Incentivizing Long Term Growth

Rewriting the Rules of the American Economy:

Incentivizing Long Term Growth


Joseph Stiglitz describes the changes in the rules undergirding the American economy over the past 40 years that have promoted short-term profit taking as opposed to long-term investments and their impacts in slowing the growth of the American economy.

The average stock was held for seven years in 1940, for two years in 1987 and for seven months by 2007. Corporate CEO pay as compared to the average worker’s salary has grown from 20/1 in 1965 to 295/1 in 2013. Firms are not investing their capital in equipment needed and designed to increase worker productivity, but rather in stock buy-backs and shareholder dividends.

Some of the economic policy changes that have distorted the incentives for long term growth and investments as opposed to short term profit taking are: the lowering of the capital gains tax, the reduced progressivity of the tax system, the proliferation of tax deductions primarily benefitting the highest income individuals, and the linkage of CEO pay to stock options.

Think of the long term perspectives taken by Steve Jobs at Apple and Bill Gates at Microsoft and contrast them with the leveraged buy out, take-over artists who buy companies, break them up, strip their assets and leave laid off workers and damaged communities in their wake. “The effects of the short-termism phenomenon are troubling … for our broader economy because they are at the expense of innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth.”

Stiglitz recommends restructuring the incentives in CEO pay, enacting a financial transactions tax and rewarding long-term investors. He suggests eliminating the performance pay loophole from taxation, requiring transparency of the ratios of executive pay to median employee salary, and mandatory shareholder votes on executive compensation. He suggests a financial transactions tax or fee for short-term stock transactions and dividend bonuses for longer-term investors.

 Prepared by: Lucien Wulsin

Date: August 11, 2016


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