Joe Nocera
A Defense of Short-Termism

ONCE upon a time, in a bygone era, a new creature began stalking Wall Street. He was called a “corporate raider,” and he made strange utterances that executives had not heard before.
He growled that executives cared more about building empires than building shareholder value. He bought big stakes in bloated, inefficient companies and began demanding — demanding! — that chief executives cut loose money-losing units to become more competitive. He insisted that management be paid with stock and options so that they would start caring about the stock price, and would be rewarded as their shareholders were rewarded.
And how did executives respond to this alien threat? They resisted mightily, of course.
Among the major arguments they raised was that these new creatures didn’t really care about the companies they were stalking. All they cared about was a short-term fix that would lift the stock price, even if that so-called fix ultimately hurt the company. The raiders, executives said, didn’t just want to pare back unprofitable divisions; they wanted to slice into valuable research and development. They wanted to throw out the baby with the bath water. Why, executives asked, should they sacrifice the long-term health of the corporations they were running just because some rich financier wanted to get a little richer?
Yes, well, that was then.
AND this is now. The former Securities and Exchange commissioner William H. Donaldson is standing at a podium in a Manhattan hotel. It is this past Tuesday — smack dab in the middle of “quarterly earnings season”— and about 40 people, including a handful of reporters, have gathered to listen to Mr. Donaldson decry the rise of “short-termism” in American business.
Two groups — the Business Roundtable’s Institute for Corporate Ethics, and the CFA Institute’s Centre for Financial Market Integrity — have produced a report about the corrosive effect of short-term thinking in American business. Mr. Donaldson is helping them unveil the report at the luncheon.
In addition to laying out the problem of short-termism — which the report describes as “the excessive focus of some corporate leaders, investors, and analysts on short-term quarterly earnings and a lack of attention to the strategy, fundamentals and conventional approaches to long-term value creation” — it also proposes a handful of solutions. These include eliminating “earnings guidance,” pegging executive compensation to “long-term strategic and value-creation goals” instead of short-term stock market goals, and communicating to Wall Street more frequently about long-term strategy and fundamentals.
“It’s a beginning,” says Mr. Donaldson, who then cedes the floor to people from the two organizations that produced the report.
“Seventy-six percent of our members say they don’t want earnings guidance,” says Jeffrey J. Diermeier, the president of the CFA Institute, which represents thousands of Wall Street analysts and professional investors. Kurt N. Schacht, the institute’s managing director, adds that it is critically important that Wall Street and corporations “get off the quarterly earnings treadmill.” In this room, at least, there are no dissenters.
And why would there be? Who, after all, can possibly be in favor of short-term thinking? In the space of 25 years, quarterly earnings have gone from being a requirement to an obsession that has seemingly warped the way American executives think and act. The Enron scandal, for one, was directly related to this obsession. But even putting scandal aside, it is pretty clear that too often, companies worry more about creating short-term financial results than long-term strategic results. Remember how Coca-Cola, under the late Roberto C. Goizueta, used to make its quarterly number, usually by a penny a share, like clockwork? Then, in 1997, Mr. Goizueta died, and eventually the truth came out: the company had played some financial games to smooth its earnings and achieve those results. I don’t think it’s a stretch to say that the company is still paying the price for some of the things it did back then.
“There’s a tyrant terrorizing nearly every public company in the United States,” wrote the Harvard Business Review in 2001. “It’s called the quarterly earnings report. It dominates and distorts the decisions of executives, analysts, investors, and auditors. Yet it says almost nothing about a business’s health.”
It wasn’t hard for me to find people to echo that line this week. “Stop worrying about the quarter,” said Robert Olstein, who runs the Olstein Financial Alert Fund. “It’s irrelevant.”
Peter L. Bernstein, the well-known economic historian, said, “There is evidence that companies will pass up profitable opportunities” if such an investment will have a short-term effect on coming earnings.
Peter M. Gilbert, chief investment officer for the Pennsylvania State Employees’ Retirement System, said, “Short-term focus takes the eye off creating long-term value for corporations and ultimately for the investor.”
And Candace Browning, Merrill Lynch’s global head of research, said, “It became a game.”
Ms. Browning was speaking in particular about earnings guidance, which companies began doling out in the 1990’s. That’s the now-common practice of a company estimating, within a small range, what its earnings-per-share are likely to be both quarterly and annually. Practically speaking, it means that companies get to set the bar — and then jump over it.
To Mr. Olstein, this is a classic example of “the tail wagging the dog instead of the dog wagging the tail.” It’s also a prime example of short-termism — companies that were really focused on long-term strategy wouldn’t bother trying to do the analysts’ job for them, nor would they be particularly worried about the short-term hit the stock might take if it “missed” the consensus earnings number ginned up by the analyst community.
In any case, companies that are managed well for the long-term will likely see their stock price rise accordingly — even if it is more volatile over the short term. Google doesn’t give guidance, and it hasn’t exactly hurt the company.
The most shocking thing I heard this week about the bad effects of short-term thinking came from a 2005 study conducted by three economists for the National Bureau of Economic Research. They asked a series of questions about the importance of quarterly earnings to more than 400 executives and discovered that almost 80 percent of them said they “would decrease discretionary spending” in such critical areas as research and development, advertising and maintenance if they needed to do so to make the quarterly numbers.
Campbell R. Harvey, a Duke University economist and one of the authors of the study, still sounded a little stunned by the results when I spoke to him. “You would think they wouldn’t want to admit this,” he said. As he saw it, in the wake of the accounting scandals, companies were less willing to use “accounting shenanigans,” as he called it, to meet earnings projections. So instead, “they are doing things that effect the real operations of the company, like postponing R.& D. This is the stuff that creates real value in the long term.”
So why, even after hearing the horror stories, is there still a part of me that says, “Not so fast?” Partly it’s because for all the anecdotal evidence of short-termism and its effects, there is not a lot of empirical data to back it up. Corporations, for instance, still do a great deal of research and development — $250 billion worth each year, according to Baruch Lev, the well-known accounting professor at New York University.
Mr. Lev scoffs at the notion that short-termism is even a problem. “It would be ludicrous to tell managers, ‘we’re going to leave you alone for five years and then come back and monitor your performance,’ ” he said. “Even if you are long-term oriented, you are going to look at how they are doing every quarter.”
The second reason, though, is that as I listened to Mr. Donaldson and the others, I couldn’t help thinking back to the early 1980’s, when the executives themselves made the exact same arguments Mr. Donaldson was making from the podium.
Let’s be honest here: for many of the executives back then, the argument that they were managing for the long-term was bogus. There was too much lethargy in too many companies, and a desire by too many executives to avoid making tough decisions — cutting loose unprofitable divisions, for example. Having sailed through the post-war era without much in the way of global competition, there were plenty of American industries that desperately needed to be shaken up in a tougher, more competitive era. Whatever their flaws, the raiders helped spur that process — in no small part by forcing executives to pay more attention to the stock price.
Ms. Browning of Merrill Lynch told me that she thought “the pendulum has swung too far in terms of focusing on the quarter.” I agree with her. That’s what often happens on Wall Street — and, indeed, in business. We swing from one extreme to the other.
So yes, by all means: let’s get rid of earnings guidance, and start paying executives for achieving important long-term strategic goals that will help the company grow and prosper into infinity. Those are worthy suggestions. But let’s not swing the pendulum back too far.
Surely we’ve learned by now that long-termism can be just as much a problem as short-termism.

The Relationship Blend
By DAVID BROOKS

In the world of public policy, there are ecologists and engineers. The ecologists believe human beings are formed amid a web of relationships. Behavior is shaped by the weave of expectations and motivations that we pick up from the people around us every day.
The engineers believe all this relationship talk is so much mush. They believe behavior is shaped by incentives. You give people the resources they need and socially productive, rational behavior will usually follow.
Most politicians are ecologists who turn into engineers once in office. They know how much relationships mattered to their own success. But in government, the major tool they have is a budget appropriation. So suddenly every problem turns into a question of resources.
This transition, unfortunately, leads to a misleading view of human nature and often, policy failure.
A case in point: Over the past three decades there has been a gigantic effort to increase the share of Americans who graduate from college. The federal government has spent roughly $750 billion on financial aid. Yet the percentage of Americans who graduate has barely budged. The number of Americans who drop out of college leaps from year to year.
The reasons for dropping out are as numerous as the people who do it. Many students are academically unprepared for college work. Many suffer personal or family crises. Many are bored in the classroom and disengaged on campus. Many suffer from a strange cognitive dissonance. They have high aspirations. They know what they have to do to succeed. Yet when it comes time to, say, show up for a math test, they blow it off. And yet they still seem confident they will achieve their goals.
Some students, a relatively small slice, drop out because they can’t afford college. Perhaps 8 percent are driven away purely for financial reasons, according to a growing pile of research. William G. Bowen, Martin Kurzweil and Eugene Tobin summarized what we know in their book “Equity and Excellence”: “It seems that family finances have a fairly minor direct impact on a student’s ability to attend a college,” though family background has a large impact on whether students are academically and socially prepared.
Yet when politicians address this problem, they inevitably ignore the core issues — lack of preparedness, personal crises, disengagement, cognitive dissonance. They flee to the issue of tuition costs. They think like engineers.
Recent administrations have increased tax credits and grants to help make college affordable. This week, Hillary Clinton and the folks at the Democratic Leadership Council unveiled the centerpiece of a plan to restore the American Dream. They called for creating performance-based higher-education block grants worth $150 billion over 10 years and $3,000 tuition tax credits. They believe the programs will lead to one million more college graduates by 2015.
These are some of the smartest and best people in politics today. And yet their proposals won’t work. Tuition tax credits and grants have not produced more graduates in the past and they will not do so in the future. Bridget Terry Long of Harvard meticulously studied the Clinton administration’s education tax credits and concluded that they did not increase enrollment. Sarah E. Turner of the University of Virginia concludes, “Very broad-based programs such as tuition subsidies or across-the-board grants to low-income students are likely to have minimal effects on college completion while imposing large costs.”
It’s easy to see why politicians would want to propose tax credits as a way to bribe middle-class parents into voting for them. But if you actually want to increase the share of college graduates, you have to get into the ecology of relationships.
You have to promote two-parent stable homes so children can develop the self-control they need for school success. You have to fundamentally reform schools. You have to expand church- and university-sponsored mentoring programs and support groups. As Caroline Hoxby of Harvard notes, you have to surround students with people who will help them make informed decisions so they can attend a college they find useful.
None of these programs pack the policy wallop of a great big appropriation. But the fact is, when it comes to helping people flourish, the ecologists are usually right.
Hillary Clinton has forgotten more about early childhood development than most of us will ever know. Why she needs to be reminded about the importance of relationships is beyond me.

Stressing Parenthood
By JUDITH WARNER

In the lead essay to this year’s “State of Our Unions” report, which was released last week by the National Marriage Project at Rutgers University, Barbara Dafoe Whitehead looks at popular television shows, surveys, books and magazines and concludes that parents today are an unhappy lot. They’re anxious, depressed, warring in stress-torn marriages and feeling “out of sync” with a larger, adult world of “fun.”
Parents feel this way, she says, in part because they’ve been spoiled by too many years of childless living. Earlier generations began raising children just after their teens and had such large families that they were busy with their kids well into middle age. But today’s adults have children later and have fewer of them, spending decades instead soused on cosmopolitans and scattering their disposable income on Caribbean vacations — all of which makes buckling down to the financial and personal constraints of life with children extremely difficult. The situation is the worst among — Guess who? — highly educated professional women, for whom life with little people who have no respect for time management and no ability to generate performance reviews is as much a shock, Whitehead writes, as was Victorian brides’ first experience of sex.
Though I’ve previously been tagged as one of the chief purveyors of mommy misery, I have to say that I cannot recognize myself — or anyone I know — in this picture.
That isn’t to say that other parents and I don’t suffer from stress, anxiety or sometime marital tensions. Of course we do. But does that mean that parenthood is for us the “source,” as Whitehead puts it, of dissatisfaction and distress?
Absolutely not. On the contrary: children are the bright spot — the joy — that makes every other aspect of life worthwhile. Furthermore, motherhood, rather than “losing its luster” as Whitehead attests, seems to me to be considered a more worthy and desirable vocation now than it was at any other time in recent memory. (Our 50’s- and early-60’s-era moms never talked about it with the reverential breathiness we routinely muster.) If anything, in this era when having children is a choice, and women’s infertility struggles drive home the fact that the ability to become pregnant is a gift, I would say that parenthood is more highly prized than ever.
To suggest otherwise, to assert that mothers and fathers who express something other than Hallmark card sentiments about life with children somehow have issues with parenthood, is profoundly unfair. But it isn’t new. For at least five years now, ever since “mommy lit” emerged as a best-selling book genre, there have been stolid folk who have been using words like “whiners” and “spoiled” to get parents — and educated mothers in particular — to put up or shut up. And the way they most commonly do this is to recast big social problems as the little personal problems of those who “complain” about them.
Yet “the rising chorus of complaint” that Whitehead and other critics decry is based upon rock-solid reality. The depression and anxiety and angst and guilt they see — and trivialize — aren’t due to parents’ cravings for bigger cars or better clothes; they’re due to the fact that life for most parents is really hard. It’s expensive and competitive and stressful and fatiguing, for reasons that have nothing to do with having a bad attitude toward the challenges — and pleasures — of child-rearing.
Not having access to decent child care or affordable health care or good quality public education is not a question of attitude. Neither is being frustrated that you can’t ever make it home for a family dinner because you can’t afford to work a decent schedule or to live close enough to work to make it home at a decent hour. Talking about these problems isn’t a condemnation of parenthood; it’s a condemnation of the way parenthood is being lived, in our culture, at this particular time.
The problems facing American families — the dilemmas currently sapping the joy out of motherhood for vast numbers of women in particular — are real social and economic phenomena. They can’t be fixed just by changes in attitudes or “priorities” — at least, not just by changes in the attitudes and priorities of individual women or families. They require social change — a new attitude toward collective responsibility, a new infusion of meaning into debates about our nation’s values. And they require listening to mothers’ (and fathers’) complaints — not shutting them up.
Judith Warner, the author of “Perfect Madness: Motherhood in the Age of Anxiety” and a contributing columnist for TimesSelect, will be a guest columnist through the end of July.

As Israel Goes for Withdrawal, Its Enemies Go Berserk
By DAVID BROOKS

Why is this Middle East crisis different from all other Middle East crises? Because in all other Middle East crises, Israel’s main rivals were the P.L.O., Egypt, Iraq and Syria, but in this crisis the main rivals are the jihadists in Hamas, Hezbollah, Syria and, most important, Iran. In all other crises the nutjobs were on the fringes, but now the nutjobs in Hamas and Hezbollah are in governments and lead factions of major parties.
In all other crises, the Palestinians, thanks to Yasir Arafat’s strenuous efforts, owned their own cause, but now the clerics in Iran are taking control of the Palestinian cause and turning it into a weapon in a much larger struggle.
In all other crises there was a negotiation process, a set of plans and some hope of reconciliation. But this crisis is different. Iran doesn’t do road maps. The jihadists who are driving this crisis don’t do reconciliation.
In other words, this crisis is a return to the elemental conflict between Israel and those who seek to destroy it. And you can kiss goodbye, at least for the time being, to some of the features of the recent crises.
You can kiss goodbye to the fascinating chess match known as the Middle East peace process. That chess match was dependent on a series of smart and reasonable Arab players with whom Israel could negotiate. Those smart and reasonable interlocutors still exist. They still invite visiting Westerners to dinner and may still represent the majority of their countrymen. But they are not running the show now.
Iran has conducted a semi-hostile takeover of what used to be known as the Arab-Israeli dispute. Iran has deepened and widened its support for its terrorist partners. Iran and the Islamists are fueled by the sense that the winds of history are blowing at their back. They pushed the Soviets out of Afghanistan, the U.S. out of Lebanon, Israel out of Lebanon and Gaza and they seem on the verge of pushing the U.S. out of Iraq. After centuries of Muslim humiliation, these people know how to win.
So Hamas and Hezbollah audaciously set the pace of confrontation. Maybe the moderates will eventually crack down on the radicals (there’s a first time for everything), but in the meantime there will be no peace process. There will be no shuttle diplomacy. Instead, the main mode of communication will be death: the minuet of missile launches and retaliations, escalations and de-escalations that irreconcilable enemies use to talk with one another.
You can also kiss goodbye to the land-for-peace mentality. In all other crises there was the hope that if Israel ceded land and gave the Palestinians a chance to lead normal lives, then tensions would ease. But this crisis follows withdrawals in Lebanon and Gaza, and interrupts the withdrawals from the West Bank that were at the core of Ehud Olmert’s victory platform.
Israel’s main enemies in this crisis are not normal parties and governments that act on behalf of their people. They are jihadist organizations that happen to have gained control of territory for bases of operations. Hamas and Hezbollah knew their kidnappings and missile launches would set off retaliation that would hurt Gazans and Lebanese, but they attacked anyway — for the sake of jihad. They answer to a higher authority and dream of genocide in his name.
What’s happened over the past few years, in short, is that public opinion in Israel has moved to the center at the same time that decision-making power on the other side has moved to the extreme.
Now there is a debate over how Israel should respond to this situation. Some say Israel should temper its response so Arab moderates can corral the extremists, which would be great advice if the moderates had any record of ever doing that or any capacity to do so in the near future. Others say Israel simply must degrade the capabilities of its fanatical opponents.
But this is a secondary issue. The core issue is that just as Israel has been trying to pull back to more sensible borders, its enemies have gone completely berserk. Through some combination of fecklessness and passivity, the Arab world has ceded control of this vital flashpoint to Mahmoud Ahmadinejad and Bashar al-Assad. It has ceded its own destiny to people who do not believe in freedom, democracy, tolerance or any of the values civilized people hold dear.
And what’s the world’s response? Israel is overreacting.

Left Behind Economics
By PAUL KRUGMAN

I’d like to say that there’s a real dialogue taking place about the state of the U.S. economy, but the discussion leaves a lot to be desired. In general, the conversation sounds like this:
Bush supporter: “Why doesn’t President Bush get credit for a great economy? I blame liberal media bias.”
Informed economist: “But it’s not a great economy for most Americans. Many families are actually losing ground, and only a very few affluent people are doing really well.”
Bush supporter: “Why doesn’t President Bush get credit for a great economy? I blame liberal media bias.”
To a large extent, this dialogue of the deaf reflects Upton Sinclair’s principle: it’s difficult to get a man to understand something when his salary depends on his not understanding it. But there’s also an element of genuine incredulity. Many observers, even if they acknowledge the growing concentration of income in the hands of the few, find it hard to believe that this concentration could be proceeding so rapidly as to deny most Americans any gains from economic growth.
Yet newly available data show that that’s exactly what happened in 2004.
Why talk about 2004, rather than more recent experience? Unfortunately, data on the distribution of income arrive with a substantial lag; the full story of what happened in 2004 has only just become available, and we won’t be able to tell the full story of what’s happening right now until the last year of the Bush administration. But it’s reasonably clear that what’s happening now is the same as what happened then: growth in the economy as a whole is mainly benefiting a small elite, while bypassing most families.
Here’s what happened in 2004. The U.S. economy grew 4.2 percent, a very good number. Yet last August the Census Bureau reported that real median family income — the purchasing power of the typical family — actually fell. Meanwhile, poverty increased, as did the number of Americans without health insurance. So where did the growth go?
The answer comes from the economists Thomas Piketty and Emmanuel Saez, whose long-term estimates of income equality have become the gold standard for research on this topic, and who have recently updated their estimates to include 2004. They show that even if you exclude capital gains from a rising stock market, in 2004 the real income of the richest 1 percent of Americans surged by almost 12.5 percent. Meanwhile, the average real income of the bottom 99 percent of the population rose only 1.5 percent. In other words, a relative handful of people received most of the benefits of growth.
There are a couple of additional revelations in the 2004 data. One is that growth didn’t just bypass the poor and the lower middle class, it bypassed the upper middle class too. Even people at the 95th percentile of the income distribution — that is, people richer than 19 out of 20 Americans — gained only modestly. The big increases went only to people who were already in the economic stratosphere.
The other revelation is that being highly educated was no guarantee of sharing in the benefits of economic growth. There’s a persistent myth, perpetuated by economists who should know better — like Edward Lazear, the chairman of the president’s Council of Economic Advisers — that rising inequality in the United States is mainly a matter of a rising gap between those with a lot of education and those without. But census data show that the real earnings of the typical college graduate actually fell in 2004.
In short, it’s a great economy if you’re a high-level corporate executive or someone who owns a lot of stock. For most other Americans, economic growth is a spectator sport.
Can anything be done to spread the benefits of a growing economy more widely? Of course. A good start would be to increase the minimum wage, which in real terms is at its lowest level in half a century.
But don’t expect this administration or this Congress to do anything to limit the growing concentration of income. Sometimes I even feel sorry for these people and their apologists, who are prevented from acknowledging that inequality is a problem by both their political philosophy and their dependence on financial support from the wealthy. That leaves them no choice but to keep insisting that ordinary Americans — who have, in fact, been bypassed by economic growth — just don’t understand how well they’re doing.

July 2, 2006

Of Human Bonding
By DAVID BROOKS

If I had $37 billion to give to charity, I'd give some of it to a foundation that would invent an Oxytocin Meter. That way we could predict who is headed for success and who for failure. We could figure out which organizations are thriving and which are sick.
Oxytocin is a hormone that helps mammals bond. Female rats injected with oxytocin nurture newborns placed in their cages, which they would otherwise attack. Prairie voles with oxytocin receptors form lifelong monogamous bonds, whereas other varieties of voles without the receptors mate promiscuously.
In humans, oxytocin levels rise during childbirth, breast feeding and sex. Humans with higher oxytocin levels are more likely to trust other people. They are more resistant to stress and social phobias. Humans seem to experience delicious oxytocin floods in the brain after being with someone they love. It's no wonder neuroscientists — displaying the branding genius for which they are famous — have nicknamed oxytocin "the affiliative neuropeptide."
I figure if we can hang Oxytocin Meters around people's necks, we can tell who is involved in healthy relationships and who isn't. If you walked into an office where nobody is having an oxytocin moment, then you'd know you're in a dysfunctional organization and it's time to get out of there.
Now I'm not really trying to reduce all human relationships to one hormone. But I am trying to emphasize the importance of human attachments. We in the policy world debate education, incarceration rates, poverty, productivity and competitiveness, and we try to figure out which qualities individuals need to thrive in the new economy. But often it's the space between individuals that really matters, the nature of their attachments.
Attachment theory has been thriving for decades, but it's had little impact on public policy. That's because the policy world is a supermagnet for people who are emotionally avoidant. If you go to a Congressional hearing and talk demography, you are treated like a serious policy wonk, but if you start talking about relationships, people look at you as if you're Oprah.
But everything we're learning about the brain confirms the centrality of attachments to human development and the wisdom of Adam Smith's observation that the "chief part of human happiness arises from the consciousness of being beloved." (Brain research rarely reveals anything new about human nature; it just tells you which of the old verities are most important.)
And so maybe it's time to focus a little less on individual capacities and more on nurturing attachment. Let me give you an example of what I mean.
Over the past few decades federal and state governments have spent billions of dollars trying to improve high schools. Much of the effort has gone into trying to improve individual math and reading scores. But the effects have been modest and up to 30 percent of students drop out — a social catastrophe.
The dropout rates are astronomical because humans are not machines into which you can input data. They require emotion to process information. You take kids who didn't benefit from stable, nurturing parental care and who have not learned how to form human attachments, and you stick them in a school that functions like a factory for information transmission, and the results are going to be horrible.
The Gates Foundation recently sponsored focus groups with dropouts. The former students knew how detrimental dropping out would be. Most were convinced they could have graduated if they wanted to. But their descriptions of school amounted to a portrait of emotional disengagement: teachers were burned out and boring; discipline was lacking; classes weren't challenging; there weren't enough tutors and wasn't anyone to talk to; parents were uninvolved.
If school is unsatisfying but having a child or joining a gang seems as if it would be emotionally satisfying, then many students, especially those with insecure attachments at home, are going to follow their powerful drive to go where the attachments seem to be.
If I had $37 billion, I would focus it on the crucial node where attachment skills are formed: the parental relationship during the first few years of life. I'd invest much of it with organizations, like Circle of Security, that help at-risk mothers and fathers develop secure bonds with their own infants, instead of just replicating the behaviors of their own parents. I'd focus on the real resource crisis that afflicts the country. It's not the oil shortage. It's the oxytocin shortage.