Hillary’s bold, new idea

One thing going for Hillary Clinton’s struggling campaign is that she is alert to new ideas. Email scandals continue to rumble. Her mediocrity on the stump worries supporters — no Bill Clinton or Barack Obama is she. But even detractors concede her appetite for new thinking. Her bold idea is to take on economic short-termism.
The topic’s wonkishness ensures it will be drowned out by Donald Trump’s shenanigans. Yet, it ought to be taken seriously.
The odds are that Hillary is the next president, which will put her in a good position to wage war on “quarterly capitalism”, as she calls it. She might even win victories. Ending the tyranny of quarterly earnings is an idea that is on the march.
The case for reforming shareholder capitalism is strong. The level of US investment is at its lowest since 1947.
Last year, according to Goldman Sachs, S&P 500 companies spent more than $500 billion on share buybacks. This year it is expected to hit $600 billion.
The longer this cycle continues, the more puzzling the investment drought becomes. With healthy profits and a near zero cost of capital, now ought to be the time to lay down plans for the future. Today’s investments yield tomorrow’s dividends.
But listed companies are almost uniformly opting for dividends today. For every dollar the top US public companies spend on investment, they are returning eight or nine dollars to shareholders.
Corporate America is stuck in a self-fulfilling pessimism. As long as it believes US growth will not exceed roughly two per cent a year, it will not bet on future expansion, which delivers what it fears. In an ideal world, the US public sector would compensate for private sector saving by running fiscal deficits. But that is a political impossibility.
The merit of Hillary’s idea is that she would try to kindle investors’ animal spirits without expanding government. Today’s incentives are hopelessly biased towards boosting the short-term share price.
That is how business chiefs are rewarded. Hillary is right to point out that America is short-changed because of it.
But her cure is no match for her diagnosis. She would introduce a tapered capital gains tax that would fall with the duration of the investment. Those who held their stake for at least six years would pay a lower capital gains tax of 20 per cent.
Those who sold within two years would pay almost double. It is doubtful such tinkering would be enough to alter investors’ time horizons. The lure of a bird in the hand would still outweigh two in the bush.
Many big investors, including pension funds, are already exempt from taxation. Nor is her proposal likely to deter shareholder activists, whose gains from holding C-suites to ransom will outweigh any new penalties. As long as chief executives’ compensation packages are set by the share price, little is likely to change.
Yet, Hillary is venturing where others fear to tread. Quarterly capitalism was king during Bill Clinton’s administration in the 1990s. It still rules on the right. The chief mark of today’s Republican field is its allergy to new ideas. With the modest exception of Marco Rubio, who has suffered for it, every candidate is proposing big headline tax cuts — and little else. It is as if the last decade did not happen.
The GOP is as much in the grip of 1980s supply-side thinking as ever. The economist Arthur Laffer, who popularised the notion that tax cuts always pay for themselves, remains the patron saint of Republican hopefuls. Anything that contradicts his edict is taboo.
This is both bad economics and bad politics. At a time of record inequality and stagnant wages, bigger tax cuts for high earners in 2016 is likely to be a vote loser. T
o Hillary’s left, the big idea is to break up the “too big to fail” banks and punish Wall Street for its crimes. So far, Hillary has resisted such populism.
If Bernie Sanders, the socialist from Vermont, continues to poll well in Iowa, that might change. But if the size of banks had been the cause of the 2008 meltdown, Canada — with just a handful of big ones — would have fared worse than the US. The politics of breaking up Wall Street electrifies Democratic primary voters but the economics is unpersuasive.
The advantage of Hillary’s platform is that it is both accurate and popular. She is also in good company. When critics accuse her of class warfare, she can refer them to similar points made by Larry Fink, head of BlackRock, the largest money manager in the world. Dominic Barton, the managing director of McKinsey, the world’s best-known consultancy, is also on board. He invented the term quarterly capitalism.
Many economists, including conservative think-tankers on a hunt for a candidate bold enough to agree with them, have also signed up. Their aim is not to soak the rich but to repair capitalism.
Can such ideas win Hillary the White House? The next US election will be fought on the economy. For the time being, Hillary has the policy field to herself. The left lacks a plausible champion. The right is forming a circular firing squad.
The door is wide open to original thinking. Whatever her flaws as a candidate, Hillary’s instinct is to walk through it.