As individuals, we oftentimes struggle to comprehend our actions past their immediate impacts. This often can cause negative impacts further on down the line. Some effects can be relatively minor. When faced with a good meal or a tasty sweet, we will eat past our limits, satisfying our taste buds in the moment, only to regret it by feeling bloated, or seeing a higher number on the scale. However, some effects can be much greater. Many Americans (75% to be precise) have retirement savings that fall short of even the most conservative of savings targets, and (21%) don’t save at all. So too can vary the effects of short-sightedness as a nation.
“A society grows great when old men plant trees in whose shade they know they shall never sit”. Some attribute this quote to the Ancient Greeks, some to modern motivational speakers, but the one thing all can agree on is that the sentiment rings true. Western societies of old were renowned for the ability to look beyond their own current short-term benefit for the greater good of their societies in the long run, as seen in the cathedrals of medieval Europe which would take hundreds of years to complete. However, nowadays, we have collectively decided to stop looking out for the needs of the future in order to satisfy the wants of the present.
Sacrificing Long-term Investment for Short-term Gains
Shareholder capitalism is the driving economic system in the USA and much of the modern world. In such a system, corporate leaders are legally required to operate companies in a way to maximize value for shareholders, meaning those who have purchased a share of the company. This usually takes form by the company executives doing anything they can to keep share (stock) prices high and growth metrics consistent. While the system allows for great short-term results for investors, it can oftentimes be to the detriment of the company’s employees and customers, or even to the detriment of the company itself.
If a company makes a profit, it would be logical to assume it would be best for the company to reinvest its profits back into itself, in order to continue to achieve profits in the future. However, that is often not the case. Corporate leaders are under such great stress to keep share prices high, meaning they oftentimes have to cut back on investments in R&D, employees, or capital expenditures, all of which would help the company succeed in the long-run. This has not always been the case. Financial markets used to be seen as a way to easily create long-term investments in sound businesses. However, as these markets have grown more complex in modern times, the growing number of financial intermediaries has started to see investments in the market as a sort of paper asset; something meant to be traded in the short-term, not invested in the long-term. This new kind of trading makes some, including the intermediaries, quite wealthy in the short term. However, this kind of trading is also a zero-sum game, sorely lacking in long-term wealth creation.
The Debt to GDP Ratio: a Marker of Economic Health
As financial markets have matured and grown more complex in the USA, so has the country’s debt to GDP ratio. The ratio, defined as the total government/sovereign debts of a country to its GDP, or economic output, is usually a bellwether for the health and performance of an economy. For example, a study done by the World Bank shows that countries with a debt to GDP ratio of more than 77% are expected to go through economic slowdowns and recessions. As of 2022, the ratio in the USA is over 120%, as seen in the graph below.
Traditionally, the debt to GDP ratio has remained quite low in the USA, only spiking in times of large government spending, mainly in times of war or financial recession. These instances of spending make sense in the short and long term; one cannot fight or win a war without spending big on the armed forces, and fiscal spending and loose monetary policy can help a struggling economy bounce back. However, both of these come with a caveat. Once the war or recession is over, spending must go down, and taxes must go up.
While America has been good historically about maintaining a low federal debt to GDP ratio, it has not been nearly as good since the 1980’s. In response to the recession, inflation, and oil crisis of the 1970’s, Reagan was elected president under a platform of lowering taxes in order to help the American economy recover. This resulted in the annual federal budget deficit growing from $41 billion in 1971 before his presidency to $212 billion in 1985 after his first term in office.
By this time, the American economy was booming again, meaning that spending should be cut and taxes should be raised in order to maintain a stable debt to GDP ratio. However, that has not been the case. Besides Clinton’s second term in office, every over American president has seen an increase in the debt to GDP ratio. Spending continues to increase during each recession (from $161 billion in 2007 before the Great Recession to $1.41 trillion in 2009 after) but even when policy is tightened, it rarely ever results in a budget surplus, just less of a budget deficit.
Utopia vs Reality
Why would American politicians engage in such reckless fiscal policy? The answer is quite simple. Americans, as with all other people, hate to pay taxes. Additionally, Americans love government benefits and programs, such as medicare, social security, and infrastructure. These beliefs, while compatible in a theoretical utopia where scarcity does not exist, are not compatible in the real world. However, it is unlikely that any presidential candidate would be elected on a policy of making their voters’ lives worse, even if only in the short term. Instead, Republicans run under a policy of decreasing taxes (with negligible spending decreases), while Democrats run under a policy of increasing spending (with negligible tax increases). Both yield the same result in regards to the debt to GDP ratio.
These problems mentioned are far from the only instances where we prioritize short term benefits of long term successes. We prioritize increases in home value over home affordability through restrictive zoning policy, helping retirees maintain home values at the expense of the young looking for a place to live. We raise our children in ways that keeps them protected and sheltered, but causes them to flounder in the real world. It’s in our personal lives, our culture, and our elected governments.
When looking towards the future, we have two choices. Either to continue to try to benefit in the short term at the expense of either our future or future generation’s futures, or to bite the bullet now; to do things that may harm us in the short term, but will greatly benefit us many years from now. We can stop structuring our financial markets in their current predatory forms, which seek to leech from companies instead of investing in their futures. A potential solution to this would be structuring shareholder voting rights in a way that makes them dependent on the length of time they have held their shares, instead of just by the number of shares they currently hold. We can stop supporting politicians who care more about getting elected than the economic health of the nation. We can look out for the needs of the future instead of the wants of the present.