August 21, 2015

Clinton Takes Soft Swipe at "Short-termism"

Gerald Epstein of PERI, U. Mass. Amherst, argues that Clinton does not go far enough by just calling for transparency in "short-termism" because buybacks of corporate stocks should be made illegal
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Gerald Epstein is codirector of the Political Economy Research Institute (PERI) and Professor of Economics. He received his Ph.D. in economics from Princeton University. He has published widely on a variety of progressive economic policy issues, especially in the areas of central banking and international finance, and is the editor or co-editor of six volumes.


Clinton Takes Soft Swipe at SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to the Real News Network. I'm Sharmini Peries coming to you from Baltimore.

In news from the campaign trail for 2016, Democratic candidate Hillary Clinton recently brought the economic issue of short-termism into the [26] presidential campaign. Short-termism is a term used to describe how corporations run to create short-term profit for shareholders at the expense of long-term investment. Clinton's proposal, which her own campaign describes as progressive, would raise capital gains rates to up to six years on top of income bracket taxpayers, and according to her proposal encourage investment in communities that need it the most.

Here to discuss all of this, we are joined by Jerry Epstein. He's a co-director of PERI, Political Economy Research Institute in Amherst, Massachusetts. Thank you so much for joining us, Jerry.

GERALD EPSTEIN, CO-DIRECTOR, PERI: Thanks for having me.

PERIES: So Jerry, tell us first about what short-termism is, and why it's so important for the campaign.

EPSTEIN: Right. So this is an issue, a term that's been around for at least several decades. It refers to the orientation of CEOs of corporations, non-financial and financial corporations both, trying to make the quick buck, making their business decisions based on what will generate short-run returns, primarily to raise the value of their stock prices rather than thinking about the long term, and making the long-term investments that really contribute to economic growth, productivity growth, innovation.

Now, why do CEOs do this? Well, a main reason is that their pay is based on stock options and other things linked to the stock market. So CEOs, if they're able to raise the price of their stocks, they're able to raise their bonuses and their incomes. And this is a big factor explaining the huge increase in inequality in the top 1 percent, or 0.01 percent, whose pay is 300, 400 times the average worker's pay. It also helps to explain why there's been relatively little investment, despite the massive increases in profits and CEO pay over the last several decades.

PERIES: So then why is this advantageous for her, given that most of her support and perhaps dollars is going to come from Wall Street? And of course the CEOs themselves have a lot to say in terms of those contributions. Why is it advantageous for her to address this short-termism?

EPSTEIN: Well, I think this issue has, as I said, been around for a while. It's clearly linked up to this huge issue of growing inequality brought to the fore by the Occupy Wall Street movement and others. So this is a way for her to talk about an issue that's out there even in the business world. Even in the world of financial and non-financial managers who have been decrying this for a long time. So this is a way for her to make a mark, to make a stamp on this issue. But unfortunately the policies that she has proposed really aren't very strong and really won't do a lot about it.

It's good that she's actually getting this back on the agenda, but it's kind of a cheap shot in the sense that what she's proposing isn't going to really do all that much about it.

PERIES: The two main candidates, Clinton as well as Bernie Sanders, are all beginning to address this issue. How do they differ and where would you put your dollars behind?

EPSTEIN: Well this issue of short-termism has been addressed by Bernie Sanders with respect to Wall Street. And in particular he has proposed what's called a financial transactions tax, which is a tax that was first proposed by John Maynard Keynes in the 1930s, and my colleague Bob Pollin has proposed it and analyzed it, Dean Baker. Many others have analyzed it. And this is a tax on short-term trading in stock markets and securities markets that will raise the cost of those kinds of trades, discourage this kind of churning and short-term trading without at the same time discouraging long-term investments.

Now, Bernie Sanders has not actually addressed this broader issue of short-termism with respect to non-financial corporations and CEOs, and indeed it would be a good idea for, for him to do so. Hillary Clinton, in her speech, in decrying what she calls quarterly capitalism--that is, CEOs [of] non-financial corporations who are concerned about the profitability and the stock price over each quarter, as you said in your intro proposed raising the capital gains tax on investments held for less than a year. Try to get CEOs to have a much more long-term orientation.

The problem is that most of her policies really don't have much teeth, as economist Bill Lazonick who is at the University of Massachusetts Lowell has written about. Lazonick has pointed out that one of the big problems with short-termism is the fact that corporations use stock buybacks. That is, they take their profits and rather than reinvesting them in the corporation, increasing training, increasing wages, they use this money to buy back the stock. That's a way of raising the stock price. That's a way of benefiting financial institutions that own stock, benefiting CEOs. And what Hillary Clinton has done is said there should be more transparency about these stock buybacks.

But what Bill Lazonick has proposed is actually making them illegal, these kinds of manipulative short-term buybacks. That kind of policy would be a lot stronger. Of course, the CEOs that support Hillary Clinton would in no way support that, but perhaps that's something that Bernie Sanders can come out in favor of.

PERIES: Jerry, we know that many corporations such as AT&T and Fiverr spend more on buybacks than R and D. Do stock buybacks generate useful value for our economy or not?

EPSTEIN: Well according to Bill Lazonick, who again I think is the top expert on this topic, the answer is no. what they do is rather than spending money on R and D and invest in skill training for workers, it just gives the money back to the rich shareholders and the CEOs by raising the stock price. So what we find is that some of these companies who have massive profits, they go to the government to say, you know, they want the government to invest in research and development and so forth. But in fact the corporations themselves could do that with their own profits, but instead of doing that they're giving it back to the shareholders and manipulating their stock prices so the CEOs can make a killing.

So no, these kinds of buybacks in most cases have very little social benefit. It would be better for corporations to use this money to raise productivity and raise wages and skills for workers.

PERIES: Jerry Epstein, we value the contribution you are making to this discussion on the 2016 campaign and the economy, and we hope that you join us again very soon.

EPSTEIN: Thank you, I certainly will.

PERIES: And thank you for joining us on the Real News Network.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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