Philip Cross: Short-termism plagues left-wing politics – Financial Post

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Many people unquestioningly accept the canard that corporations focus too much on short-term earnings and neglect investing in a long-term vision. Clayton Christensen of the Harvard Business School always claimed firms are too focused on the immediate needs of their customers to make important innovations. Firms that favour “downsize-and-distribute” strategies over “retain-and-reinvest” strategies depress longer-term economic growth.

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The economist Tyler Cowen argues in his book Big Business that such criticisms are overblown. There are plenty of examples of firms focusing on long-term results. Most examples of supposedly excessive short-termism actually reflect another firm’s superior ability to anticipate emerging new trends, like Netflix’s innovative model for delivering home entertainment (or at least once-innovative model).

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Amazon is a good example of a firm planning for the long term. It did not post its first profit until seven years after its founding and then cycled in and out of profitability for several more years before becoming the world’s dominant retailer by reinvesting its earnings in on-line retailing and cloud computing. Founder Jeff Bezos burnished the myth surrounding Amazon, telling Wired magazine in 2011 that “If everything you do needs to work on a three-year horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue.”

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But Bezos exaggerates the uniqueness of Amazon’s emphasis on patient capital. Lots of other private sector firms play the long game. The business model of venture capital investing is predicated on absorbing numerous short-term losses in order to unearth a rare diamond that pays off handsomely. Nor is there compelling evidence that sectors shielded from the pressure to produce short-term profits, such as private equity investors or pension fund managers, significantly outperform their supposedly myopic competitors in publicly-held firms or index funds.

Canada’s large resource sector gives us an innate advantage in focusing on the long term. Our largest industry is energy, which these days is dominated by oilsands extraction. The oilsands industry necessarily focuses on the long term since it requires the commitment of capital for decades, unlike the short-term outlook of the frackers who dominate U.S. oil production. The result is that oilsands output and employment rarely stray from their long-term trends, not even during sharp price declines such as in the spring of 2020. This steadiness contrasts with the cyclical ups and downs of industries such as autos, housing and high tech to which our political leaders are attracted like moths to an LED light bulb. (Memory of the 2001 bust of Nortel and JDS Uniphase still resonates among Ottawa residents.)

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The myth persists that Asian countries have a competitive advantage in long-term planning. Akio Morita, chair of Sony Corporation in the 1980s when it had the equivalent stature of Apple today, boasted that “America looks forward ten minutes; Japan looks forward ten years.” In reality Japan failed to anticipate its decades of economic stagnation. For years, Westerners have misinterpreted former Chinese Premier Zhou Enlai’s famous reply in 1982 when asked about the consequences of the French Revolution that “It’s too soon to tell” as meaning China’s leaders looked centuries into the future. Turns out he misunderstood the question, which referred to the May 1968 student uprisings not the revolution of 1789.

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Politicians are much more obsessed than business firms are with short-term results. This reflects the imperatives of the electoral cycle, usually between two and four years, and the shrinking average tenure of G20 leaders from six years in 1946 to 3.7 years now. As Dambisa Moyo concludes in The Edge of Chaos, “The myopia embedded in the democratic process creates a mismatch between short-term electoral incentives and the long-term economic challenges that need to be addressed. Worse still, this short-termism exacerbates the headwinds that are already dampening economic growth.”

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The University of Toronto’s Joseph Heath argues this weakness of political leaders is partly offset by civil servants, who supposedly are better able to play the long game. Central banks are also generally better equipped to focus on the long term since they are usually granted some measure of independence precisely in order to insulate their thinking from voters and elections. As one Swiss central banker recounted, the prevailing view used to be “We are responsible for the long run, so the short run can take care of itself.”

In spite of their supposed insulation from politics, central banks increasingly have focused on boosting short-term economic performance at the expense of long-term growth and financial stability. The problem of excessive focus on the short term is exacerbated by the long lead times involved in monetary policy. Former Kansas City Federal Reserve President Thomas Hoenig observed that “The short run was the focal point” of Fed policy after 2010, especially its policy of Quantitative Easing. Similar short-termism contributed to the recent build-up of inflationary pressures.

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The dividing line between a focus on short-term “presentism” and long-term results increasingly follows the fault line between liberalism and conservatism. Liberalism has a hostility to past traditions and customs, summarized in Keynes’s famous dictum “in the long run we are all dead.” Hayek criticized Keynes’ focus on the short-term effects of economic problems “as a betrayal of the main duty of the economist … to stress the long effects which are apt to be hidden to the untrained eye, and to leave the concern about the more immediate effects to the practical man.” People who want a return to long-term strategies instead of relentless short-term stimulus should favour more corporate and conservative influence in our economy and politics, not less.

Philip Cross is a senior fellow at the Macdonald-Laurier Institute.