Short-termism: The False Debate.

Andrew Smithers
London, 1st February 2021

This paper was submitted to The Harvard Review, but was not published:

The Harvard Business Review January–February 2021 includes an article by Lucian A. Bebchuk Don’t Let the Short-Termism Bogeyman Scare You in which he claims that “articles…decrying the perils of short-termism…are long on alarming rhetoric and short on empirical evidence or economic logic… short-termism has not produced the predicted deterioration and decline.” He assumes that “A major premise of short-termism worriers is that markets systematically undervalue long-term investments, which are consequently not fully reflected in stock prices” and seeks to show that this is inconsistent with the evidence.

If the case against short-termism involved the stock market’s reaction, its validity could be decided by examining stock market returns and Professor Bebchuk’s claims would be fully supported. He seems also correct in assuming that the vast majority of those arguing against short-termism assume the “major premise” which he ascribes to them. Nonetheless he is in error when he claims that there is no evidence of economic damage, as short-termism has produced a marked slowdown in US (and UK) growth. I recently set out the evidence in Productivity and the Bonus Culture and the references that follow are to the Figures and page numbers in that book.

In the 1990s there was a major change in the amount and way that corporate managements were paid (Figure 41 page 74). This altered their behaviour, as it was designed to do, but an unintended and unexpected consequence was a pronounced fall in fixed tangible investment after 2000 (Figure 10 page 29). This in turn led to the marked slowdown in the growth of the fixed produced capital stock (Figure 5 page 26), and thus in the growth potential of the economy, as the ratio of the capital stock to output is stationary (Figure 6 page 27). The result was the well-known slowdown in the rate at which labour productivity improved (Figure 3 page 24). That these were the consequence of the changes in corporate behaviour that followed the new approach to management remuneration is shown by the altered response of corporate investment to returns on equity (RoE) (Figure 39 page 70 with the change in the correlations shown in Table 12 page 71) and to the level of corporation tax (Figure 40 page 71 with the change in correlations shown in Table 13 page 72).

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Short-termism: The False Debate