Tuesday, September 15, 2009

Potential Short-Term Gain vs. Certain Long-Term Pain

With the re-emergence of bashing Wall Street employees for their “short-term” compensation practices, I wonder why legislators don’t heed their own advice.

A member of Congress is at most two (House) or six (Senate) years away from their next election, therefore, short-term gains help them keep their job, and long-term consequences are largely ignored. Unlike Wall Street, there is no governing body examining the long term consequences of legislation like a Board of Directors, or Senior Management team (in theory this should be the President, but he is only, at most, four years away from losing his job).

Unfortunately this short term view is present in almost all legislative initiatives in front of Congress.

Typically, these short-term gains consist of immediately giving away something for nothing - cash for clunkers is the perfect example. The long-term consequences take an extra layer of thought that the voting public, and frankly, their elected representatives, are generally uninterested in discussing much less understanding.

Sticking with the cash for clunkers example, what are the long-term consequences of this relatively modest program? While they cannot be determined with certainty today, it doesn’t take a PhD in economics to understand at least two impacts:

  1. US Deficit will be increased by at least $3 billion – $3 billion out the door and into the pockets of those fortunate enough to have an old car sitting around and in a position to fund the remaining purchase of a new car (i.e. not the poor , unemployed, or otherwise underprivileged), with zero offset in revenue.
  2. Short term auto sales will be up but long-term sales trends will be unaffected by the program – why would a one time subsidy on cars create future demand?

This leaves taxpayers with a bill that makes Congress look great in the short term (“Thanks guys, I just got a $4,500 discount on my new Lexus SUV!”), but will ultimately be forgotten in the long term, except by those who will need to pay for this piece of legislation when our debt comes due – our children.

Cash for clunkers is one vivid example, but there is no shortage of other examples:

Sarbanes-Oxley Act – As an accountant this one was near and dear to my heart – and one of the main reasons for getting out of the field of public accountancy. Enron was bad, so Congress put in place onerous regulations that have soaked our job creating businesses of resources and money for little to no benefit to the investing public. This is not a case of increasing the deficit by spending, but it’s an equally dangerous, but less obvious, increase in the deficit by reducing tax receipts (i.e. expensive compliance efforts reduced corporate profits, which in turn reduce income tax revenues).

Consumer Product Safety Improvement Act – Lead in children’s toys is bad! Nobody could argue with that, which is why this terrible piece of legislation passed with flying colors off the back of the Chinese toy lead scare. However, Congress decided to explode a nuclear bomb on the issue rather than make some surgical strikes that would have had a much lower amount of casualties while accomplishing the same objective. Again, Congress can grasp the immediate effect of the ban on lead in children’s toys (Yea!), but fail to grasp the effect the nuclear bomb would have on the millions of small business/libraries/schools/thrift stores, etc. that would be disproportionately disadvantaged by the bill. The WSJ has done a good job of chronicling this mess - its latest op-ed is here.

The Stimulus – the bill was sold on short-term benefits, despite only a fraction of the expenditures expected to hit in the short-term (and even fewer actually hit in the short term). However, any short-term gains will be dwarfed by the negative burden this will place on future generations. Additionally, this bill also features a huge issue that is often overlooked – providing needy parties with food instead of teaching them how to farm or hunt. Throwing money at a problem only masks the underlying weakness, and without addressing the underlying weakness, the money is wasted. This leads perfectly to my next example.

Using TARP funds on the US Auto Industry – The short-term benefits were clear – auto union members would continue to receive their bloated pay checks and benefit packages (as a kickback for their votes), funded by the taxpayers, and our auto industry will have yet another chance to try and reorganise into something that resembles competitive car manufacturers. To continue with the metaphors, our government is acting like a problem gambler who just lost big in the Sunday football games and is about try and make it up with huge bets on the Monday Night game – throwing good money after bad. Without significantly renegotiating union contracts and fundamentally changing the operating model which has produced losses for years and years, Detroit has no chance of becoming profitable enough to repay the US taxpayer.

Medicare/ Medicaid / Social Security – Even these hugely popular programs are nothing more than enormous Ponzi schemes that make Bernie Madoff look like a small time purse thief. And we’ve only seen the beginning. These programs will become even more insolvent (if that is even possible) once all the baby boomers hit the Medicare books and start collecting Social Security. Of all the elephants sitting in the hallowed halls of Congress, this is by far the largest, and instead of addressing our current entitlement issues, we’re looking to create more.

Aside from my last example, these bills all have one thing in common – they were all short-term knee-jerk reactions to a crisis, written in a panic and insufficiently debated (and in some cases, not even read before a vote). Therefore, it’s no surprise that these have all backfired. Looking back, these examples have, at best, solved a short term problem while creating bigger long term problems, or, at worse, failed to solve the short term problems, created bigger long term problems all while adding huge amounts to the federal deficits.

After all of this, the President and Congress are at it again with the proposed Health Insurers are Evil Bill, er, the proposed health insurance reform bill. Our children and grandchildren deserve a full and complete debate on the issue, with logical and incremental reform that makes sense - not hurried proposals, backroom dealing and procedural shortcuts to jam through radical, ill-conceived change overnight.


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