I've felt for a long time that the current business climate, which punishes rather than rewards long-term research investments by companies, is misguided. When most stock is owned and traded by institutional investors and large funds who don't have any interest in holding particular companies for the long term, and when executive compensation massively overvalues year-over-year growth (because we all know that 40% annual growth in cell phone sales is sustainable forever, right? There's no such thing as market saturation, is there?), you end up where long-term investment is viewed by company boards as a misuse of resources. This article in Business Week makes some interesting arguments on ways to try and fix this. Unfortunately I think most of these ideas are not very compelling or likely. Norm Augustine had an interesting suggestion: scale the capital gains tax rate inversely with the amount of time one owns a stock. If someone holds a stock less than a year, tax the capital gains at 90%. If they own the stock 10 years or more, tax the capital gains at nearly 0%. Interpolate appropriately. The idea here is to set up a system that incentivizes long-term investment, which in turn is more likely to support industrial research. Hard to see how such an overhaul would ever get passed in Congress, though. I imagine the financial industry would crush it like a bug, since anything that slows down trading is viewed as interference in the free market, or, more cynically, interference in their enormous transaction fee profits.
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So Doug,
I always hear people say that the current climate favors the short term, and I understand why. But clearly that wasn't always the case. As a fairly young student, I don't know what it was like back in the heyday of Bell Labs, etc. So I was wondering if you could explain how it was different in the past and what policies led companies to favor long term R&D back then? Or is not any particular policy, but just that people approach investment differently today?
Thanks.
I think it's a combination of things. First, the companies that traditionally went in for long-term investment tended to be accidental monopolies or near-monopolies, such as Bell Telephone, IBM, Ford, GE, Westinghouse, etc. Companies with some effectively guaranteed longevity and market supremacy presumably felt a bit more free to invest in areas that did not have immediate short-term payoff. Second, if you look at how money is invested in the stock market now in the days of IRAs, 401Ks, 403Bs, 529 plans, and giant pension funds, it really is different than it was when my grandparents would buy AT&T stock intending to hold it for 20 years. Someone more versed in econ could give real facts and figures about this. As they say on wikipedia, [citation needed].
Hey Doug,
I don't see that Augustine suggestion in the Business Week story you linked. Am I missing something?
Also, we already differentiate to a degree between short-term (less than a year) and long-term capital gains, just not to the extreme degree you describe. We've also made some big changes in the way capital gains are treated, so I don't know why it couldn't happen again.
Hi Don - You didn't miss anything; the Norm Augustine idea is separate from (but related to) the stuff discussed in the Business Week article. Perhaps my pessimism about capital gains changes is unfounded, though a path forward is hard for me to see right now.
It's hard for me to see, too, given the current infantile political climate. But I keep hoping (with no evidence) that that's a temporary phenomenon.
I've added some further thoughts about industrial research over at my blog.
By and large, the financial industry is a parasite on society. Consider the stock market: companies report data perhaps once per month. That's the rate of information entering the system.
So, then, what good does it do for the price of a company to change on a second-by-second basis? It's just noise.
"Parasite" is how I think about it, too.
But may be it's damping?
No investor needs to know the stock price every minute, or even every day. All of the "news" is just for speculators, and the reason it's covered so widely is that it takes no work to report the numbers--like the sports scores.
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