long-term vs. short-term

Many policies have bad short-term effects but good long-term effects. This is helpful if you have an ideology to push, because you can just pick whichever one serves your purpose when making an argument, and ignore the other.

Let’s look at two examples that I hear all the time on conservative talk radio.

“If you raise taxes on corporations, all that will happen is that they will pass it on to the consumers by raising prices.”

This is true only in the short term. If you truly believe in capitalism and the operation of the free market, however, the situation will correct itself in the long term. Companies know that people are happy with the prices lower, as they were before the tax-related price-hike. That consumer preference will drive innovation on the part of the companies, because if just one company can find a way to cut their expenses so that they can lower their prices back down again (while still paying the taxes), they will do it. They will do it because it will drive all of the customers to their product, and they will generate more market share and more revenue. All the company has to do is find some way to cut expenses: they can become more efficient, they can cut down on management, they can improve their automation technology. Whatever they come up with, it will allow them to lower their prices and beat out the competition. And naturally, once the price offered by one company drops, it will force down the prices offered by other companies as well: forced with the threat of being driven out of business, the other companies will also be forced to innovate and improve their efficiency.

That’s how a free market functions in the long-term. That’s how the free market is supposedĀ to function: taxes are a part of “the cost of doing business”, you pay it and find a way to keep your prices low through innovation. The person who says that an increase in corporate taxation will “only” raise prices is lying to you, because he is only telling you the short-term story.

“Decreasing the top marginal income tax bracket will lead to more jobs.”

Interestingly (although perhaps not unsurprisingly), this argument suffers from exactly the opposite problem: it only focuses on the long-term story. In the short-term, there is no direct link between Bill Gates’s income and the number of people that Apple hires. No company makes its hiring decisions based on the personal wealth and annual net income of its CEO’s. The only way that this argument makes sense is to take the long-term systemic view: when people with more money have more excess money, they take greater risks. Often this risk can be expected to take the form of investments in industry, which means more rapid growth in companies that have a need to expand but might not otherwise have the resources to. As a result of investing in these companies, they grow and are able to provide more job openings in the job market.

That’s how the system is supposed to function, but it takes a long time and it is not a direct relationship. It is contingent upon wealthy people choosing to take risk and invest in growing companies, rather than hording their wealth or investing in financial instruments (which is safer than investing in start-ups or struggling companies). It’s also contingent on there being a pool of companies that are poised for growth and success so that investing in those companies will actually lead to more jobs, instead of leading to a company that simply has excess money but no pressure to expand. In theory, these conditions should always be able to be met. But there are a lot of “links in the chain” that can fail between “tax breaks for high income earners” and “jobs”.

 

The flip-flopping between the long-term argument and the short-term argument happens all the time, with a wide variety of issues. It’s something you need to be aware of. When you’re listening to someone making an argument for or against a particular policy, action, law, or whatever, it isn’t enough for you to think, “Does that argument make sense?” Often, the argument that is presented makes perfect sense… as far as it goes.

But you also need to ask: “Is that the whole story?”

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