose the long list of things Larry recommends that only governments can do, including minimum wages, tax incentive, and pay regulation? Just who if not the government is this "crucial challenge" for?
Before all the Mars creatures show up to bail us out - or at least to help governments "help" businesses, maybe it's time for mere earth mortals to have a place at the table for long term economic growth. Governments will doubtless continue to help themselves. Tradables sectors should still be able to do the same, in spite of a downgraded growth forecast around the world.  On the other hand...continued marketplace success on the part of non tradables sectors? Not so much. In this instance, give people the chance to learn how to take care of themselves. Granted, it's not something that governments are willing to do. Just the same - for the sake of long term growth and a more prosperous world - it's time to try.

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