Short Term Gain, Long Term Pain

By Ron Robins, Founder & Analyst, Investing for the Soul

Blog Enlightened Economics; twitter

First published March 31, 2011, in his weekly economics and finance column at
alrroya.com

Unacknowledged as key causes of most developed countries’ growing and

unsustainable debt is their citizens’ lack of happiness and well being. This induces
people to seek immediate comfort in material goods, drugs, and activities and
lifestyles that eventually cause them, and their societies, great harm, ill health, and
massive debt!

After decades of study, Robert E. Lane, the Eugene Meyer Professor Emeritus of
Political Science, at Yale University in the US, found that it is a lack of happiness and
well being that is eating away the moral fibre of the populations in advanced market
democracies. In Professor Lane’s seminal book, Loss of Happiness in Market
Democracies, he writes, “amidst the satisfaction people feel with their material
progress, there is a spirit of unhappiness and depression haunting advanced market
democracies throughout the world, a spirit that mocks the idea that markets
maximise well-being and the eighteenth-century promise of a right to the pursuit of
happiness under benign governments of peoples choosing.”

Continuing, “the haunting spirit is manifold: a postwar decline in the United States in
people who report themselves happy, a rising tide in all advanced societies of clinical
depression and dysphoria [anxiety, malaise], especially among the young; increasing
distrust of each other and of political and other institutions, declining belief that the
lot of the average man is getting better, a tragic erosion of family solidarity and
community integration together with an apparent decline in warm, intimate relations
among friends.”

It is these conditions which Professor Lane observes that give rise to individuals
seeking immediate comfort anyway they can. Hence, most developed countries’
populations gravitate to instant solutions that might ameliorate their lack of
happiness and anxieties. This, no matter the long term monetary, psychological, or
physical consequences and costs to themselves or society. Professor Lane believes it
is imperative for western democracies to give the highest priority to improving the
happiness and well being of its individuals. And this means their focus should be on
human psychological health and relationships—not about income levels.

By looking for hedonistic joys in the present, many developed countries’ individuals
seek excessive material consumption which then creates unsustainable levels of
consumer debt. In the US, though to a lesser degree in other developed countries,
consumer debt has grown far faster than individual earnings gains over the past
several decades. Despite a respite in consumer debt growth during the past two
years, signs are emerging that US consumer debt might well begin to outpace actual
earnings gains again in 2011, thereby creating conditions for yet another future
financial crisis.

Also, and again much ignored in the debate concerning debt, are other individual
behaviours that induce it. For example, to provide a modicum of happiness and to
make life more bearable, people in America (and in many developed countries)
consume drugs (legally and illegally) in extraordinary amounts. These drugs—
alcoholic beverages, marijuana, cocaine, cigarettes, prescribed and non-prescribed
medications, etc.—often create dependencies that impair health, brain and
psychological functioning. These dependencies then lead to greater crime to support
drug habits, increase prison populations and criminal/legal costs, raise the number of
accidents everywhere, and encourage unhealthy lifestyles that in turn produce
epidemics of obesity, diabetes, heart disease and all manner of health problems.

Americans spend more on healthcare, by far, than anyone else. In 2009, according
to the Centers of Medicare and Medicaid Services, Americans spent $8,086 per
person on healthcare, equal to 17.6 per cent of their economic output or gross
domestic product (GDP). And such expenditures continue spiralling 4 to 10 per cent a
year, far faster than GDP itself. Thereby they add inexorably to future unfunded US
federal government medical liabilities that Boston University’s Professor Laurence
Kotlikoff believes is about $125 trillion over an infinite timeframe. To fund that
liability would require every man, woman and child in America to pay about
$407,000 to the US federal treasury!

And among public companies a short term focus on near term profits that potentially
create longer term costs and debt has been endemic. Consider this 2001 quote by
Maryann Keller on the US automobile industry. In Forbes magazine, she said, “[That]
Chrysler, GM and Ford spent billions of dollars to buy their stock in the open
market… It was always obvious that product spending [developing new autos] was
being sacrificed to provide trading liquidity [ease of selling stock] for big investors
while boosting earnings per share. GM, Ford and the Chrysler Group today [in 2001]
find themselves with growing gaps in their product portfolios as they lose market
share…”

Thus, the US automobile industry preferred to spend profits on supporting their near
term stock prices rather than developing new products for longer term profits. By
2009 all but Ford were bankrupt. After losing tens of thousands of jobs and engaging
in a massive automobile industry restructuring program, the US government bailed
out the industry (for now?) at a cost of about $85 billion. (Canadian governments
also supported GM and Chrysler to the tune of $13.5bn CAD.)

Total societal US debt (private, corporate and government) is now likely to continue
moving higher again as consumers are forever encouraged to spend now while
saving is discouraged due to artificially mandated low rates. Increasing employment,
though welcome, is not likely the answer to mounting unsustainable societal debt. In
fact, it might well exacerbate it if former long term trends of debt growth outpacing
income gains continue.

The US, like most other developed countries, is on a path to increased human
suffering and tragic financial circumstances unless it deals with the fundamental
issue: enabling individuals and families to become intrinsically happier and
experience feelings of greater well being. Only then can the compulsion towards
short term thinking and gratification—which builds huge unsustainable long term
debt—be stopped.

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