There is an ancient Chinese saying that the cough of a rich man will drown out the cries of a thousand paupers. So it was last week when Laurence D. Fink, CEO of BlackRock, the largest asset manager in the world, sent a letter to CEOs of 500 of the nation's largest companies saying in effect they should pay less attention to stock prices and more to long-term investments.
Fink is responsible for more than $4 trillion -- that's trillion, not billion -- in investments so when he speaks people tend to listen. He made many of the same points I have been making for years which goes to show that even titans of finance can eventually see the light. Fink being Fink, one can reasonably hope people will pay attention.
Fink's main point is that the pressure to return money to investors is encouraging companies to pay out more dividends and buy back their own stock. I could not agree more. This unhealthy trend reflects a short-term mentality that will, if unchecked, erode our economic standing and world leadership.
There is no question that the mania to pump up stock prices is a huge issue. Last year, U.S. companies spent nearly $1 trillion on stock buybacks and dividends. Just about every big company is involved. Recently, General Electric announced it would buy back $50 billion of its stock after selling most of GE Capital. Last year Apple authorized a $90 billion stock buyback. Exxon spent $13 billion. The list goes on and on.
The core problem with this obsession with stock value is that it diverts money away from long-term investments in capital expansion and research and development. The result is a steady decline of productivity which is the key determinant of our economic vigor. Capital investment is absolutely critical as advancing technology is rapidly remaking the "new manufacturing." If this trend should continue indefinitely, it will suffocate innovation and growth.
The chief culprit in this unfortunate trend is tax policy that "incentivizes short-term behavior," Fink said. He recommends that gains on investments held for less than three years be taxed as ordinary income which would discourage churning of assets. The lower long-term capital gains rate now applies after one year.
I would add that yet another aspect of this focus on the near-term is the plethora of mergers and acquisitions that is siphoning off even more resources from long-term investments. I acknowledge that some M&As can augment productivity, but for the most part it is usually amounts to no more than rearranging the deck chairs.
I would suggest another factor discouraging long-term investments is the lingering influence of quantitative easing that threw basic established economic assumptions out the window and encourages senior corporate management to seek near-term payouts for investors, which of course leads to bigger paychecks for the CEOs. It is imperative that government and business leaders work together to provide incentives for long-term investments.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.. April 2015