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.