The Short-Term Fallacy

We blame a lot of failures on our inability to think long-term; but when we do look at the future, we seldom make better choices. We have a bigger issue.

Photo by Diego Jimenez on Unsplash

We tend to attribute a lot of today’s economic and social problems to our short-sightedness, our excessive focus on the short term and inability — or unwillingness — to think about the long-term consequences:

• We look at high inflation and the fragile state of our financial system, and blame them on the fact that we’ve used loose monetary policy as a crutch for lackluster growth, without worrying about the long-term risks.

• We see dangerously elevated public debt levels and blame them on governments that always prefer to spend more today without worrying about tomorrow. 

• We blame the tyranny of quarterly financial reports for imparting a suboptimal short-term bias to the decision-making of publicly listed corporations. 

• The large majority of those who worry about climate change would say that we’ve brought it upon us through our narrow focus on today’s prosperity and convenience, ignoring the long-term impact of our economic growth strategies. 

The main common problem would seem to be our tendency to worry too much about the present and discount the future.

Except that this concern about short-term bias might be hiding a bigger problem. 

Consider:

Just spend more

In economics, we actually prefer to think about the long term, partly because forecasting the short term seems to be a lot harder. We (and by “we” I mean a majority of economists, financial sector participants, policymakers and commentators) failed to recognize that the inflation surge was not transitory, worried about a recession that has not materialized, and can’t seem to figure out what’s around the corner. Short-term growth forecasts are constantly revised up and down, they never seem to be on the mark — just follow the periodic IMF updates as an example. 

We are manifestly unable to forecast the volatility that always materializes. Yet we confidently draw nice straight lines to predict long-term growth. And that’s ok. There is a lot we don’t understand, a lot of objective uncertainty and shocks buffeting the economy. 

The problem is that when we think about the long term, we come up with theories like Secular Stagnation, and predict with great certainty that growth will be forever weak unless governments spend more and borrow more. Which sounds eerily similar to the short-sighted decisions that brought us to the current situation of high inflation, fragile growth and elevated debt.

The machines will feed us, one way or another

Or take technology.

Here, looking out into the future, we predict that innovation will magically solve most of our economic problems, boosting productivity and economic growth.

Even if our predictions take a dystopian turn, envisioning mass unemployment caused by the unstoppable march of robots and Artificial Intelligence, we promptly find a magic solution in Universal Basic Income, where the wealth created by machines gets liberally distributed to everyone to enable a brave new future of artistic creativity and entrepreneurship.  

Again, a forward-looking prescription that involves no immediate pain. 

And much like in economics, these confident predictions about the long-term can distract us from our very poor record on forecasting the short-term adoption and impact of innovation — for example on self-driving vehicles and the perennially imminent extinction of truck drivers, or how quickly new technologies will boost productivity.

The ark vs the umbrella

The climate change debate is firmly anchored on the long term, driven by gloomy visions of a future where our very survival as a species is threatened. Much like economists, climate scientists feed us long term forecasts of implausible precision, undeterred by their models’ inability to predict even the past, or by the still rather spotty record of short-term weather forecasts. 

Even avoiding climate doomsday seldom seems to require any short-term sacrifice. Governments subsidize our electric vehicles and the solar panels on our roofs; when an energy crisis strikes, we reopen coal-fueled power plants and beg OPEC to pump more oil, while we wait for technological breakthroughs to deliver unlimited and cheap green energy.  Long-term scenarios envision either an apocalyptic collapse of civilization or an idyllic future of sustainable abundance. There is little honest discussion of how to carry out a realistic energy transition at a cost we might actually be willing to bear.

The long and the short of it

You see where I’m going with this. Yes, we often focus on the near term and ignore the future to avoid any sacrifice and choose the easiest, most convenient solution. 

But just as often we seem to focus on the very long term simply to avoid addressing the immediate difficult choices: tougher standards in education, more responsible macroeconomic policies, a more serious look at uncomfortable tradeoffs in the energy transition. And we do this under cover of overconfident long-term predictions, knowing it will take a long time before they are proved wrong.

More than myopia, the constant here is our unwillingness to face difficult trade-offs, to accept sacrifice and take hard measures. Our insatiable appetite for a free lunch. Whether we focus on the very short term or the very long term, we always default to the easiest choice, the most convenient answer, the one that does not require any immediate pain or unpopular decision. 

So yes, taking a long-term perspective is important. But it’s even more important to take a clear-eyed look at both the short and the long term, to be honest with ourselves about the tradeoffs and not shy away from the hard choices — or at least to do it with full awareness of the consequences.