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The Short-Termism of Protectionism (Gwen Moritz Editor’s Note)

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At the beginning of 2016, when a “Trump bump” was unimaginable, the CEO of BlackRock Inc. begged CEOs of Fortune 500 companies to resist “the powerful forces of short-termism afflicting corporate behavior” — buybacks, overly generous dividends and “quarterly earnings hysteria.”

BlackRock has more than $5 trillion to invest, so when Larry Fink talks, corporations at least hear him out.

In a recent letter to the same executives, Fink noted, critically, that they had “continued to engage in buybacks at a furious pace.” But, he said, “many companies” had responded to last year’s letter by disclosing detailed plans that shareholders could use to evaluate progress.

But it turns out that those long-range plans that corporations were finally starting to make were based on assumptions of low inflation and continued globalization, Fink wrote, but then came Brexit, upheaval in the Middle East, higher interest rates and President Trump.

“At the root of many of these changes is a growing backlash against the impact globalization and technological change are having on many workers and communities,” he wrote. “I remain a firm believer that the overall benefits of globalization have been significant, and that global companies play a leading role in driving growth and prosperity for all. However, there is little doubt that globalization’s benefits have been shared unequally, disproportionately benefitting more highly skilled workers, especially those in urban areas.”

Seth A. Klarman, who runs the $30 billion Baupost Group hedge fund, has also written a letter, this one to his investors. As reported by The New York Times, Klarman frets about “perilously high valuations” in the short term and dire long-term consequences of protectionism.

“Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers,” Klarman wrote.

“President Trump may be able to temporarily hold off the sweep of automation and globalization by cajoling companies to keep jobs at home, but bolstering inefficient and uncompetitive enterprises is likely to only temporarily stave off market forces. While they might be popular, the reason the U.S. long ago abandoned protectionist trade policies is because they not only don’t work, they actually leave society worse off.”

Of course, hard truths don’t fit on ball caps. Fink, in his letter to CEOs, pointed out another hard truth for those disaffected Americans: “Workers whose roles are being lost to technological change are typically facing retirement with inadequate savings, in part because the burden for retirement savings increasingly has shifted from employers to employees.”

This feels circular, doesn’t it? Trump was elected on a protectionist promise that is short-termism writ large, depending as it does on inefficiencies.

“If things go wrong,” Klarman projects, “we could find ourselves at the beginning of a lengthy decline in dollar hegemony, a rapid rise in interest rates and inflation, and global angst.”

And if the dollar loses value and corporate profits stall, the retirement crisis will not be limited to the working class.

Fink calls for government policy to strengthen retirement systems and, in what suddenly seems like brave talk, suggests that America could take some tips from countries like Canada and Australia.

Three decades into the 401(k) era — and just as the Trump administration reverses course on an Obama rule that would hold all retirement advisers to a fiduciary standard — Fink calls on the business sector to “embrace the responsibility to build financial literacy in their workforce” and “to empower savers with new technologies and the education they need to make smart financial decisions.”

Fink does not think the retirement crisis is intractable, but solving it will require businesses “to hold themselves to a high standard and act with the conviction that retirement security is a matter of shared economic security.”

Fink’s letter is dated Jan. 24. On the same day, FedEx CEO Fred Smith appeared on “CBS This Morning” and made the same point about globalization so simply and elegantly that I was compelled to write it down:

“If you go to New Hampshire, you’ll see all these beautiful, abandoned textile mills where they lost their jobs to South Carolinians making textiles in the 19th century. I mean, free market economics are constant change, where some people lose jobs and others gain them.

“The reality is the benefits of trade are diffused in lower [priced] product, better product. The pain of trade is always localized.”

Gwen Moritz is editor of Arkansas Business. Email her at GMoritz@ABPG.com.
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