Categories
Economics Politics

Long Term vs. Short Term: On the Personal Level

The sacrifice of the long term in favor of the short term in business has been bothering me for some time. However, as I continue to ponder it, it strikes me that the same problem can be traced all the way back to an individual, personal level. People consistently make short term decisions at the detriment of the long term. I do it as well — shelling out for an expensive handbag with money I should have saved or driving my car when I could ride my bike and save a pinch of earth’s resources.

Of course, considering the long term with every decision one makes on a daily basis would be a time consuming, laborious task. I’m in no way an advocate of living one’s life stuck at home, stricken with indecision. However, one area where I see a decided lack of long term thinking is in political positions and decisions. Was anyone thinking about a long term exit strategy when the Iraq War was approved? When the extension of the Patriot Act is pushed, do those in favor consider how this affects civil liberties in the US twenty years from now? If Intelligent Design is allowed in the classroom, what would be the effect to the perception of scientific method? Do people in favor of a federal healthcare system consider the debt load, probable bureaucracy, and economic effects on the long term health (fiscally, and healthcare system in general) of the US?

Thinking long term is hard. The short term is always much easier to judge, but I believe the US would benefit from a decided surge in long term thinking.

Categories
Economics

On Long Term vs. Short Term

Link logs in the blogosphere are saturated with incredulous links to stories in the vein of “Wow. Look at this company — they pay their employees well, are socially responsible, and they’re still successful. Huh.” Among the companies likely to be the subject of the linked articles are SouthWest, JetBlue, Whole Foods, or Costco.

Great. I like to see great companies rewarded with stellar PR. However, why the accompanying surprise? These companies have chosen the long term over the short term and are justifiably reaping the rewards. Their success is not a surprise for the economically wise — in fact, economists may be wondering to themselves why more companies haven’t caught on. Success is found in thinking long term, not short term.

Oddly, against most economics 101 lessons, a large portion of the private business sector is operating only on the short term. Any small piece of negative company news, whether a possible leadership shake up or a slight miss of quarterly earnings, can send the company stock on a slide. The focus on quarterly earnings have effectly created a business world that has lost sight of the long term. What about looking past Q4 to next year, the next five years, the next ten years?

Great business leaders have a long term vision. Southwest and JetBlue know that keeping fixed costs low maintains low debt and expense burdens for the future. They know that valuing and empowering their human capital lowers turnover and discontent, thereby saving millions (billions?) in training and the added cost of unionized labor. Costco knows that having a well-paid, well-treated work force lowers turnover, increases productivity and efficiency and, thusly, increases profits more than Wal-Mart-esque penny pinching ever could. The same goes for Whole Foods.

So, how do we get out of the short term funk? Well, in my estimation (one tainted by a high level of economics geekiness, but by no means one that should be considered infallible), investors need to look past the next quarter, because the company a year or more in the future is more important. And, ultimately, a company has to be willing to take short term investor losses in order to save the long term. Economic principles will reward them in due time.

Categories
Economics Politics

Live 8: Missing the Mark

Live 8. In a throwback to the famous LiveAid concert, lots of famous artists from Madonna to Destiny’s Child donated their time to throw a huge concert that draws tens of thousands. Why you ask? They must be raising money for a cause, right? Well, that would be half right. It’s for a cause, but what they’re raising is awareness. Yes, my audience, awareness is sure to help the starving children in Africa.

The Live 8 concert is in the same vein as the ONE campaign I spoke of earlier. Good intentions, but, in my estimation, totally misguided. It all seems like a bit of a strawhouse to me. Never one to write an opinion without first finding the facts (*cough* — moving on…), I did some more investigation. Consider me a scientist looking to research my hypothesis.

Firstly, let’s start with the point of Live 8.

This is without doubt a moment in history where ordinary people can grasp the chance to achieve something truly monumental and demand from the 8 world leaders at G8 an end to poverty.

The G8 leaders have it within their power to alter history. They will only have the will to do so if tens of thousands of people show them that enough is enough.

So what is the master plan you ask? That’s a good question. Remember it’s about awareness. The point is supposedly that once we achieve a critical state of awareness, politicians and G8 leaders will fly into action to reduce poverty around the world, although, the focus seems to be mainly on Africa. Among the action plan points is doubling aid, cancelling debt, and delivering trade justice for Africa.

I do believe that the cause is noble, but they are missing the point. Again a failure to grasp economics is fairly guaranteeing that a good effort will proceed unsuccessfully. Let’s flush the action plan points out one by one.

Doubling aid

The Make Poverty History site goes into more detail on what they are hoping to achieve by doubling aid. While ascribing to the “more money is better” idea (where have we heard this before?), they also hope to maximize benefits by changing the way it is delivered. They want the $50 billion to be focused on health care and education while eschewing the usual economic strings attached. Indeed health care and education are important. However, the problem in these countries begins with poor infrastructure, pervasive corruption, and an abundance of “kleptocrats.” The first problem with aid is that it usually goes through the African countries’ governments. Portions, if not most, are siphoned into private Swiss or Cayman Island bank accounts, with the rest being divided among those who have curried the most favor with the current regime. Little if any reaches the people who need it most. Ostensibly health care and education seem important cornerstones in pulling a country out of poverty, but let’s examine it. Health care saves people’s lives, although the link to the sustainable growth needed to bring a country out of intense poverty is vague at best. Yes, healthy people are good for providing a work force, but once they’re healthy, then what? Infrastructure and a proper incentive system just magically appear? Education — seemingly important as well. Surprisingly, however, its link to sustainable growth in developing countries is arguable. The governments, in their corruption and intervention, create environments where profit opportunities do not lie in helping the country grow, but in perhaps lobbying the government for favors. This all goes back to infrastructure, physical as well as the all important incentive system. As William Easterly notes in his book The Elusive Quest for Growth, “Schooling pays off only when government actions create incentives for growth rather than redistributions.”

Cancelling Debt

The World Bank and the IMF are constantly chided for attaching strings to loans made to developing countries. The strings usually focus on economic changes — privatization a prime example. Live 8 advocates cancelling all such debt. They note, in fact, that institutions like the World Bank and IMF must “stop asking poor countries to jump through hoops in order to qualify for debt relief.” Further:

Rich countries and the institutions they control must act to cancel all the unpayable debt of the poorest countries. They should not do this by depriving poor countries of new aid, but by digging into their own pockets and providing new money.

Let’s analogize this. Joe walks into a bank. His credit is wretched. He has yet to make a single payment on the car loan given him a year ago. He has made no steps toward securing funding, in this case finding a steady job (a condition for the loan). He has made no changes in his life’s structure, yet, he walks in and asks that his car loan be written off and just be given some money. Laughable, right? Indeed. However, this is exactly what Live 8 and Make Poverty History supporters are asking. What has changed in these countries that suddenly giving them free money will fix? Given the kleptocrats in governance, loans (and, thusly, debt relief) miss their marks. What, I ask, are the chances of the corrupt governments magically using the new (free!?!) money with no strings attached to create infrastructure and build an incentivized economy when the strings attached loans didn’t work?

Delivering Trade Justice

Free trade is something I firmly believe in. However, more often than not, when an organization is talking about “trade justice” it is talking about what it calls “fair trade.” Thus, I was immediately skeptical when I saw Live 8 mention trade justice. Unfortunately, my skepticism was well-founded. From the site:

…[W]orkforces are being cynically plundered for cheap labour by powerful, under-regulated transnational companies, leaving thousands open to abuse and exploitation.

Underscoring my argument for free trade is the idea of comparative advantage. A country’s resources are best and most efficiently invested in areas that they have a comparative advantage in over another country. That is the basis for a trade relationship. Developing countries generally have a largely uneducated workforce. And, yes, given their economic status, are a cheaper workforce than that of the United States. However, they are a workforce quite suitable for industries such as manufacturing. Now we have a comparative advantage — the less skilled workforce has a comparative advantage in widget-making. Global companies realize this and wish to make use of such a workforce. Live 8 also notes that the companies are largely under-regulated. Firstly, most of those countries don’t have the governmental or economic structure in place to make such demands on industry. Perhaps this sounds crass, but is a person living below the poverty line really worried about environmental issues? They have bigger problems including making enough money to make it through the day. Also, any governmental regulations in these countries create more bureaucracy which essentially creates more overhead (read: more money spent on government, less on creating a sustainable incentive system) and lessens the amount of aid (remember all that money the G8 is donated as per the wishes of Live 8?) that actually reaches its intended recipients. The most disappointing part of all is that Live 8 was so close to a necessary cornerstone of helping developing countries — one of the keys IS trade. Free trade. Free trade, while seemingly a way to justify exploiting cheap labor, is a basis of income and standard of living growth.

And Finally

Most importantly, the money they wish to give (and the cancelled debt money), is really the taxpayers’ money. As wise “investors” isn’t it our place to ask questions, demand that we see a return on investment? Are you willing to give away your money in a cause that tosses economics to the breeze? Because I’m not.

Finally, for my donated time writing this entry, where is my $12,000 goodie bag? Oh, right. I wasn’t a performer at Live 8.

More Opinions

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Economics Rant

The ONE Campaign

You’ve probably seen the commercial. Various celebrities including Cameron Diaz, Bono, and Brad Pitt flash on screen in a subdued black and white tint trying to mobilize us to some action. At the end Brad assures us that they “don’t want your money, we want your voice.”

Already skeptical of the campaign, I visited the given address. The cause is definitely noble — to fight the global AIDS epidemic and extreme poverty. The group wishes to get the U.S. government to allocate an additional one percent of the budget (thus the name) toward providing aid to the poorest of countries by mobilizing voters across the nation.

Again, this is a noble cause. However, the tagline “we don’t want your money, we want your voice” is misleading because any money allocated through the federal government budget IS our money. People seem to neglect this fact all the time. Do you pay additional taxes to support such initiatives, or do you keep your money and donate to charitable causes privately? Shouldn’t we have this choice? I would rather keep the money and donate to the causes I felt were most important. Yes, most likely fewer people would voluntarily donate as opposed to involuntary donation (i.e. taxes), but shouldn’t we decide where our money goes? Because, ultimately only we, and not the government, can use our money most efficiently.

Also, don’t underestimate the power of the private citizen as evidenced by the amazing donations to tsunami relief.

Categories
Economics

Initiative 147 !== Jobs

This entry I must file under the “why do people stick to old ideas that no longer hold water” category. In November, along with electing a new United States President, Montana voters will vote for or against Initiative 147, also known as I-147. (This is not a vote for or against a new interstate highway).

Initiative 147 lifts Montana’s 1998 ban on CYANIDE LEACH MINING. But, I must be fair and note that the initiative would put strict environmental procedures in place for such mining. However, the only real argument for it, that I’ve seen, is that it would create jobs.

(This is the part where I sigh deeply and bang my head against the wall.)

That would be great if they were sustainable jobs and the sustained jobs didn’t hurt the environment. The problem with resource extraction related job growth is that IT IS NOT SUSTAINABLE. Gold is not a renewable resource unless you consider the thousands of year lapse needed for it to form as making it “renewable.” The same goes for silver. (And oil, of course, but that’s another story for another day).

A lot of people in Montana (and other non-urban states) believe that Montana job growth is in extracting resources. The Sonoran Institute, an economic group with a branch in Bozeman, MT, did a 30-year study that found that the exact opposite is true. Its research, Prosperity in the 21st Century West,

dispels the notion that public lands hurt local economies by preventing the development of natural resources. In fact, the contrary is true: public lands draw people who want to live and work in rural areas which leads to vibrant economies and better quality of life.

Also, I think it should be noted that a mining company, one based in Colorado at that, is backing the initiative. The often repeating television commercial for the initiative features the executive director of the mining union. I’m going to go out on a limb and guess that their activism is not motivated by non-bias and a love of Montana life.

Montana has an educated, talented work pool. Let’s work with that and create a vibrant economy that can grow into the future. Montana can do more than deplete its natural beauty.

Categories
Economics Education Politics

More is not better

This is especially true in a market that doesn’t operate efficiently. (I’ve mentioned the state of education a few times before.) And, yet, the idea that throwing more money at education will fix everything pervades. Why? I’m scratching my head on this one.

California’s education budget (in 2002) is 43 percent of the total state budget. This figure leaps up to 53 percent if one considers only the general fund. Over 22 percent of Michigan’s 2005 budget will go towards higher education alone. Mississippi allocates 65.26 percent of its budget to education. Most states fall in the 40-70% range.

Where does it stop? More money is obviously not fixing anything. When do we try alternatives? When do we say enough is enough? When do we insist that public education use our tax dollars more efficiently?

My first idea? Introduce market dynamics into the teacher market. It would lead to an incentive for those that would be excellent teachers/educators to enter the market because market dynamics would allow good teachers to be properly rewarded for their efforts.

This is a small step, but it could be one of the most important.

Further reading on the subject:

Categories
Economics Opinion Politics

The economics of wealth and wealth creation

While the Robin Hood idea of wealth dispersal appeals to many, I would like to say that it would have an absolutely horrible effect on real society. It’s great for a cartoon or film, but in reality would have dire consequences.

The “hate the rich” attitude seems to be deeply rooted in American society today. Everyone wants to “get” the rich. Let’s tax them more. Let’s take part of their wealth and hand it out to the poverty stricken. Let’s lower the income gap.

Why? Why the hate?

Categories
Economics

Adam Smith does it again

I love it when there is real world evidence that the “invisible hand” free market system really works. The evidence this time stems from the outsourcing that has been occurring in the technology sector that last few years.

Everyone knows the story: Companies looking for cost savings outsource technology functions to firms in India. An outcry rises from our technology sector — especially those whose jobs were outsourced. And the outsourcing has made the technology sector a tough one to be in.

But, today I saw an article that confirmed what I already knew: that it wouldn’t be long before it would no longer be profitable to outsource.

It’s all in the economics. Indian technology workers are cheaper. U.S. companies send their work to India. The demand for workers is greater than the supply of such workers in India (i.e. a worker shortage). Indian firms scrapple with each other for the qualified workers available. How do they attract those workers? They increase salaries. Eventually, there will be no salary savings for U.S. companies.

Sure, according to the article, the Indian firms are not yet passing the salary increases on to their clients. However, the firms cannot take these increases directly from their pockets forever. Eventually, they will have pass the costs of higher salaries on to their U.S. clients.

When that happens, I have every confidence (well, because I know the economics of free markets work) that my technology sector colleagues will be heading back to work.

Categories
Economics Opinion

Hi, it’s me Marilyn

As I was perusing the Parade last weekend, I was surprised at some of the letters as well as the somewhat inadequate answers in the ‘Ask Marilyn’ column.

Categories
Economics

cause and effect

I used to think that legislative representatives and other high-level government officials had to have a basic level of economics knowledge to be able to hold the job. Now I’m not so sure.

I just saw Chrissy Gephardt (daughter of Rep. and presidential candidate Richard Gephardt) on CSPAN. She was going on about how her father was a great advocate for American workers — that if he was elected he would work to get more jobs. (This was after she lambasted NAFTA, but that’s another entire rant.) She noted that her father has worked to get higher wages and more jobs for the American people. However, unfortunately on the basics of supply and demand alone we can see that this doesn’t work. Currently in our nation we have more supply (i.e. workers) than we have demand (i.e. employers looking for employees). Thus, a surplus which tends to drive wages down. If wage are somehow increased, through law or otherwise, demand will shift downward. And we have an acute compacting of our present problems. In an economic downturn, this definitely holds. And in fact a downturn can shift the entire supply curve back lowering wages even more. Only in times of great economic prosperity will the supply curve shift out allowing for expansion of the number of jobs as well as an increase in wages.

Why, oh, why are people so uninformed? Can’t an economics crash course be a requirement to serve the public?