Short-Term Gain, Long-Term Pain
Morgan Housel became one of the most popular investment writers by telling stories about the psychology of money and markets – the same today as it’s ever been.
Sometimes that knowledge can elicit positive change. Sophisticated institutions can build processes to increase their awareness of behaviors that might comprise optimal decisions. More often, we repeat the same patterns of behavior, which is why Morgan has so many stories to share.
Short-termism and self-interest are two behaviors that can combine to create long-term problems. The unwillingness to accept short-term pain for long-term gain alongside systems set up to reward short-term wins have contributed to some of the most significant challenges we face. In an homage to Morgan, I’ll share some stories using this lens that got me thinking about retirement benefits, obesity, and climate change.
Retirement Benefits
Social Security shortfalls in the U.S. are beginning to make headlines. As Roger Lowenstein describes in Everyone Wants to Save Social Security, the Social Security Trust is nearly depleted. A demographic shift over the last seventy-five years created a math problem that needs to be solved. At its core is a change in employee demographics without a commensurate change in promised benefits. Lowenstein points out that “in 1950, 16 workers were contributing to the system for every beneficiary. Today…the ratio is 2.8 workers for each beneficiary.” A system designed for many current workers to support fewer retirees doesn’t work when the country’s demographic profile shifts so dramatically.
Public pensions are also underfunded.[1] For many years, politicians have favored other spending and entitlements over funding to support retirement schemes. Rather than make hard current tradeoffs necessary to support long-term retirement benefits, governments engaged in accounting trickery to pretend pension funding was sufficient.
The self-interest of politicians to stay in office and avoid short-term pain created this mess. No politician wants to raise taxes or cut benefits to address retirement funding gaps. Even admitting an intractable future problem exists is politically unpalatable.
The amount of retirement benefit reduction and budgetary spending cuts required to right these ships has grown too large to solve in one fell swoop. Each year that goes by, the deficit expands. So what will happen when retirement funding runs out?
Sadly, I think I know. Inertia is a powerful force, and one body in motion since the financial crisis is our familiarity and comfort with borrowing money to avoid pain. Not enough money to fund Social Security – no problem, we’ll borrow more. Not enough for the retirement of teachers and civil servants – no problem, we’ll borrow for that too.
Before the last fifteen years, it would have been unthinkable to borrow money from the future to support today’s retirees. Today, it’s not only imaginable but likely to happen absent a significant change in behavior from our political leaders.
Obesity
My wife Vanessa recently returned from a vacation in Mexico. In the airport on the way home, she walked into a convenience store with snacks for passengers that she described as “Mexico’s Hudson News.”
Vanessa texted me from the store in shock at what she saw. The top half of the label on every food product in the store contained government-mandated warnings about excess sugar, calories, sweeteners, and caffeine on any applicable product sold. Here’s an example:
Unlike Hudson News at JFK, Vanessa balked at buying food with an in-your-face reminder of its health risks. That deterrent covered nearly the entire inventory in the store. She settled on unsalted nuts for the flight home.
Obesity is one of the most significant health issues in America. It would seem obvious to improve our collective wellness by enforcing health warnings on consumables. But can you imagine such measures getting past powerful corporations and lobbyists in the U.S.?
Once again, self-interest overpowers the greater good. Short-term gain, long-term pain.
Climate Change
Carbon emissions have been warming the planet for a long time. Weather patterns and factual research got brushed aside because intangible externalities in the distant future are a difficult concept to grasp and fund.
For some reason during the pandemic, climate risk reached a tipping point in the public discourse. What was once dismissed as a serious issue in the U.S. and elsewhere outside of Europe rose to the forefront of consciousness. The desire for action is a revolutionary change from just a few years ago; not even Malcolm Gladwell could have predicted when this would have happened. [2]
The call to action to address a long-term problem with short-term solutions is messy. ESG mashed together three different objectives and pervaded the investment landscape without consistent or clear benchmarks.[3] The movement took a pause once the war in Ukraine reminded many that fossil fuels are necessary to affect a transition to net zero emissions.
Despite the bumpy road, investment efforts to address the climate continue apace. It’s the focus of a new mini-series on the Capital Allocators podcast that starts next week. We sought out investment practitioners focused on climate solutions, including legend Tom Steyer, longstanding veteran Capricorn Group, and the most knowledgeable investors in an essential short-term solution (environmental markets) and a long-term one (nuclear energy). Taken together, these conversations share a conviction about the necessity to address the climate and opportunities to deploy capital productively.
Forces of Change
Herb Stein famously said, “If something cannot go on forever, it will stop.”
Retirement benefits, obesity, and the climate cannot survive at their current trajectory. Jeremy Grantham often cites research from GMO that every quantitatively defined bubble in market history, every single one, has eventually burst and reverted to trend. The gravitational mean-reversion of markets implies that the longer we move away from trend, the steeper and more painful the fall will be when we reach a tipping point.
I don’t know how to solve the important problems we face, but when I see three different examples of longstanding poor behavior creating serious risk, I feel compelled to share what Morgan would say, with a caveat.
“It’s the same as ever” until it’s not.
Let’s do something about it.
[1] https://equable.org/unfunded-liabilities-for-state-pension-plans-2022/
[2] Gladwell, The Tipping Point.