Daniel Altman had an article in the NYTimes today, sketching the concept of equity risk premiums--mentioning some Economists believe these premiums have been fairly stable throughout the history of the American economy; and this Author considers them basically right in their analysis. This, though, leaves a Problem: Why are the Returns on Stock so much higher than on Bonds, where it widely exceeds the equity risk premiums?
The Answer is fairly simple: Modern Corporate America has abandoned Business Management, to become Stock Salesmen. The rationale is equally simple: the award of massive amounts of Stock Options and Stock Grants. Their Jobs have advanced from efficient management, to managing their own portfolios for greatest gain.
What has this done to Management practice?
The goal of Corporate Management has shifted from longterm stability of Corporate production, to the position of earning the highest immediate Profits to maintain an inflated Stock Share price. Layoffs and Downsizing are good, as it allows for rapid Savings, raising the Profits picture--and the Stock price. Production is outsourced, even when Quality Control deteriorates, because it lowers Production Costs--raising Profits and Stock price. Products use inferior materials and Labor in Production--again an increase in Profits and Stock price. Corporate Investment is chosen for immediate payoff of Profits; it being immaterial that long Investment ventures are abandoned, or that the new Production does not fit within Corporate Marketing or Distribution networks. High Stock price remains tied to record Corporate expansion rates, whether such expansion makes sense or not. It is a wonderful World We live in, if We can survive the avarice of Our Corporate Boards. lgl