Lawrence Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Obama from 2009 through 2010.
There are not many wholly new areas to open up in economic policy. But recent months have seen a wave of innovative proposals directed at improving economic performance in general and middle-class incomes in particular, not through government actions but through mandates or incentives designed to change business decision-making. The goal is to cause companies and their shareholders to operate on longer time horizons and to more generously share the fruits of corporate success with their workers, customers and other stakeholders.
There are strong grounds for interest in such approaches. After the events of recent years, the case for relying on speculative markets to drive the real economy — to whatever extent it had validity — is surely attenuated. Instances where successful companies with strong management teams and track records of investment have been forced to curtail investment plans by activist shareholders are proper causes of concern. And all of us would like to see middle-class incomes do a better job of keeping up with productivity gains than has been the case in recent years.
Even as proposals for corporate reform respond to legitimate policy imperatives, they also tap into the current zeitgeist in another way. Just as there is widespread unhappiness with market outcomes, confidence in government is at a low ebb. So the idea of achieving reform not through traditional government programs but altered business behavior is highly appealing.
The debate on corporate behavior is, I believe, a very valuable one that gets in a fundamental way at how American capitalism functions. In many aspects, it represents an overdue recognition of basic market principles. Businesses will raise wages to the point where the costs of raising them are balanced by reduced costs of recruiting and motivating workers. At that point, a further increase in wages will not appreciably change their total costs but will certainly matter to workers. So there is a strong case for robust minimum wages.
There is also a strong case for regulating aspects of compensation. Usually competition results in desirable economic arrangements, but not always, especially when there are risks of races to the bottom. A firm that tries to stand out by offering especially attractive family leave benefits, job security or an egalitarian wage structure may attract a disproportionately risk-averse workforce. So there is a strong case for using mandates to level the playing field. Profit-sharing has proven benefits in terms of increased productivity, but a firm that stands out by offering profit-sharing may encounter difficulties in recruitment among wary workers. So there is a strong case for providing companies with incentives to choose this option.
Matters are not as clear as is often suggested regarding short-term-driven “quarterly capitalism,” and I believe skepticism is appropriate toward arguments that horizons should be lengthened in all cases. A generation ago, Japan’s keiretsu system, which insulated corporate management from share price pressure by tying large companies together, was widely seen as a great Japanese strength; yet even apart from Japan’s manifest macroeconomic difficulties, Japanese companies lacking market discipline have squandered leads in sectors ranging from electronics to automobiles to information technology. Managements of companies that are dissipating the most value, such as General Motors before it needed to be bailed out, have often been the most enthusiastic champions of long-termism. Market participants who willingly place huge valuations on many Silicon Valley companies that lack any profits and have little revenue may be placing too much, not too little, weight on the distant future. That, at least, is the implication of the technology bubbles we have seen.
Corporations that are hoarding cash earning nothing in the bank or in Treasury bills would be cheered, not jeered, by the market if they could be persuaded to put those funds to productive use. Most corporations are in this situation. The challenges are usually that companies do not have productive uses available for the cash or that they do but can’t convince investors of those projects’ validity. Pushing corporations to invest without having projects that are good candidates for investment is wasteful. And stopping or discouraging them from distributing funds to shareholders is dangerous if it results in mindless takeovers.
The real need is for a cadre of trusted, tough-minded investors who can credibly commit to strong management teams and provide assurances to a broader range of investors so that productive investments can get made. How that can best be accomplished while maintaining market discipline is the crucial challenge going forward.