The Plague of Short-Termism

Get rich QUICK. Lose weight FAST. Fix problems NOW. Think State lotteries, the South Beach Diet and TARP (or Social Security for that matter). These are merely three examples of what appears to be the endemic short-term thinking prevalent in our society. We, as a people, often times have little tolerance for the time and hard work it takes to build wealth, personal wellness or durable economic strength. People's perspectives are often measured in days and weeks, not in months and years. The problem is that such quick-fixes are rarely lasting, or are unsatisfying from the start.

Statistically, playing lotteries and gambling in general are losing propositions, and while people certainly extract utility from the rush of playing the games it wears off fast and results in a negative outcome - no wealth, no lasting utility. Faddish diets are the same way. Everyone knows that losing weight and keeping it off boils down to a few key principles: eating fewer calories, eating healthier food and regular exercise. Most people don't need countless books, pre-made meals and the like to lose weight. They need focus and determination, and a willingness to be uncomfortable for a while until they can develop good habits that will last for a lifetime. Yet the diet industry is a multi-billion dollar industry, because many are looking for easy answers or a crutch to help them through. As with most things, there are no easy answers. 

Similarly, consider TARP and the other Government support programs add up to a few trillion - or more. They are focused on dealing with the surface-level aspects of the economic dislocation, not really digging beneath the surface to get at the embedded problems weighing down our ability to recover. Providing financing to failing businesses and broken portfolios without dealing with the problems will only result in one outcome: more taxpayer dollars being thrown at the problem when the initial amounts are burned through due to "unexpected" losses. There is nothing unexpected about how it will end up; it will end up badly because we didn't do what was necessary upfront.

Just like Social Security. "Why deal with it now when it is so politically costly and when it can be dealt with in the future?" This appears to be the stance of successive Administrations; pass the hot potato onto some other sucker, far, far in the future. Even our corporate compensation regimes are cast in the same light. Managing quarterly earnings to Wall Street expectations, large cash bonuses based on annual performance metrics, etc. This is not the way to promote long-term value creation. Yet this is what our society expects. We are sadly mistaken.

This is a profound issue that will plague us again and again unless we collectively adopt a different, longer-term mindset. There is honor and dignity in a job well-done, and in providing for one's future through hard work, smart saving and adding real value. The lottery and other "get rich quick" schemes do little to add real value to society. Living healthier, better lives over time will both make people feel better and sharply reduce our health care and insurance costs. If you don't lose 20 pounds in one month, how about two years? The process of getting there will make you better able to keep it off and more apt to stay with exercise patterns and other aspects of healthier living.

Economic policy in this country is reflective of an unwillingness to experience pain. Bankruptcy is perceived as failure, not simply as a natural cost of doing business. But every time we bail out companies that should be bankrupt, it sends a message to other companies: we can mess up, but we'll ultimately be bailed out. Whether it's the GSEs, AIG or perhaps GM, these actions are being funded on our dime and with questionable long-term benefits. And if we do, in fact, make the decision to bail out certain businesses it should be done the right way, with the systemic issues addressed but with pain taken where appropriate (e.g., equity-holders and bondholders wiped out). 

Getting it right by taking time is almost always preferable to getting it wrong, very quickly. Yet our policies and thought processes are frequently clustered around the latter. If we hope to be better people, better citizens and elements of a better society, we've got to get this right. And time, hard work and a willingness to endure pain are part of what's required to get it right.

Comments

[Michael Zhuang:]

In Maryland, our government has put a constitution amendment on ballot to allow slot machines. Ostensibly the tax revenue from slot machines will offset the current budget shortfall. This is exactly the shot-termism you talk about.

2008 Nov 04 04:14 AM

[sheople:]

Intuitive article, Mr. Ehrenberg. We cannot repair an economy that is 70% dependent on "what we spend" by throwing more money at it. Where is the manufacturing? Mr. Paulson's bail-outs and incentives are just piling more debt on. If I didn't think that the dollar is going to fail, I would be tearing my hair out because of the debt that we will be leaving for our children and grandchildren. Where are our leaders?

2008 Nov 04 09:42 AM

[Consider_this:]

However, consider what if we're already beyond saving? That all the short-termism is really because the underlying problem is too big for anyone to solve.

In other words, like a family who eventually move towards foreclosure and bankruptcy: There comes a point in their finances and while they may not be in actual foreclosure or bankruptcy "legally", they might as well have been, because they've "short-term"ed themselved into a narrow tunnel, and the only path open is not to escape the destiny, but to postpone the inevitable.

Like a spaceship trapped by a black hole; the actual event of crossing the point of no return may not actually be felt, or even marked. However, once the event horizon is crossed, no amount of fuel or engine prowess can pull the ship out of eventual destruction, so the rational thing to do then, is just to slow the descent.

I think despite your words of encouragement, if you really look at the mountain of debt and mountain of obligation and the structural and *MORAL* decay of our industrial, commercial, financial and political structure. I would submit that we've long moved pass the "point of no return".

This is perhaps why human civilization is destined to repeatedly go through total war/destruction before restarting as a new structure. No civilization in history, no matter how advanced, was able to escape this fate.

2008 Nov 04 10:20 AM

[mbborak:]

Thank you for your article. It is amazing how many aspects of our society, government and economy are subject to this "short-term" mindset. We can't wait until we have savings to go out and spend; we can't fund long-term infrastructure projects because the upfront cost is politically unpalatable; we won't accept short-term economic pain in order to allow the system's problems to work themselves out. Every time I hear a comment like "deficits don't matter because we need to put out the fire now" I think of how we will look back in 10 years and see how wrong that sentiment was. Just like Greenspan's overstimulation of the economy in 2001-2002, we will sacrifice everything to avoid the dreaded recession, not realizing that it will set us up for inflation and huge budget deficits once the "crisis" is over.

We have simply become too spoiled and too entitiled to simply batten down the hatches, keep our noses to the grindstone and work through our problems. We cry out for a safety net to rescue us from the inevitable downside to our "get rich quick" economy. The result is constant imbalance and volatility, with the worst consequences being passed on to future generations.

2008 Nov 04 11:22 AM

[phantomfive...:]

Dead right. You touched on a few different ways short-termism is hurting us. I think the last one you mentioned, executive compensation, is a biggie. Would financial CEOs have made the decisions they did during this giant credit bubble if their incentives weren't so badly skewed toward maximizing short term results? No way.

2008 Nov 04 11:27 AM

[GeminiAtlas:]

Exactly right, those who are screaming "the sky is falling" concerning the recession are short-termers. But they are selling out their birthright for a bowl of stew (for those who remember their Sunday school classes). The recession is a necessary medicine to weed out the weaker business models and to restructure resources to their most efficient use. Now with these businesses getting another lifeline to stay on, they will continue on in their businesses utilizing their resources inefficiently. The opportunity cost of tying up those resources in inefficient businesses could ripple across time to affect the economy 10 years, 20 years, 50 years etc down the line.

2008 Nov 04 11:53 AM

[Peacelover:]

The root of the problem is that we live in a culture that encourages us to live beyond our means. Leverage is a virtue while saving is considered bad and outdated. Hopefully Senator (or shall I say President elect?) Obama understands this and bring real CHANGE to this culture.

2008 Nov 04 11:54 AM

[sheople:]

Peacelover, Peace at what cost? As disgusted as I am with Bush (I didn't vote for him this last time), I am leary of what Obama brings to the table. We already have lost too much in the way of freedom. Our free market is going fast. Mr. Obama seems to lean towards socialism. We'll see.

2008 Nov 04 01:49 PM

[derryl:]

I think Roger Ehrenberg and Consider_this are both right. We are looking at the consequences of our human nature.

Reformers have been trying to "change the hearts and minds of humanity" at least since the Jewish prophets began speaking out around 700 BC, or Moses around 1500-1700 BC. We had the Buddha and Confucius. Greek philosophers sought to educate and improve human nature. Jesus tried to teach us to love one another. The Catholic Church tried to at least make us aware of the 7 deadly sins that afflict our nature so we could try to suppress these character failings.

Reformers to this day are repeating the same messages that have been shouted from the rooftops for 3000 years. Some people "turn, and are healed" as Isaiah puts it. But most just keep pursuing our animal passions until whatever civilization we had built is run into the ground.

Read Jared Diamond's "Collapse". He shows the processes by which historical civilizations have risen and ended. His chapter about Montana, a place where he lives and he loves, is particularly relevant. Sometimes there really is no way to prevent a collapse. It's usually because we were too shortsighted (as Roger is pointing out) and don't see the cliff until it's too late (as Consider_this is pointing out).

But we can't see the future, and hindsight is 20/20. I'm not ready to write us off just yet. Rome lasted over 400 years between Caesar changing it from Republic to Empire in 63 BC, and the sacking of Rome in 410 AD. Rome's strength was the belief of her people that they were strong, so corrupt government could not destroy them quickly or easily. But once the people go from feeling strong to feeling "entitled", I think you've begun the long decline.

2008 Nov 05 09:02 PM