The New York Times’ DealBook newsletter today is almost entirely devoted to an essay on “stakeholder” capitalism, written by Dorothy Lund, a law professor at the University of Southern California, and Leo Strine Jr., former chief justice of the Delaware Supreme Court. This bit from their piece pretty well encapsulates the argument: “It is more important than ever to understand the connection between the poor policy choices we have made and the reasons for yet another enormous corporate bailout.”
By “poor policy choices,” Lund and Strine do not mean Washington’s failure to ready the nation for a pandemic despite several dangerous global outbreaks from the past two decades: SARS in 2004, H1N1 in 2009, and the Ebola outbreak in 2015. They do not mean Washington’s failure to build and maintain a fully and properly stocked reserve of all the things we might have found helpful in the current pandemic: ventilators, masks, medicines. They do not mean the disbanding of the National Security Council’s pandemic response team in May 2018. They do not mean Washington’s failure to develop a COVID-19 diagnostic test that could have been mass produced and distributed so government could have better tracked the outbreak and earlier imposed quarantine measures. They do not mean America’s continued inability to do the level of testing and tracking that would facilitate a ASAP reopening of the US economy.
No, the “poor policy choices” Lund and Strine are referring to are all those buybacks and dividends Corporate America has been sending to shareholders. “American corporations should have had substantial cash reserves to sustain them during a short period without revenue.”
Really? Big business in the US should have planned for an economic pause causing perhaps a 50 percent (annualized) decline in real GDP along with an unemployment rate of 20 percent or more? That seems like an odd expectation when the premise of the shareholder-driven “short-termism” idea espoused by the authors and other such advocates is that business — under pressure from activist investors — has been spending too little on long-term investments and workers, not saving too little in a mega-rainy day fund. The whole earnest essay is an awkward and revisionist effort to show how this pandemic supports an existing policy agenda. Then there’s the reality that governments in advanced economies around the world are having to economically support their private sector. It’s not just Washington.
And even taken on its own terms, the stakeholder/short-termism thesis is unimpressive. A 2018 Federal Reserve study that compared public company investment behavior to that of private firms found public stock markets actually “facilitate greater investment” overall. US corporate research-and-development spending has been at historically high levels (although there is still room for improvement) as a share of GDP and exceeds that of EU firms. “Accountable capitalism” featuring greater worker participation in corporate decisions making seems to be floundering in Germany, often held up as the model. The link between productivity and wages remains strong. Moreover, advocates seem to deeply misunderstand the nature of the modern economy and how it rewards companies that make effective use of intangible investments.
If the coronavirus pandemic illustrates the dangers of how short-term thinking is bad for workers and business, it’s short-term thinking by government, not Corporate America.