JOHN MASON: "Short-terminism" and fiscal and monetary policy.
A very timely book that I believe should be read by as many people as possible is the newly released “Edge of Chaos: Why Democracy is Failing to Deliver Economic Growth” by the economist Dambisa Moyo, who has been named by Time magazine as one of the 100 most influential people in the world.
The major thesis presented by Ms. Moyo is that democracies around the world, including the United States, are subject to the curse of “short termism.”
“Short termism” is described by Ms. Moyo as the myopia of the political community and the business community when it comes to decision-making. Economic growth is failing in democratic nations around the world because politicians and business leaders are too focused on the short-run and, consequently, fail to consider longer-term needs that are really the foundation of sustained, higher rates of economic growth.
Politicians in democracies focus on the short-run because they must get re-elected. Business leaders focus on the short-run because the policies created by the politicians produce an environment that emphasize the short-run. Managements have a great fear of “failing to meet the short-term demands of shareholders.” And, in this modern age, these tendencies are exacerbated due to modern technology that make “news” available constantly and almost instantaneously.
Ms. Moyo states that politicians concentrate on short-term metrics such as unemployment, growth, and inflation. They also tend to put aside longer-term concerns like the infrastructure, education, and health care. She writes a lot about tariffs, protectionism, and trade.
I would like to concentrate on “short-termism” and how it impacts monetary and fiscal policies and creates an environment of what I call “credit inflation” that is, in the longer-run, detrimental to the actual goals and objections the politicians are really attempting to achieve.
In the early 1960s in the United States, the newly elected Kennedy administration introduced economic policy programs based upon the work of the economist John Maynard Keynes, the author of the statement “In the long run we are all dead.”
The programs offered by the Kennedy administration consisted of tax cuts to “get America growing again” and fiscal deficits to pick up the slack in the spending of the private sectors.
The idea was to provide government stimulus to the economy so as to either keep workers working in the jobs they had or help return workers to the jobs they had lost during a period of economic decline. This was a good platform that politicians could use to run for office.
This “Keynesian” effort was augmented by something called “the Phillips Curve,” an empirical relationship ship between unemployment and inflation, showing a historical relationship between the two. The “Curve” purported to show that an economy could buy for itself some lower unemployment if it accepted a little bit more of inflation.
But, this moved the economy into a longer-run scene, one in which government stimulus, both monetary and fiscal, could continue to stimulate the economy, even when not in recession, so that faster economic growth would be achieved, which would produce lower rates of unemployment.
Through deficit spending and monetary stimulus, credit could be expanded, almost continuously to achieve the goals of government. Hence, businesses and investors could expect a longer-run environment of credit inflation.
By the late 1960s, inflation became a real issue in the United States, which eventually led to wage and price controls in 1971. However, the underlying foundation for credit inflation was in place. Especially, as President Nixon came on board stating “We are all Keynesians.”
Inflationary expectations grew in the early 1970s and businesses and investors changed their way of investing, leaning now more to assets like houses, gold, art, and other items that would retain or expand value.
The 1970s and 1980s saw the advancement of financial innovation to take advantage of the perpetual nature of credit inflation and this resulted in increasing risk taking, the increasing use of financial leverage, and the creation of new and exotic financial instruments.
And, this is the world that we have been living in, ever since.
But, we did not get some of the results that economists…and others…expected. Economic growth actually slowed down. Yes, business expansions actually got longer, but the growth rates were not what they once were. Labor force participation rates fell as workers failed to kept up their skills or learn new ones, because, the government (politicians) promised to stimulate the economy so as to keep workers in the jobs that they were working in. And, actual price inflation actually slowed down as credit inflation resulted in asset bubbles in things like gold or houses or commodities, rather than increases in the prices of consumer goods and services.
Ms. Moyo spends time in earlier chapters discussing why the economic growth slowed down, why labor force participation rates fell, and why the growth of labor productivity declined.
What we learned over this time period is that monetary and fiscal policies could not actually produce the economic growth that was desired. Economic growth depended upon such “real” factors as the growth and composition of the labor force, output per person, and total factor productivity. (Besides the book by Ms. Moyo, one could also recommend the book by Robert Gordon titled “The Rise and Fall of American Growth.”)
In other words, the emphasis on the short-run produced greater withdrawal from the labor force, greater income inequality, and asset bubbles. And, what fell through the cracks? The infrastructure. Corporate real investment. Educational standards. Health care support. And, we also got slower longer-term rates of economic growth.
One of the real questions that Ms. Moyo asks in her book is about the future of democracy. Can a governmental system set up to change who is running the government on a short-run basis compete with another system…state capitalism… and, exemplified by China…that is more autocratic, but also focuses upon longer-run outcomes.
A problem the democracies of the world is facing relates to the fact that, right now, the democracies are struggling and are producing economic outcomes that are not satisfying larger and larger segments of the population. Hence, the move toward more “populism.”
Whereas, China has shown over the past twenty years or so, a remarkable ability to focus on longer-run economic goals and objectives and created sufficient success to gain the attention of many nations that want to improve the lot of their people through accelerated economic growth.
We in the democracies of the world must find a way to incorporate longer-term thinking in our political process. I have a strong belief in the democratic way and the open capitalistic economy. I believe that history has shown that a free and democratic nation can work things out and move on, stronger, into the future. We just have to ask ourselves the right questions.
Up to now, we have not been asking the right questions.