Who's Time Horizon is Shorter?

Movin' in for the kill tonight
You've got every advantage when they put out the lights
It's not so pretty when it fades away
'Cause it's just an illusion in this passion play
--Pat Benatar

It is often the claim of Big Government proponents, and of the current administration in particular, that private enterprise makes decisions that are too shortsighted. They suggest that businesses prefer short term profits to long term investment that have paybacks far out in the future. This purported shortsightedness is then used by bureaucrats to justify government sponsored 'investment' projects.

These claims do not stand up to reason.

We should observe at the outset that people generally prefer satisfying their desires now rather than in the future (a.k.a. 'high time preference'). However, just how high that time preference is varies from person to person as well as temporally.

We can confidently posit that if resources were unlimited in quantity, then people would generally consume large amounts of them today in a quest to satisfy desires in the here and now. Unfortunately, resources are scarce, and left unrestrained, human efforts to satisfy desires in the here and now would deplete supply--leaving the future a barren place indeed.

Resources must therefore be economized, or rationed, so that a balance is struck between consumption today and adequately preparing a decent standard of living for tomorrow.

Unhampered markets offer an effective means for striking this balance--a means centered around the pricing mechanism. Prices provide signals that encourage various behaviors. High prices encourage supply and discourage demand. Low prices discourage supply and encourage demand.

The ebb and flow of human behavior, reflected in cycles of optimism/pessimism and of greed/fear, are kept in check by prices that periodically serve to restrain overconsumption today so that some resources can be invested in producing more resources for tomorrow.

Businesses invest in future supply when economic calculation enabled by the pricing mechanism suggests attractive reward per unit of capital (i.e., saved economic resources) put at risk.

Hampered markets destroy the signalling value of prices. A primary price manipulated by bureaucrats in hampered markets is the price of money and credit. Because of high time preference, there is constant political pressure to suppress the price of money and credit below the unhampered market value. This is because artificially low prices of money and credit facilitate living larger in the present. However, excessive borrrowing of resources for both consumption and investment purposes is likely to result in fewer resources available for future demand and supply needs. For example, borrowers are burdened with debt that must be repaid out of future income.

Stated differently, hampered markets stimulate overconsumption and overinvestment which squanders resources available for future use (which, btw, leads to the chronic boom/bust cycles we experience).

After decades of such squandering, we currently have few resources available for investment purposes. Low supply means that investors are less likely to put their scarce capital at risk. They are only prone to do so if those projects are perceived to deliver very high rates of return.

Therefore, to the extent that private enterprise currently does have an unusually low appetite for long term investment, we can be confident that it is a consequence of past government intervention.

But the real fallacy lies in the notion that government is a more prudent long term investor than private enterprise. Bureaucrats know little about economic calculation. They deploy the capital of others which insulates them from risk.

Moreover, it is ludicrous to suggest that politicians are more 'long term' oriented than private enterprise. The time horizon of the politician is the election cycle. This cycle drives excessive short term oriented behavior by politicians in order to win votes.

There is an overwhelming body of empirical evidence to support the claim that government inherently possesses a short, rather than long, time horizon. If politicians were long term oriented, then we would not be drowning in debt and spending in attempts to maintain an elevated standard of living that was obtained thru, yep, borrowing and spending.

The prudent long horizon thing to do would be to step away and allow pent up market forces to rebalance the economic system. Less consumption, less borrowing, more saving.

To be sure, present day standard of living would take a hit--perhaps a big one. But the long term oriented individual understands that deflating the excesses from the system today would build the savings necessary to fund healthy investment tomorrow.

As practiced today, government has little chance of operating with such a mindset.