Friday, May 30, 2014

If Politicians Have Short Attention Spans, Then Why Do Economists (Or Anyone) Ever Think About Long-Term Problems?

-- Posted by Neil H. Buchanan

One of the most widely accepted, and most universally deplored, aspects of modern representative democracy is that politicians are almost necessarily myopic.  U.S. Representatives serve two-year terms, so that they are never more than a year or so away from their next possible primary challenge.  Presidents are often accused of spending their first four years trying to achieve short-term policy victories that will matter immediately, because wise policies that take decades to pay off will only help someone else get re-elected.  Even U.S. Senators, who win six-year terms, now find themselves in the "money primary" as soon as the last election is over, thus thinking at all times only about what can make supporters happy as soon as possible.

This conventional wisdom, in turn, has led to the creation of systems of governance that are deliberately insulated from short-term political winds.  The most important of these is the Federal Reserve, which Congress created a century ago, and to which Congress delegated its Article I power "[t]o coin money [and] regulate the value thereof."  Even the Fed's statutory political independence, however, has not removed people's suspicion that it bends to the political winds.  The most obvious example was the Fed's pumping up of the economy in apparent support of President Nixon's reelection campaign in 1972, but there is always lingering suspicion among both liberals and conservatives that short-term politics, not wise policy, is at work in the Fed's decisions.

Of course, if it is true that we get the government that we deserve, then the problem is not that politicians' reelection concerns and fund-raising demands force them to think only about the short term, but that the people who vote for them and fund them are themselves myopic.  People talk about "our children and grandchildren" all the time, usually as a way of talking about the short-sightedness of one policy or another.  Yet if people wanted to improve long-term policy for their progeny, they could do so by electing politicians who will enact sensible long-term policies, while punishing those who are trying to pander to short-term interests.

I suspect that there is more than some truth to the idea that people are myopic and impatient, that politicians are also myopic and impatient, and that there is a complicated symbiotic relationship between the two groups.  Here, however, I want to discuss what appears to be a contradiction.  If politicians, either because of their own imperatives or as proxies for their myopic supporters and voters, would be rationally uninterested in policies that do not provide nearly immediate bang for the buck, then why would economists and other policy entrepreneurs ever bother talking about long-term effects of policy?

This question arose during my recent series of posts (last Friday's being the most recent) about "deep" economic theory, focusing especially on the Cambridge Controversies of the 1960's.  As usual, Dorf on Law's commenters set a high standard of engagement throughout that series of posts, giving me plenty to think about.  In my post two Fridays ago, I tried to lay out why that long-ago intramural debate among Keynesians still matters in developing a "longer-term strategy for improving economic outcomes."  One commenter (who is, like me, a "recovering economist") objected that I had made myself irrelevant by trying to say that longer-term strategies matter at all, because clearly U.S. politicians do not care about anything but short-term outcomes.

Although I offered an immediate response on the comment board (with which I am still comfortable), I do think that it is worth thinking a bit more about these questions: If political decision-making is inherently skewed toward short-term results, does longer-term thinking ever matter?  And, do scholars who talk about long-term effects reveal themselves to be irrelevant and woolly-headed, with no hope of ever having any impact on the world?  (I should add that, if the answer to the second question is "yes," then that might still not change how I conduct my life.  But maybe that is just me.)

After some further thought, I have surprised myself by concluding that the conventional wisdom on which these questions are premised is almost completely, 180-degrees wrong.  That is, it is not only possible to find politicians taking seriously policies that will have effects long after the next election, but that is the norm rather than the exception.

The most extreme example of this point is provided by the political reaction to Thomas Piketty's blockbuster book.  Piketty's analysis is, in essence, the ultimate in long-term thinking.  He argues that, left to itself, capitalism will inevitably concentrate more and more money in the hands of a dynastic elite, over the space of many decades.  Paul Krugman has further pointed out that, even though the skewed wealth and income distributions in the U.S. do not currently fit Piketty's story, they will do so within a generation or two, because the "labor income" that is being earned by hedge fund managers and various titans today will become part of the concentrated, dynastic wealth of coming generations.

Piketty thus calls for efforts to prevent the re-emergence of "patrimonial capitalism" over the course of the next few generations, and conservatives then freak out and call him a communist.

If everyone were short-term thinkers, however, this should not be happening.  Liberals should not care about whether someone in 2064 will be dealing with the third generation of the Koch family, and conservatives should not be trying so frantically to prevent the enactment of policies that would not affect anyone in any serious way for decades.  (No one on the left has made this offer, but we can be certain that conservatives would roundly reject an offer from liberals to enact Piketty's policies in 2024, rather than 2014.)

And it is not just that people are mobilizing real resources to argue about policies with future effects, which might emerge from the popularity of Piketty's book.  We are now in our third decade of battles over the estate tax, with Democrats agreeing to changes that collect less money today because they fear the argument that the estate tax will break up family businesses and farms -- a claim that is not only completely unsupported empirically, but that also lacks any immediate consequence for all but a tiny, tiny fraction of the population.

Furthermore, as Krugman has also pointed out, the broad fascination with Piketty's book is actually rather bizarre when compared with what we could and should be doing.  We are currently suffering the ongoing damage of the Great Recession, with long-term unemployed people still not finding jobs (even after being given the "incentive" to find work that the Republicans so generously provided, by cutting off unemployment benefits), and with the economy still well below its capacity in the here and now.  Yet we are all talking about whether Piketty's decision to use one data set over another fatally compromises his claim that inequality is self-reinforcing over the span of generations.

Beyond that extreme example, think about the general run of economic policy debates.  Social Security is supposed to be "broken" in the sense that its trust funds might be exhausted in about twenty years, at which point the benefits will be cut by about 25% (which, because they will have risen in the meantime, would return them in real terms to current levels).  Real present-day political battles are informed by economists and other analysts who have long-term theories and long-term predictions about Social Security, and Social Security's long-term future is very much a hot-button issue.

Fiscal policy generally, in fact, is debated almost entirely around questions about its long-term effects.  Can we spend more now, or will that reduce the incomes of our children and grandchildren?  Should we invest in infrastructure, to increase the long-term growth rate of GDP?  If the conventional wisdom were true, and politicians really did win reelection simply by distributing candy to the myopic masses, then we would have overreacted to the Great Recession by enacting too much fiscal stimulus, not too little.

Indeed, if the only thing a politician is willing to hear is advice about how to have an immediate impact on people's pocketbooks, why would Congress have created the Fed?  And, if the answer is that Congress is now more short-term in its thinking than it used to be, then why has it not simply eliminated the Fed?  Could Congress not just print money, in response to complaints that people do not have enough money right now?  Perhaps, however, that is the the limit of the logic, because the likely impact of simply sending everyone checks would be almost immediate inflation (and no increase in real living standards), not merely the possibility of future inflation.

Short of that, however, it is actually rather remarkable that so much of our policy debate is driven by competing narratives about long term effects of policies.  Conservatives say that social spending will, over the space of decades, create a culture of dependency from which today's poor children will never extricate themselves, so we cannot help those poor children's parents today.  Liberals say that we need to spend more money on education, to keep the country economically competitive in the decades ahead.  The ACA was enacted (with, it should be noted, a multi-year roll out) on the promise of some immediate impact, but much more because of its non-immediate effects.

Even beyond economic policy, it is a challenge is to find U.S. policy debates that are not waged over longer-term questions.  Military strategy?  Foreign policy?  Same-sex marriage?  The payoff on these things, either way, is either minimal or non-existent in the immediate sense, but potentially enormous over time.  A policy analyst who thinks that politicians will not listen to a compelling long-term story is likely to be both grievously surprised and completely ignored.

Note that I am not saying any of this as a matter of defending politicians, voters, economists, or anyone else.  Instead, I find myself truly surprised by how backward the standard story turns out to be, upon examination.  People seem to be myopic and impatient, and politicians also seem to be myopic and impatient, yet the vast bulk of our arguments and actual policies focus on effects that stretch far beyond the next election.


Michael C. Dorf said...

Very interesting post! One quibble: I think the Fed is the SECOND most important US governance system that is "deliberately insulated from short-term political winds." The Art. III judiciary is the most important.

Neil H. Buchanan said...

Point taken. What was I thinking?

Michael C. Dorf said...

You were thinking like an economist, rather than a lawyer! (Fighting words, I know.)

Jimmyd said...

Neil. We are both correct, just focusing on two different aspects of the same situation. If I understand your post correctly what you are observing is the fact that in the present America is moving from a past orientated society to a future orientated society, a shift in which technology is playing a central role. But this cultural movement should not be confused with the political winds that guide the politician's actions. Culture is like the waves upon which the structure of the sailing ship of state rides. When the culture is future oriented it's like the tide running out and when the culture is past orientated it's like the tide running in. Yet the politician still sails the ship of state by tacking to and fro in the shifting political winds. If the political winds are strong enough it's possible for the ship to leave the harbor even with an incoming tide and if there are no winds to speak of the sailor who lets himself go on the outgoing tide finds himself adrift on a vast ocean.

As I see it my post of some days ago was about the structure of the boat and your post today is about the direction of the tide. When I claim that America is structurally set up to focus on the present I'm not saying that politicians cannot or do not adopt rhetorical stances that embrace long-term thinking, any sane sailor considers the direction of the tide. What I am saying is that a politician may talk about the the distant future but what he does is tack for the next election. The politician tacks for the next election because he's in a sailboat--the ship of state is designed to respond to the political winds first and foremost.