WE keep being lectured about the effects of short-termism, sometimes rightly so. But nobody ever rails against an equally pernicious problem: long-termism, when decisions that should be taken now keep being delayed.
Many zombie firms have been kept alive for years thanks to cheap money and banks’ leniency, yet show no sign of ever healing. Capital and labour remain misallocated, dodgy debt clogs up lenders’ balance sheets, and the economy cannot readjust. Many government policies promote dithering and weaken the economy’s ability to reinvent itself.
Countries with restrictions on hostile takeovers also suffer from long-termism – bad CEOs are not removed, good companies cannot expand. Bans on short-selling or rules that limit the ability of prices to react to supply and demand or to new information have a similarly deleterious effect. Strict labour market laws mean that unneeded staff are kept on too long, damaging firms and individuals alike and reducing productivity. Politicians love to slow change down, bailing out failed industries or useless practices long after their sell by date.
The private sector undoubtedly suffers from short-termism – it may be impossible to gain financing for a genuinely excellent innovation. Some backers lose patience too quickly. Some landlords hang on too long, delaying the regeneration of an area. No system is perfect. But it is hard for officials to predict which project would succeed if only more time were given to it – and very easy for assistance to mutate into an equally lethal case of long-termism.
There is one solution, and that is to ensure the existence of far more, varied and competing sources of finance, to maximise the chance of good ideas being given a chance. Sadly, while the Labour party-commissioned review into short-termism conducted by Sir George Cox contains some great proposals, it also backs misguided ones.
First, the good stuff: we must remove the bias in the tax system in favour of debt. Quarterly reporting shouldn’t be compulsory. There remains a lack of a “funding escalator” to carry UK ventures from start-up to global giant. Stamp duty could also be abolished on Aim-listed shares (though why not for all firms?).
Other ideas aren’t as good. He points to falling business investment as proof of short-termism – but reduced manufacturing as a share of GDP, and a collapse in its profitability, could just as easily be the reason. There may be too little R&D – but the causes are complex. Simply blaming short-termism doesn’t explain much. More state spending – unaffordable and politicised – isn’t the answer.
His proposal that all shareholders who buy shares after a takeover bid is announced would enjoy no voting rights would undermine property rights. There would suddenly be two categories of shares. Anybody seeking to sell their stake during the deal, for whatever reason, would find markets to be less liquid. It would make a change of ownership far harder, and promote excessive long-termism.
He wants to hike capital gains tax on shares held for under a year from 28 per cent to 50 per cent, and taper the rate to 10 per cent by year 10; dividend tax would also be tapered to zero in the same way. Yet such moves would encourage investors to hold on to shares for far too long. They would make it difficult for them to change their minds, or react to new information, and make prices less informative. Equity investing would become far less attractive, and starve firms of funds. Short-termism is a problem – but the extreme long-termism many of these policies would promote would be even more damaging.
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