- Glenn Sonnenberg
Musings from the Bunker 2/19/21
SHORT TERM THINKING IS THE OTHER PANDEMIC
Jewish Journal July 2020
Enshrined in our Constitution are words worthy of heeding today. They sought “…to secure the blessings of liberty to ourselves and our posterity” Not for themselves, nor even for their children, but for generations unborn. Such sentiments seem unthinkable in today’s environment.
We are squandering the blessings of liberty for our posterity every day—from despoiling the environment to mortgaging our future to underfunding education and job training—because we are thinking in the short term. COVID-19 is not the only virus plaguing us. We are infected by a short-termism that crippling us and our ability to act, on both the business and the national fronts.
There’s an apocryphal story of Henry Kissinger asking Chou en-Lai what he thought about the French Revolution. The response was “too early to tell.” In another conversation, Mr. Kissinger commented on how things had changed in “the last fifty years,” to which Chou indicted that in China, progress is measured in centuries, not in years.
The Kuwaiti government decided years ago that it could not assume its oil revenue would continue rolling in indefinitely. In an extreme example of long-term thinking, the Kuwait formed the “future generations fund,” into which a portion of that revenue is deposited and invested, with the with the intent that it not be used until a hundred years from now. Think about how a Congressperson would be run out of town to suggest thinking about consequences even ten years hence, much less 100 years from now.
While for the past 30 years many have lamented the 24-hour news cycle, we have missed an even worse development—the triumph of “24-hour thinking.” Our inability to consider the long-term effect of our actions has led this country down dangerous paths—in the economy and in government.
We depend upon people to act on our behalf all the time—from doctors, to lawyers, from real estate agents to elected representatives. These people often are bound by “fiduciary duties” established by law to protect the people they represent. In essence, fiduciary duties require a duty of loyalty and a duty of care—requiring someone to act in the best interest of another party, even if it might conflict with one’s own interests.
We trust people in business to act in our interest and yet they don’t always do so because their interests are not always aligned with ours. Behavioral economists have noted, for instance, that real estate agents often advise clients to take a lesser price and get a deal closed quickly, rather than holding out for a more optimal result for their client. This is because, while a $10,000 increase in price means little to a broker netting 3%. By thinking of the short-term guarantee of a sale, the broker ignores the longer-term interest of his or her client.
While the impact of the broker acting on such divergent interests can have negative consequences on a personal level, it can have a devastating impact on us all when applied to large-scale economic trends or legislation.
Now apply this example to an even larger type of transaction. As most people know, the plethora of failed mortgage backed securities issued in the early 2000s was a major contributor to the Global Financial Crisis. Institutional investors purchased packages of various credits that, notwithstanding detailed offering materials warning of potential risks, proved to have much more embedded risk than anyone appreciated. How could so many smart people facilitate the sale of securities that brought financial markets to their knees? Because the folks that were “issuing” the securities were not investing on their own account. Rather, they were in the business of packaging and selling the securities. Think of it like “hot potato.” The arranger of the loans had to keep them in a pool only long enough to sell them to someone else, careful to technically fulfill their duties as an agent. Their interest was short term (i.e., just get the sale), while the interest of the purchasers was long term (i.e., the duration of the underlying loans).
Once the securities were sold, the issuers were off the hook, with minimal remaining liability, while the purchasers were left holding the bag. The inherent conflict between those looking to short term performance (“let’s just get the sale”) and long term investors (“I’m stuck with this for a long time”) plays itself out in our current legislative environment.
But when the fiduciaries for ourselves and our posterity are legislators with short term interests that don’t align with society’s long term needs, that’s when it gets even worse. With our two-year election cycle, representatives’ primary concern is more with the “sizzle” than the “steak.” Their motivation is to produce headlines, get a bunch of interviews on the Sunday morning shows, and win the next election, all while eyeing the next, bigger, electoral prize. Meanwhile, we, the people, are left holding the bag for the long term. In other words, they are the agents selling us a “new shiny thing” but neglect to tell us how it will be paid for or even conduct the appropriate inquiry as to whether the program will work. The measure of their success is short term; whereas, the success of those for whose interest they should be acting is longer term.
This is why we have pension funds that almost uniformly are underfunded, a partially built high speed rail project, dams waiting to burst, bridges in the last stages of their useful life and a country falling into decay. Meanwhile tax loopholes are rampant, making entire industries happy (which they reward with generous contributions to campaigns in the short term), all while the long-term economic health of the country is in peril.
The problem is that our leaders are thinking short term and we let them. So long as our elected representatives aren’t “playing the long game,” we are doomed. Both sides of the aisle seem content to spend and spend, mortgaging our children’s futures, without a care. I’m not sure how we ever balance the budget, much less responsibly grow our economy and care for our fellow citizens in efficacious ways until we elect people with the nation’s long term interests at heart. Expressed another way, when we elect our representatives, we imbue them with vast powers to act in our best interest. They owe us the two primary duties of any fiduciary—a duty of loyalty and a duty of care. Their loyalty more often is only to their own election prospects.
In fact our leaders’ duties are, in the end, not to themselves and not even to us, but to our children’s children—to those that will be here in 100 years.