Losing the Future

Why short-term thinking is the greatest threat to the global economy.

The biggest problem facing the global economy is not climate change, trade imbalances, financial regulation, or the eurozone. It is short-term thinking. An epidemic of myopia has swept over the world in the past few decades, and it threatens our living standards like nothing else.

It's an epidemic with more than one cause, and not all of them are obviously sinister. Part of the problem is the growing complexity of the global economy. Life is simply getting harder to handle with the brainpower at our disposal.

To understand why, imagine a chess master. She might be able to think her way through the game about eight moves in advance. Now add more squares to the board, and perhaps a few new pieces. How many moves in advance can she think? Not eight -- maybe not even five. Because of the growing interconnectedness of the global economy, our lives are becoming more complex in much the same way, with many more moving parts; we can no longer worry just about those closest to us. As a result, we can't plan for the long term as easily as we used to. Every corner of the global economy is like a chessboard with an infinite number of squares; there's simply too much uncertainty.

Structural aspects of the global economy are magnifying the problem. For instance, the quarterly-earnings culture of financial markets -- the obsession with meeting analysts' expectations for corporate profits every three months, no matter what financial acrobatics that may imply -- owes its existence in part to arbitrary choices about how often companies have to report their results. Similarly, the money pumped into political campaigns has allowed them to lengthen considerably -- up to 22 months in the case of the 2008 U.S. election -- but legislative cycles have stayed much the same. With only two years between Congresses in the United States, for example, there's hardly time to focus on anything except reelection.

Together with these challenges, there is one truly odious cause of short-term thinking: narcissism. This personality trait has been changing in a measurable way. In surveys taken by psychologists, the level of narcissism -- often defined as a lack of empathy -- among successive cohorts of college students has been rising steadily since the late 1970s. Evidently, the "human potential" movement of the 1960s became transformed into the self-realization movement of the 1970s, the selfishness of the 1980s, the self-affirmation of the 1990s, and finally the self-absorption of the Internet age. Narcissistic people don't only empathize less with others today; they also empathize less with others in the future, including their future selves.

The effects of these changes are manifest in every part of the global economy. Individuals fail to plan adequately for their retirement; they simply don't care about their future selves as much as they ought to. They're also happy to push their debts into the future, in forms ranging from credit cards to government bonds. Essentially, they are stealing from future generations to fund their lifestyles today. In the long term, however, their actions could be disastrous: a rash of debt crises, perhaps, or tax rates high enough to stifle even the fastest-growing economies.

The corporate sector is suffering too. Managers focused on hitting their quarterly targets may ignore profitable long-term investments if the upfront cost is too great. This may be especially true for so-called social investments, whose benefits may not occur until several years have passed. For instance, what executive would spend extra money to help the quality of education in his company's community if the benefits in terms of higher-skilled workers and wealthier consumers might not appear until after he retired?

Governments are also passing up valuable opportunities to help their economies grow. Infrastructure, scientific research, and education cost a lot in the short term, and their benefits can take years or even a generation to accrue. Yet these benefits, in terms of higher wages, enhanced competitiveness, and economic growth, are enormous. The question is: How can you get a politician to focus on these investments, when she may be long gone from office by the time they pay off? For that matter, how could you get her to spend money today to fend off global warming or some other apparently far-off calamity?

The answer in both cases, of course, is for voters -- and shareholders, in the private sector -- to send a strong message that will punish short-term thinking. For this to happen, we need to change our preferences. We have to take responsibility for our own excesses. We have to teach our children to delay their gratification, to work hard even when the results might not come right away, and to use all the tools at their disposal to understand all the complications of an uncertain world.

If we do not, we risk an enormous disappointment of expectations that will be catastrophic in both economic and psychic terms. Already, living standards for the younger generation in wealthy economies are starting to fall short of those their parents enjoyed. The response among the young has been to borrow more, earlier, and the oceans of cheap money supplied by the world's central banks have only served to enable them.

They are just accelerating the catastrophe. The time to stretch out our time horizons at home, in business, and in government is right now, before our future disappears altogether.


Daniel Altman

The Fed Jumps on the Bandwagon

Where was Ben Bernanke when Obama needed him?

Too little too late? Depends who's asking. Late last week, the U.S. Federal Reserve Board finally launched another round of what it calls "credit easing" -- buying securities in the private market to improve the availability of credit -- and also committed to keep short-term interest rates low through mid-2015. Some people, especially certain presidential incumbents running for reelection, would have liked to see this happen earlier. But now the real question is whether it will matter at all.

The Fed committed to buy $40 billion a month in mortgage-backed securities issued by Fannie Mae and other government-backed enterprises, thus injecting a huge amount of new money into a long-term lending market. The hope is that long-term interest rates will fall as a result of the increase in the supply of money; it'll be easier for homeowners to refinance (giving them more cash) and for new buyers to get mortgages (creating more demand for housing).

Eventually -- it typically takes several months -- this cash injection is supposed to encourage companies to make new investments and hire more people. As a result, the Fed's action may only boost Barack Obama's chances of reelection through the spike in the stock market that followed the Fed's announcement. Of course, the people who own most of the nation's stocks don't spend every increase in their wealth, if they even live in the United States, so rising markets don't necessarily translate into higher consumption and new jobs.

Either way, the Fed's action will continue to depress the dollar against other currencies, and in the long run this may make the United States less dependent on foreign investors, help American exports, and create jobs. Even if American imports are affected by the exchange rate, a recovery here will still be good news for the global economy, as billions in income generated in the United States flow abroad. And if the Fed does manage to bolster employment, it will also transfer some wealth from savers to workers by lowering long-term interest rates in a bid to spur job creation today.

So why did the Fed wait to act until now? For months, its officials had been saying that the U.S. economy's growth was too slow but not slow enough to compel them to act. For one thing, they doubted the effectiveness of further easing because, quite simply, they didn't think companies had very good opportunities to invest. The uncertainty caused by political tribulations in Washington and the rolling snafu in the eurozone were probably holding back businesses more than interest rates, which were still at historic lows.

What changed? Some of that uncertainty finally went away. Two weeks ago, Mario Draghi, the president of the European Central Bank, declared that he would use extraordinary measures to support the euro if necessary, and -- perhaps because he was relatively new in the job and still had his credibility intact -- the markets believed him. Then, Mitt Romney reloaded his revolver and shot himself in the foot a few more times over his economic plans and foreign policy, leading even conservatives to say he had lost an election he didn't deserve to win, anyway. The chances that he and Paul Ryan -- who was unconcerned by the notion of the United States defaulting on its debt as chair of the House Budget Committee -- would win in November fell to about 30 percent in the prediction markets.

It's possible that the Fed's governors decided companies could at last be pushed off the fence by a further round of easing. Or perhaps they decided that they had to be seen doing something. After all, the Fed has a dual mandate to maintain price stability and promote full employment. Since Republicans in Congress had done their best to obstruct any fiscal policy that would support the economic recovery -- back in 2010, their leader in the Senate, Mitch McConnell, even said he wished they had been able to "obstruct more"  -- all of the burden for putting Americans back to work fell on the Fed's shoulders.

The effects of that obstructionism are starting to dissipate, though, as job losses in state and local government, in large part the result of congressional stinginess, are finally slowing. The private sector has been slowly but steadily creating jobs since early 2010, so the unemployment rate could begin to fall more quickly at any moment.

As a result, if the economy finally does snap back to a healthy rate of growth, it'll be tough to figure out whether the Fed's action was decisive. Are we really supposed to believe that all the factors that made the Fed's governors doubt their own effectiveness for the past year or so suddenly disappeared? Or are they just jumping on Mario and Mitt's bandwagon of certainty?

We can't go through history twice -- once with the Fed buying securities, once without -- so there's no way to know for sure. Long-term interest rates like the Treasury's 10-year note have actually risen since last week's action, not fallen as the Fed might have hoped.  But even this signal is hard to interpret. It could mean that other sources of uncertainty are making lenders nervous. Or it could be a sign that the markets expected a strong recovery; a surge in profitable economic activity usually comes with more demand for credit, so rates tend to rise.

In any case, it's too early to appraise the results of the Fed's move; only days, not months, have passed. And the Fed isn't just jumping on the bandwagon -- it's attaching a $40 billion per month turbocharger to the bandwagon. Still, the bandwagon carries the inertia of tens of thousands of businesses, so even a turbocharger might hardly make a perceptible difference.

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