Want something to be afraid of this Halloween week? No, it’s not Ebola, nor is it ISIS, nor is it that some undocumented person will cast an “impersonation ballot” at some polling station… it’s Short Term Thinking. Today’s rant from Curmudgeon Junction is a general grouse about the lack of foresight intrinsic in our economic and political institutions.
The Economics of Myopia
The whole artificial edifice of Shareholder Value would collapse in a heap if the Management Interests would take a longer view of their corporate health. When one’s interests are aligned with quarterly earnings reports, and the effect on stock market prices, then what we will get are executives who place cost cutting measures above the long term interests of the corporation. It will be necessarily more important to lay off expensive workers than to promote long term corporate loyalty. It will be necessarily more important to engage in stock buy backs than to allocate resources to research and development. It will be necessarily more important to invent ever more exotic tax treatments and financial products than to invest in corporate expansion. It will be necessarily more important to conflate the interests of trade with the interests of financial markets. It will necessarily be more important to accumulate a profitable financial product revenue stream than to invest in modern plants and equipment. And, this is a recipe for a witch’s brew for short term “results” and long term losses.
What U.S. steel industry? Yes, U.S. Steel is still in business, but it’s no longer producing 67% of this country’s steel. [USX] Did anyone notice when U.S. Steel was removed from the Standard and Poor 500 Index? [NYT] Yes, the company has diversified, but it also moved in and out of some very risky propositions in the process, and simply surviving isn’t a particularly impressive item in comparison to actually thriving.
VWonder Bread is back on the shelves, but why did the process have to be such a mess? Let’s start with what financial writers are pleased to call a “highly leveraged capital structure with little room for error.” [Forbes] And, we can add in an obsolete line of products – where was the investment in product research and development? And, we can add in relatively high labor costs – which were cut in return for a promise (unkept) that the management would allocate resources into more efficient plants and equipment… So, the Twinkies got the axe, (rather later than perhaps that product line should have in the face of changing consumer trends), and the whole jerry-built private equity backed operation couldn’t take the strain of having to turn a mismanaged company around in the face of immediate capital needs.
Chevron made much of its prowess in developing alternative energy, it even created a renewable power group (CVX) and then shut the lights down.
“In January, employees of Chevron’s (CVX) renewable power group, whose mission was to launch large, profitable clean-energy projects, dined at San Francisco’s trendy Sens restaurant as managers applauded them for nearly doubling their projected profit in 2013, the group’s first full year of operations. But the mood quickly turned somber. Despite the financial results and the team’s role in helping launch more than a half-dozen solar and geothermal projects capable of powering at least 65,000 homes, managers told the group that funding for the effort would dry up and encouraged staffers to find jobs elsewhere, say four people who attended the dinner.” [Bloomberg]
The renewable power group created a net profit of $27 million in 2013, well above the $15 million target, so why did Chevron pull the plug?
“When you have a very successful and profitable core oil and gas business, it can be quite difficult to justify investing in renewables,” says Robert Redlinger, who ran a previous effort at Chevron to develop large renewable-energy projects before he left in 2010. “It requires significant commitment at the most senior levels of management. I didn’t perceive that kind of commitment from Chevron during my time with the firm.” [Bloomberg]
Translation: OK, the renewables were making money just not enough money to get the attention of top management. More translation: the Renewables group wasn’t making enough money in the short term to get management support in the long run.
How many investments banks are there in the United States? If you guessed Zero you got it right. None, zilch, zip. We now have Bank Holding Companies, as the former high flyers on Wall Street sought the protection of the Federal Reserve to avoid financial oblivion in September 2008. [MotleyFool] After running, ever so willingly, into the arms of the government in their debacle of 1002-2008, the bankers now want to revert to playing by their own rules – Repeal Dodd Frank – and re-engage in the same short term behaviors which brought on the collapse of the financial sector in 2007 and 2008.
The Politics of Myopia
There’s never been a shortage of self-serving myopia in politics. Ever. Nor has there been a surfeit of times in which there was less costuming going on in political campaigns than there were little goblins out seeking confectionary items to put in their pillow cases. However, turning the politics of fear into an art form, is to emphasize the fear and trivialize the long term prospects of hope.
So, we have politicians ginning up fear of a virus – of which we now have ONE case in the entire country of 330 million people – to secure short term votes based on “Did the administration do enough?” Has the administration been strong enough?” Probably – given that we have ONE case in a population of 330 million. Notice, we’re not talking about (1) What should U.S. funding priorities be for the research and development of vaccines for relatively rare viral diseases which occur primarily in third world nations? or, (2) What should be the U.S. contribution to world wide efforts to eradicate viral infections? Those would be long term questions – and we seem to have the attention span of fruit flies when it comes to politics.
The Media and Myopia
While we’re on the topic of viral diseases – has it occurred to anyone in the management end of public media that Wolf! is not to be carried to extremes, or have we missed that point from the kindergarten reading list? How many times have we been told that Swine Flu! Avian Flu! West Nile Virus! MERS! SARS! was going to be the End of Humanity! Or, close to it. Now, it’s Ebola – and the media circus begins once more. Has it not taken hold in the imaginations of media management that there may come a time when something like the Spanish Flu – a real pandemic – may creep up on us and because the “Wolf!” cry has been offered up so often and in such a dramatic way, that health care professionals will have trouble convincing the public that “This time it’s REAL?” Are the monthly, or weekly, ratings really so important in the short run that we’d take this risk in the long run?
How many editors across the nation are assigning people to cover stories for which the reporter is simply unqualified? That’s not ‘on’ the reporter. If a reporter turns in a story about race relations in a mid-western city based on impressions made during a few nights of protest, with little or no background knowledge of the historic context, do we blame the superficiality of the reporting on the writer – or on the management which decided to cut back on the number of writers in order to “increase shareholder value?” How many media outlets retain the services of several persons with a background in economics or finance to craft articles about our economy? How many media outlets hire individuals with a background in history/sociology to write about race and ethnic relations? How many can afford to?
It’s one thing to blast the banality of much political reporting – and another to remember that national pundits aren’t reporters. The pundits are time fillers. It’s expensive to send reporters to New Hampshire, Colorado, or Nevada. It’s more expensive to send them to Ukraine, Burkina Faso, and China. It’s cheaper to keep a pool of reporters in central locations and send “teams” out to cover events – whether or not the team members have any expertise in the regions to which they are sent.
In return for short term economies we get a long term prospect of sensationalized reporting on the dramatic and very little contextual information about subjects of greater long term impact ( such as, the efforts of Middle Eastern nations to come to terms with the historic impact of post World War I boundaries). Are we hearing about what mega-studies of student learning models tell us about how children actually learn, or are we getting packaged news about how children in one city measure up against children in another on a high stakes standardized test?
Are we hearing about how most bridges in the United States are designed to last 50 years, and the average age of bridges in this country is 43? Do we know that in just ten years one out of every four bridges in this country will be over 65 years of age, that would be some 170,000 of them. [BridgeReport pdf] Or, do we wait until another one collapses and more lives are lost?
And so it goes. We’ll shove more and more eye-catching events with less and less context into the great maw of 24 hour news cycles until the information is granulized into particles about which the Time Fillers will offer interminable speculation because that’s what they’re paid to do – speculate. In the short term it’s entertaining – in the long run it isn’t conducive to a well informed electorate.
Worse still, we’ll probably keep doing this until the old song lyrics are true: “I get all the news I need from the weather report.”