The Short-Term America

Michael Jacobs was appointed to the newly created post of Director of Corporate Finance at the Treasury Department after the 1988 presidential election. His mandate was to develop policies to improve the competitiveness of American business. But more pressing problems always took precedence—the savings and loan crisis, banking reform, financing Operation Desert Storm—which finally led to the writing of this book.

Many people believe that short-termism is an American habit, but shortsightedness has not always been so pervasive. The building of railways, interstate highways, and great companies like IBM required patience and persistence. Business managers and investors are not irrational people; the current focus on short-term results is a rational response to the system in which they operate.

Jacobs identifies the primary cause of business myopia as the distant relationship between capital providers (shareholders and lenders) and capital users (corporate managers). Their distrustful, often antagonistic relationship motivates each group to make decisions based on its own short-term interests rather than cooperating for mutual long-term gain. This raises investment risk, thus driving up the cost of capital and making long-term investment economically nonviable. Laws and regulations governing securities, corporations, antitrust, and banking have increasingly discouraged shareholders and lenders from behaving as owners, further magnifying their differing goals. Related issues covered include corporate governance, takeovers, and management compensation.

The discussion of causes is a remarkably clear treatment of a complex issue, but the book really shines in the final chapter on proposed solutions. While solutions tend to be the weak link in such discussions, Jacobs demonstrates original thinking tempered by practical realities. He aims to provide concrete suggestions which usually do not require changes in current laws, only changes in attitudes. For example, institutional investors are ideally suited to become the group of long-term investors needed to break the short-term cycle—but money managers, corporate officers, and government regulators would all have to accept changed roles. May they all be exposed to this thoughtful, readable book.