The economy will not improve unless our politics improve. Changing the politics will require a change in our values and perspective.
Behavioral economics suggests our society has become highly myopic in its focus: rewarding short term gain at the expense of long term productivity.
In an address to the National press Club in Washington, D.C., former FDIC Chairman Sheila Bair, suggests this myopia is based on a primitive evolutionary response. In essence, our strong intellectual development has outpaced the biological evolution involving emotions and psychology.
As a result, investment as a percentage of GDP and monetary velocity (transactions per dollar) dropped 50 percent during the past 30 years. The supply of value added products fell as wealth destroying financial derivatives skyrocketed. The latter then exploded in 2008, leading to further declines in monetary velocity.
The mechanics of the recent financial crisis applies to both business and government.
Ms. Bair aptly states:
“The reason that lenders were willing to make these risky loans, and the reason that securities issuers were willing to fund them, is that they knew they would be paid up front. Mortgage investors and the homeowners themselves would end up bearing the long-term consequences.”
“[T]he compensation of loan officers, portfolio managers and bank CEOs was typically based on current-year loan volume, earnings or stock price, with little regard for the risks that were building up in the system. Most damaging of all, some of the largest and most complex financial companies were made exempt from the discipline of the marketplace because their size, complexity, and interconnectedness made them Too Big to Fail under the resolution process in place at that time.”
“Government assistance to financial institutions took on a variety of forms, amounting to a total commitment of almost $14 trillion by the spring of 2009.” [This figure has risen since 2009.]
“But the drawback is that those facing re-election have little incentive to take a longer view of the issues than their constituents do.” [emphasis added]
Much of our economic debacle is the result of poor public policy. Reforming our economic climate requires a radical reformation of our political landscape. Public servants that serve society well are critical.
Politics as a career is a formula for disaster.
Three simple reforms that can make a tremendous difference:
1. Term limits, similar to that for the president (e.g., 12 years in the House or Senate, 16 years total for both).
2. All laws apply to all citizens, including those serving in the executive, legislative and judiciary branches of government.
3. Compensation based on merit based parameters (e.g., compensation rises as debt falls).
Reform politics and the economy will follow.
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