The Long and Short Of It

The indispensable Don Boudreaux riffs on a comment here at The Big Questions to observe that one cannot consistently argue that both a) Citizen’s United gives outsized political power to corporations and b) corporations need to be nudged out of their excessive focus on quarterly statements. Political contributions, after all, do not ordinarily pay off within one or two quarters.

One can, I think, maneuver around Don’s point by maintaining that corporations focus on both the short and long runs, putting too much emphasis on the short run, but still putting enough emphasis on the long run to make it worth manipulating the political system. But that’s a tricky maneuver, and kudos to Don for pointing out that there’s at least some serious tension here.

(I’ll take the opportunity to add that Dave H., the commenter to whom Don is responding, has been a great asset to our comments section. I often disagree with him, but I’m sure glad to have him around.)

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16 Responses to “The Long and Short Of It”


  1. 1 1 Doctor Memory

    Political contributions, after all, do not ordinarily pay off within one or two quarters.

    Tell that to Goldman Sachs.

    And this is not just snark: I suspect strongly (and indeed expect better-learned contributors here to immediately school me) that if there were some way to model this, the “payoff” from political contributions would not look anything like a normal curve, and would in fact be bimodal. Some contributions are about long-term relationships obviously, but a change in political leadership at the right moment can have substantial and immediate short-term payoffs: anyone holding pre-IPO options in Palantir has probably just had a very good day, to say nothing of the coal and private prison industries.

  2. 2 2 Will A

    In general, I find the following hard to argue:

    a) X and b) corporations need to be nudged out of their excessive focus on quarterly statements.

    Apple, Google, Exxon, etc. seem to be companies look toward the long term. They also seem to be involved in trying new products/technologies to help their business.

  3. 3 3 Steve Landsburg

    Doctor Memory: anyone holding pre-IPO options in Palantir has probably just had a very good day, to say nothing of the coal and private prison industries. But the political contributions that might have led to these good days were made, in most cases, substantially more than a quarter ago.

  4. 4 4 Doctor Memory

    I’m not sure how substantially. Trump’s operation was notoriously threadbare at traditional fundraising until he hired Mnuchin. Thiel had obviously climbed on the train early, but he was famously an outlier.

  5. 5 5 Scott H.

    Doctor Memory @ 1

    Very interesting. My mental model of political corruption involves purchasing allegiance, protection, and influence. Yours seems to revolve around the ROI of purchasing victory. My corruption centers on influencing the candidate, yours the electorate.

    My gut tells me that the efficiency of markets should play a role in mitigating the kind of corruption you are talking about, but I haven’t gotten there yet. Plus I’m starting to think that any markets theory I finally do arrive at might end up mitigating the kind of corruption I’m talking about as well.

  6. 6 6 Dave H.

    As you might expect, I don’t find the mental gymnastics all that difficult at all.

    I have no trouble with the idea that half of the 0.1% are frantically cutting jobs to create a false impression of short-term profitability, while the other half are tossing money around like Scott Disick tipping at a Vegas nightclub. These are simply two different groups making two different kind of bets. One of them is trying to impress institutional investors (and their own Board) while the other is trying (and succeeding) to buy influence. This is as obvious as the observation that Google is not in the Defense industry, and United Technologies doesn’t sell web advertising.

    First, though let’s revisit the Citizens United Decision. Justice Kennedy, in the majority opinion, stated that our nation’s interest in preventing the attempted bribery of government is “overridden” by the right of a corporation to make expenditures in elections. I am not the only legal theorist that considers this to be “legislating from the Bench”. Fred Wertheimer stated flatly that this was not so much a novel interpretation of the Constitution, as a completely new definition of “corruption”. The old definition (developed in Buckley V. Valeo back in 1976) was completely abandoned without explanation or comment. The new definition now requires that there is a specific quid pro quo. As Chief Justice Roberts now contends (for example in the McCutcheon in 2014), unless there is a direct exchange of an official act for money, then there has been no bribery.

    As a result of this decision, Super PACs were born, including “individual candidate” Super PACS which raise and spend unlimited contributions, support only one candidate and are controlled by the associates of that candidate. These PACs have only one purpose: to circumvent the $2700 limit on contributions (that was originally designed to stop corruption.)

    Since that decision, roughly $500 million in secret contributions flowed into federal elections through nonprofit corporations. If they were not trying to purchase influence, then why would they do it? If a series of strongly worded letters would have had the same effect, then why wouldn’t they do that instead? In 2012, Sheldon Adelson spent $150 million to advance his views. I donated roughly $190 (plus a couple of days knocking on doors) to advance mine. Who do you suppose got more influence?

    In 2014, dark money expenditures topped $1 billion. We don’t know for a fact that this is coming from corporations, because the actual source is completely hidden.

    According to Justice Kennedy, neither would not cause the public to lose faith in the election system, but he was simply incorrect. Roughly 85% of all citizens believe that corporations were able to purchase outsize influence in exchange for their contributions, and more than 50% believe that voters are not given enough information to assess the source of advertising.

    For example, “Citizens for Better Medicare” was funded by the pharmaceutical industry. Even more blatantly: The Wisconsin governor’s campaign advertised dark money as a feature, not a bug. Deep-pocketed donors were urged to give to the Wisconsin Club for Growth because it “can accept Corporate and Personal donations without limitations and no donors’ disclosure.”

    Some of what big donors get is immediate: The government is already looking to privatize Medicare and Social Security. The payoff to big donors will be so many times bigger than the investment that the ROI boggles the mind. But even in cases where the payoff is not immediate, the long term effect still undermines Democracy. As Martin Gilens showed in his book, when rich people hold different opinions about public policy from any other group, politicians almost always agree with the rich.

    It has always been this way, of course, but Gilens demonstrated that the influence of the rich is steadily increasing, and the influence of the middle class is steadily decreasing. The influence of the poor was never great, but it is about as close to zero as ever before in our history. Fully half of all members of Congress become lobbyists when they leave office. They are usually not leaving to lobby on behalf of poor people.

    Into this argument, Hillary Clinton introduced her July 2015 speech on “quarterly capitalism”. She was taking aim at the whole process, but the most obvious target was Google, which had beat its quarterly advertising revenue by 11%, and seen its stock price jump by 16% in just a few days. The same month, Amazon had announced one of their first quarterly profits, and seen its stock price jump by more than 18%. Similarly iPhone sales had only grown by 38% (instead of the expected 41%), and watched their market capitalization decline by $60 billion in three days.

    And those three obvious examples are actually the best examples: All three have shown repeatedly that they are willing to ignore quarterly trends: Google and Amazon because their stock is tightly controlled, and Apple because their market capitalization is so large that quarterly earnings should have been almost meaningless.

    For companies that don’t enjoy such immunity to quarterly expectations, the pressure to cut costs is enormous. As Clinton pointed out, it was the 14th quarter in a row where earnings had grown at a faster rate than revenues. (According to the Guardian, it was actually the 16th, but who’s counting?)

    Hillary’s argument was not that all cost-cutting is bad, but only that companies that skimp on research and innovation are hurting the economy in the long run. I agree with the point, but it is far from proven. Many times, companies that cut costs end up being more efficient and more creative than before.

    I also admit that her proposed solution lacks some evidence. Hillary wanted to expand the definition of “short term” from one year to two, and introduce a sliding scale of capital gains tax rates. Although I like the idea, from an economics point of view it is arbitrary. Forcing companies into longer-term investments is not proven to improve the quality of the investments. All it does is reward companies that were about to make good long-term investments, and punish the rest. As if a bad investment was not punishment enough.

    The same is true, generally, of investing in bribes. There are over 1800 billionaires in the world. Many of them choose to invest very little in obtaining political influence, while others invest so much that it seems less a hobby than an obsession. (The fact that you can now apparently buy yourself a cabinet position is not new development, it is just more widely publicized than before.)

    Billionaires run the world, but they are not a united voting block. If they were, there wouldn’t even be any need for the rest of us to vote. They would have figured out a way to insure their interests regardless of the electoral college, or quarterly profits, or whatever.

    For anyone to argue that Citizen’s United did not allow influence peddling, one would have to prove that corporations are getting nothing for their investment. For anyone to argue that corporations don’t pay too much attention to quarterly profits, one would have to give an example of a CEO that survived two or more quarters of bad results without cutting jobs, cutting R&D, or both. IBM’s CEO Ginni Rometty is the perfect example, in a way. If not for the last three rounds of layoffs, do you really believe she would still be there writing letters of advice to Donald Trump’s economic team?

    This is not to say that her advice was bad, merely that the only reason she is still at IBM is that she supervised more than 30,000 layoffs.

  7. 7 7 Dan

    This is a silly argument. You don’t need investments made by firms under Citizen’s United to make the argument, ANY investment that has a pay-off of more than a quarter will do.

    Since 99.99% of publicly traded firms have some investments that will pay-off in more than a quarter, it is logically impossible for firms to put too much emphasis on quarterly earnings.

    Is that the argument? or do you also find it easy to do some mental maneuvering?

  8. 8 8 Drew

    “to observe that one cannot consistently argue…”

    Complete digression, but one of the biggest takeaways from this election seems that you can do exactly that, and far from it being a problem, it’s actually a pretty powerful strategy in the modern world.

    There’s even an emerging new theory of illiberal democracy that has, at its core, the idea that self-contradiction causes civic confusion and paralysis rather than censure. Under this way of thinking, Trump’s innovation was simply taking it much farther than most politicians dared (they tended to do it out of strategic pandering but still with some concrete goal or alternate political reality in mind). So while Clinton’s campaign policy people may not have actually taken either of those ideas seriously enough to think them through rigorously to the point where a contradiction would become troublesome, Trump’s vanguard would be positively excited to discover a new contradiction and happily have their candidate endorse all four of the possible extremes of both issues at various times.

    Or maybe I’m especially cynical today because of this: http://blogs.wsj.com/economics/2016/04/11/the-case-for-free-trade-is-weaker-than-you-think/

  9. 9 9 Will A

    @ Drew #8

    Really excellent point. In general, you can’t consistently argue that taxes on the wealthy are going up and propose and that single payer systems are good and that you want a health systems of tax credits where people can buy their own plans.

    But you can inconsistently argue them and become president.

    As an admirer (but not a practitioner) of confidence games, it really is an amazingly beautiful thing to see.

    What makes this game interesting is that all of those participating (voting for Trump) know that someone is being played, but each assumes it isn’t himself.

    White Working Class voter’s know that Trump is going to make the hated Paul Ryan and Mitch McConnell do blow up trade deals, preserve social spending for them, and make the wealthy elites pay for it.

    Congressional Republicans feel that they have a good shot at lower taxes on the wealthy and decreasing spending on social programs.

    It will be interesting to see how things turn out. If Trump is playing the best confident game, he will govern like Clinton and con everyone who voted for him and use the position of the president to make himself and his kids immensely wealthy.

    A true artist deserving ultimate props.

  10. 10 10 Ken B

    9 Will A
    Usually Will I can tell if I agree with you or not, but paragraph one is incomprehensible to me, so this time I cannot.
    FWIW I see no logical contradiction in saying “we should have a progressive negative tax on purchasing health insurance”.

  11. 11 11 sean

    Research I’ve seen on corporate lobbying is its extremely profitable. A couple million dollars might lead to billions in gains. The huge ROE may square your circle. Its worth investing small in something with huge returns even if it doesn’t fit a quarterly schedule.

  12. 12 12 Will A

    @ Ken B #10

    Sorry about that. Maybe this is better.


    Really excellent point. In general, you can’t consistently argue that taxes on the wealthy are going up, that you propose tax cuts for those who are wealthy, and that you alone have to power to implement the changes that need to be done.

    You can of course consistently argue that taxes on the wealthy are going up, that you are proposing tax cuts for those who are wealthy, and that you are a lousy negotiator who isn’t able to enact your proposals.

  13. 13 13 iceman

    Ironically this campaign didn’t seem too supportive of the notion that $ buys elections (that would’ve been Hillary beating Jeb). Neither was Freakonomics, which concluded that $ *follows* electability / “inevitability” as much as anything. (Always good to put #s to our intuitive truths whenever possible.)
    Agree the ‘revolving door’ with lobbying firms is problematic – I thought there was at least supposed to be a waiting period?

    “Quarterly capitalism” sounds like more evidence that politicians who don’t have a working familiarity with financial markets should avoid tinkering with what they don’t understand.
    As with anything that involves principals and agents, allowing companies to raise public equity is an imperfect (if valuable) process, but not clear how to improve it if, as it seems in this case, the incentives are sufficiently internalized.
    Investors understand (and often support CEOs through) bad results due to tough circumstances; what they don’t like is bad *surprises* and unreliable guidance. This could be viewed as punishing companies who engage in ST spin.
    And ‘troubling’ volatility of the type described here, e.g. a stock price move that exceeds a change in quarterly *revenue*, seems by definition to be discounting a longer horizon. Tech examples are typically the most sensitive, e.g. how could a short-sighted market assign $billions of value to a company with no earnings?

    Perhaps the concern then is that investors are simplistically extrapolating ST results. Again analysts have every reason to be, and their research reports are, more circumspect than that. However they get limited looks at companies’ performance and strategies, while knowing that companies have lots of accounting dials and levers to hit their numbers, so missing by a penny is actually meaningful.
    Perhaps the reformers would limit companies to annual earnings releases? Seems unlikely to decrease volatility and encourage leaks.

  14. 14 14 mlanier

    @iceman #13

    I don’t believe that the Freakonomics guys are wrong. Most spending was done prior to the last week of the election. Until the last week all evidence was the Clinton would win. Fivethirteight’s analysis up today shows that in the last week Clinton lost a net vote of 4%. This was driven in large part to the Comey letter which galvanized his voters who assumed he was going to lose and Clinton voters who stayed home rather than vote for someone who played fast and loose with the truth. Polling for the last week wasn’t available as of election day (since it takes time to poll) and so the information wasn’t in the market, which meant it couldn’t be acted on.

  15. 15 15 Nick

    A simple model of a profit-maximizing firm, which decides how much money (out of $90 billion) to spend on short-run investment in capital, mS, how much to spend on long-run investment in capital, mL, and how much to spend on long-run investment in politics, mP.

    The firm’s profit is given by a standard functional form,

    P = mS^0.5 + d*(mL^0.5 + mP^0.5),

    where d is the discount rate of the firm. Assume that from a social standpoint, the firm is ‘too’ impatient, and that political investment, as rent-seeking, is wasteful. For simplicity, assume that the social discount rate is 1, that the firm’s private discount rate is d = 1/2, and that political investment is entirely wasted. (A more general specification will, my guess is, have some parameter values at which the firm’s impatience results in an optimal amount of political investment. The extreme assumptions made here are only to illustrate the point.)

    That is, social welfare is
    W = mS^0.5 + mL^0.5.

    To maximize social welfare, the firm should (by symmetry) split its spending equally between long- and short-run investment, mS = 45, mL = 45.

    To maximize its own profits, some calculus shows that the firm will choose mL = mP = 15, and mS = 60. The firm is overspending on short-run investment, and over-investing in political spending.

    So no, there is no inconsistency at all in arguing both that we should be restricting political spending by firms, and that firms are too short-sighted. A few moments with the simplest of economic models is enough to establish this.

  16. 16 16 Nick

    And if you believe this simple economic model fails somehow to capture some complex nuance of the original argument being made, then I would appreciate either some description of those complex nuances, or, better yet, an alternative model in which it is made clear just how obviously inconsistent it is to both think corporations are short-sighted, and to think we should reduce political spending by corporations.

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