Voice

Mr. 3.75 Percent

Paul Ryan wants to cut federal discretionary spending to the level of Equatorial Guinea. Yes, that's as crazy as it sounds.

In my last column, I wrote of the need for us to take a longer time horizon in our planning at home, at work, and in government. One political leader who likes to plan for the really long term is Paul Ryan, the Republican nominee for U.S. vice president. By 2050, Ryan's budget plan would reduce federal spending outside health-care programs and Social Security to 3.75 percent of GDP, down from 12.5 percent last year, according to the nonpartisan Congressional Budget Office. So, what would it mean to chop away two-thirds of the federal government?

According to the World Bank, government spending minus health care was already lower in the United States than in all of the European Union, Japan, China, and India in 2009, the latest year with comprehensive figures. At just 3.75 percent of GDP, the United States would be one of the world's lowest spenders. The only countries that spent less in 2009 were Equatorial Guinea, the Democratic Republic of the Congo (DRC), and the Central African Republic.

The first of these three is a small West African country where per capita income is as high as in much of Europe, but life expectancy is just 51 years; a tiny elite monopolizes revenue from oil exports while the majority stays mired in poverty. The other two countries are in the top 10 of Foreign Policy's Failed States Index, meaning that their governments barely function and provide almost no services to their people.

Even the meager spending of these governments is greatly subsidized by foreign aid, to the tune of 13 percent of spending in the Central African Republic and 29 percent in the DRC as of 2011. Their people also depend heavily on private charity. Many basic services are provided by nonprofit organizations such as Oxfam and Mercy Corps, and security has been provided by the United Nations in the wake of regional conflicts.

Of course, the United States isn't going to turn into a war-torn sub-Saharan republic overnight because of budget cuts. But Ryan and his cohorts do want to replicate some aspects of life in Africa's poorest countries. They prefer to replace public services paid for by taxes with programs run by charities; because the decision to fund the latter rests with the individual, no state power tells you how much of your income to surrender. They also want many of the services now paid for by the federal government to come under local control, as they are by default in failed states. Yet we saw in the past few years what happens when an economic downturn hits the states: massive budget cuts, blanket layoffs of public employees, and services slashed at the moment they're needed most.

The problem with this approach is that an economically efficient outcome is very unlikely. In principle, a government's spending has three motivations: 1) it can provide something more efficiently than the private sector, 2) it can ensure quality in a way that the private sector can't, or 3) the private sector alone doesn't have an incentive to provide enough of the item in question. These days, the first motivation is rarely relevant, except in small countries where some industries may offer the most benefit to society as publicly run monopolies. But the second often is, as in the case of airport security. And the third covers a huge variety of "public goods" such as infrastructure, scientific research, and vaccinations, all of which have benefits for society beyond the benefits that an individual purchaser would receive.

If we rely on charity to fund all these items, we may simply end up with too little of them. Imagine, for example, a United States with a stripped-down Justice Department, a bare-bones military, and only tiny agencies to deal with issues like highway safety, air traffic control, food safety, and the disposal of nuclear waste. All these would rely on individuals' goodwill to continue providing services that protect the entire population.

Charity would also have to fund long-term investments like the National Science Foundation and the National Institutes of Health. These organizations dispense just under $38 billion a year in grants for research in the physical, chemical, biological, and social sciences, or about $121 per American. Many projects they fund are too fundamental to have immediate applications for business. Yet these same projects lay the groundwork for waves of innovation in the future. They are not crowding out research in the private sector, either; rather, they are complementary, as additional publicly funded research leads to more research in the private sector as well. Left to their own devices, would Americans support a science charity to the same degree?

In fact, every American would have a strong incentive to contribute nothing and free-ride on the contributions of others. After all, they would still receive the same benefits from things like national defense and technological innovation. Government solves the free-rider problem by coordinating all of us to pay for public services collectively. Without government fulfilling this role, public services may simply disappear.

To rely on charity would diminish the potential of the United States to grow, and it would create new risks that could push the country back through economic time. That the United States has done so well despite much lower spending than many other wealthy countries is a testament to the strength of its private sector and the ingenuity of its people. But there is a limit to how much you can cut.

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Daniel Altman

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.

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