ELEVEN

CAPITALISM’S SHORT-TERM ORIENTATION

Businesses operating in a capitalist market economy need to do dual planning. They must keep their eye on the short-term picture, making sure to achieve their growth and profit objectives. And they must implement their long-run investment plan for profitability, growth, and sustainability.

Both privately held enterprises and public utilities can do well with dual planning. Privately held enterprises are usually family-owned, and the plan is to pass on the business to children and grandchildren. The family avoids issuing public stock and therefore does not owe the public any quarterly or annual report on the company’s revenue and profits. The family company is free to invest heavily for long-term success and may even lose money for some quarters in the short run.

The same can be said about public utilities. Gas, electric, and water utilities are under public scrutiny and regulation. They are set up to be currently profitable and investment-oriented toward the future. They must grow their facilities and output to meet future demand. Their profitability goal is agreed on by the regulators to be high enough to satisfy current investors and yet deep enough to ensure long-term growth.

Publicly traded companies, by contrast, have a distinct bias toward short-term planning and execution. Presumably, they have an understanding of investors’ expectations for the coming period. If the corporation fails to meet their expectations, many investors are likely to sell their stock and move their money into more profitable businesses. Some investors may stay with a company during one or two disappointing years, but not much longer.

The management of a publicly traded company needs to share with its investors what it plans to achieve in the current period. A shortfall at the end of the period may lead the financial community to downgrade the company’s stock and change its recommendation from a “buy” or “hold” to a “sell” position. The company will find its borrowing costs starting to rise. Management will do almost anything to avoid missing its targets. Senior executives are tempted to over-report sales in the present quarter, although there are laws against doing so. They may under-report current sales in good times in order to report these sales in the next quarter. Management wants to show a picture of smooth sales and profit growth rather than a picture of deficits and spikes from quarter to quarter.

The other problem is that stock markets are increasingly attracting investors and speculators who jump in and out of the market on short notice. So capital, instead of moving into long-term investment, is becoming more oriented toward short-term gains, leaving less capital available for long-term investment.

ON THE ISSUE OF LONG-TERM INVESTMENT

How much money can publicly traded companies plan to spend to meet their long-run investment needs? Clearly a company puts the first priority on achieving its short-term target revenue and profits. Hopefully, it will gain enough surplus income to invest in new product development and needed infrastructure. If cash is low for long-term investment, the company has the option of borrowing more money by issuing additional stocks and bonds. But long-term investment is clearly at the mercy of the company’s short-term profit performance.

Capitalism’s success in a country rides heavily on the quality of the country’s physical infrastructure. Sadly, U.S. economic growth is terribly handicapped by the rusty state of our infrastructure.

The American Society of Civil Engineers (ASCE) issued an infrastructure report card in 2013. Patrick Natale, the ASCE executive director, lamented: “We really haven’t had the leadership or will to take action on it. The bottom line is that a failing infrastructure cannot support a thriving economy.”¹

The ASCE gave grades to the condition of fifteen U.S. infrastructure entities. For example, roads got a D–, drinking water a D–, levees a D–, the national power grid a D+, rails a C–, bridges a C, and solid waste treatment got the highest grade, a C+. The ASCE estimates that the government and business would need to invest $2.2 trillion over five years simply to maintain the existing quality of our infrastructure. But under the current budget, the spending will be less than half that amount. Natale adds that “by underinvesting, the price tag escalates.”

Several countries get much better grades, according to Norman F. Anderson, president and CEO of CG/LA Infrastructure. His survey showed that “[the United States’s] ability to develop infrastructure projects [is] well below those of Brazil, India, China, and other countries with which we compete for scarce infrastructure dollars and expertise.”²

The irony is that there is plenty of infrastructure construction occurring all around the world, but not in the United States. The only capital investment made in the U.S. on infrastructure that seems to pay its way is digital infrastructure, because there is service revenue from customers. But digital infrastructure is only a small fraction of the renewed infrastructure that the United States needs.

The late professor Hyman P. Minsky advanced the thesis that the tendency of American capitalism to focus on maximizing short-term profits has exacerbated the inherent instability of investment demand.³ Speculators are drawn into financing long-term projects, but delays and other concerns eventually lead them to cash out, which introduces financial instability and eventually panic selling. Long-term corporate growth is sacrificed to short-term survivalist strategies. Growing financial fragility has had devastating consequences for both the West and the emerging economies.

MAINTAINING AND IMPROVING INFRASTRUCTURE

Let’s remember the benefits that infrastructure contributes to an economy. High-level infrastructure lowers the costs of supply and gives greater competitive accessibility to more productive enterprises. Spending on infrastructure can increase employment, facilitate enterprise migration, integrate national regions, and support urban economic productivity and livability.

How is infrastructure to be maintained and improved in a short-term focused enterprise economy? Much of the infrastructure initiatives come from government at the local, state, and national level. Roads, schools, and bridges are usually the responsibility of cities and states. Unfortunately, cities and states are suffering from a budget crunch and many cannot push their capital borrowing any higher. The federal government, which needs to take care of fixing the electricity grid, preventing a cyberattack, improving our ports, reconstructing infrastructure lost in natural disasters, and so on, is handicapped by a dysfunctional political system that says no to any budget increases. Add the fact that in a democracy, elected officials can be voted out in as little as two years, which means they may be even less interested in supporting long-term projects.

Some corporations are in a good position to get the financing they need to enable large-scale investments. Many businesses form public-private partnerships (PPPs) to build or rebuild needed infrastructures. The PPPs will cover the cost of interest and capital repayment through public revenues, subsidies, and public debt.

Not only will improved infrastructure increase the nation’s productivity, but the projects themselves would produce badly needed jobs. President Obama has pleaded for congressional cooperation to improve our infrastructure and create jobs, but current partisan politics has prevented it from happening.

In the past, the U.S. government managed to launch bold infrastructure projects. Consider the Panama Canal, the cross-continental railroad system, the cross-continental highways, the Tennessee Valley Authority (TVA), and other major projects. But today, one political side loudly tells everyone government is bad, government is our major problem, and government should shrink (except for the military). Meanwhile, our competitors, especially China, can develop dozens of new skyscrapers, ports, airports, and even new cities in the blink of an eye.

Consider the following example. The city of Suzhou in China decided to industrialize in the 1980s and build the necessary infrastructure. Today the Suzhou Industrial Park has grown to 288 square kilometers with several hundred multinational companies located at the park, including Siemens, Emerson, Bosch, Panasonic, GE, Bayer, Johnson & Johnson, Nokia, and Hydro, as well as many leading Chinese companies. There are over 15,000 foreign-invested companies in Suzhou Industrial Park. The planners developed a higher education zone within the park. Today, 40 Chinese and international universities are established within the education zone and supply tremendous talent to the companies within the park. This is what big-scale infrastructure planning can do.

Can an economy whose enterprises care primarily about quarterly profits and prefer to cap or reduce government spending nevertheless find a way to attract the capital it needs to repair the country’s infrastructure and gain all the benefits flowing from high-level infrastructure? This is the $64 billion question.

The way CEOs are currently compensated has a lot to do with reinforcing companies’ short-run profit obsession. CEOs receive stock options in their pay package to incentivize them to increase the value of their company’s stock. As a result, they concentrate on building current revenue and holding down current costs. But the true measure of their contribution is whether their long-term projects will yield a rate of return higher than their cost of capital. In many cases, company stock prices have risen while capital projects have yielded a negative rate of return. This will eventually cause problems when the company can no longer pay dividends and its stock price falls. In addition, the company stock price often rises because of a rise in the whole market, which has nothing at all to do with the CEO’s performance. Company boards need a better measure of the real value added by the CEO, not just whether the current stock price has appreciated.

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Fortunately, some corporations have been able to avoid the excessive preoccupation with maximizing current shareholder wealth and do what is right to serve their stakeholders’ long-term interests. As examples:

• Jeff Bezos of Amazon has held firm to his vision of making decisions that would benefit customers’ interests, even against criticism that he could make more money in the short run.
• Jim Sinegal of Costco said no to financial advisers who said the company should raise its prices to make more money. He is not
• interested in trading short-term profit for long-term growth and profitability.
• Howard Schultz of Starbucks is obsessive about delivering an outstanding customer experience and does not give in to short-term profit making.
• Richard Branson of the Virgin Group keeps his eye on increasing customer well-being through offering value, fun, and innovation.
• Acting Ikea President Rob Olson announced in 2014 that the furniture company will raise its average minimum wage from $9.17 an hour to $10.76 starting January 1, 2015. This 17 percent increase will go to the lower-paid half of Ikea’s 11,000 employees at its thirty-eight U.S. stores. “It’s driven from our vision of wanting to create a better everyday life for our coworkers,” said Olson. This voluntary raise will also reduce employee turnover and bolster recruitment. Ikea has no plans to raise prices, cut staff, or reduce hiring.⁴

These companies are focused on building long-term enduring relationships with their customers, employees, shareholders, and the wider community, and are not fooled by short-term profit maximization. They provide evidence that high-pay companies can also be high-profit companies.