Market versus political cooperation amongst generations

Garrett Petersen
March 16, 2014
The generation wars are most commonly framed as a political issue. Garrett M. Petersen argues that this is to be expected, political time horizons are far too short to consider future generations, but markets get it just right.

Market versus political cooperation amongst generations

Garrett Petersen
March 16, 2014
The generation wars are most commonly framed as a political issue. Garrett M. Petersen argues that this is to be expected, political time horizons are far too short to consider future generations, but markets get it just right.
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Considering all the government policies that compel the young and the unborn to pay for their elders’ retirements, such as the Canada Pension Plan (CPP), unfunded public pensions and the buildup of public debt, it can seem as if the interactions between generations are all negative and exploitative. However, we must recall that the young can only hope to meet these obligations because of the tremendous assets that were set aside for them by previous generations. These assets are the tangible elements of the co-operation between all past generations and the new generation. The extent to which different generations co-operate depends on the institutions through which they interact. Presently, adult generations interact with future generations through government and markets. Those presently alive are always the first movers, and in politics, this means that the current crop of politicians can impose legislation on future generations before they are born or are old enough to participate in the political process. However, when people interact with future generations through markets, they are constrained by the knowledge that those future people will be born with not only hands and minds with which to produce but also with property rights over the products of their labour. Thus, market interactions with future generations must be consensual; in order to finance their retirements with the products of future generations’ labour, the present generation must offer something of value in return.

The often selfish intentions of producers and consumers drive the market, but voluntary exchange turns these selfish intentions toward benevolent ends, as voluntary exchanges only occur when both parties expect benefits. All exchanges require some preparation, and these preparations, or investments, often begin long before the exchange takes place. We are all the beneficiaries of past investments, whether made by software developers in the 2000s, petroleum engineers in the 1980s or bricklayers and carpenters in the 1930s.

It may seem absurd that the bricklayers and carpenters of the 1930s, working to provide for themselves and their families at the height of the Great Depression, were in fact working for the benefit of people living in the present. And yet, those who commissioned the building of new homes in the 1930s did so with the intention of selling them to people who derived benefits from living in them or renting them out in the 1930s or from being able to resell them to later dwellers. These dwellers in turn derived value both from their own use and from their ability to resell, and so on, up to and beyond the present day. Thus, a house built to last until 1960 is not as valuable as one built to last until 2030, and the value of sturdy buildings reflected this even in 1930 when the concerns of 2030 were on no one’s mind. Those bricklayers and carpenters were indeed building sturdier structures for the people of today, not because they necessarily cared about our well-being but because the market encouraged them to do so. In contrast, the politicians of the 1930s, and of every time and place, were not working to pass value on to future people but to pass on obligations and debts, as per their incentives.

The political obligations passed down from each generation to the next represent the political class’s relentless attempts to prevent the setting aside of resources, to free these resources to be distributed as political largesse in the present. While the market is fundamentally forward-looking, politics looks only as far as the next few elections. Unlike investors, whose returns derive from the value they create for future consumers, politicians do not require the approval of anyone outside of a voting booth on one of a small number of election days. If the voters on those election days place some value on the well-being of future people, then politicians have some incentive to appear to be working for the benefit of those future people. However, politicians act in the interest of those future people only to the extent necessary to satisfy the voters of the present. Every bit of wealth set aside for future people is wealth politicians cannot use to appease the interest groups of today, so successful politicians are likely to be those who can convince voters of their concern for the future as cheaply as possible. Entrepreneurs have to deliver the goods before they can earn a cent; politicians only have to convince voters that they will deliver the goods eventually. Outside of government, we have a term for people who get what they want from others by promising future benefits that they have no intention of delivering: We call them con artists. A con artist in politics is like a wolf among sheep: Since each voter has a vanishingly small chance of deciding an otherwise tied election, no one voter has enough incentive to check any politician’s honesty. Only this rational ignorance on the voters’ part can explain their full-throated support for some of the more bizarre policies imposed on them.

For instance, one would think that few coffee lovers would support a policy that taxed them to pay café owners not to brew them coffee, and yet this is precisely what popular government programs such as the CPP do. The brewing and selling of a fresh cup of coffee requires the development of agricultural land for bean production, the design of distribution networks and the creation of storefronts and kettles, and all of these things require people to invest long before the coffee can be made and served. The CPP encourages the middle-aged workers of one generation to save less for their retirements by promising them a portion of the revenue taxed from the next generation of workers. Unfunded public pensions perform the same function in the public sector: They replace workers’ savings with claims on future taxpayers. Some of the resources that the CPP and unfunded public pensions prevent workers from saving would have gone toward investments in future coffee establishments, so the future people paying into the CPP are really paying for the privilege of having less coffee served to them and of having fewer consumer goods in general. The CPP’s chief actuary boasts of the sustainability of the CPP: Twenty per cent of its liabilities are paid for with investment income rather than with present contributions. Working Canadians should take little solace in the fact that 20 per cent of this program does for them what any private mutual fund could do, and the other 80 per cent forces them to pay for the privilege of not being transacted with.

Another way governments redirect resources from investment to present largesse is by issuing debt. When one saves, one can invest in the private market or buy government debt. Investments in the private market can only yield returns by creating wealth. Firms use the resources set aside when people save in the early stages of production processes, and investors can be paid only because those production processes eventually create something of value that someone else is willing to pay for. Thus, investments in the private market are mutually beneficial to the savers and to the future consumers who buy the output created with the resources set aside by the savers if the investments are in fact productive. Mistakes happen, but the costs of mistakes are borne by the people who make them. When governments issue bonds, they compete with private investments for the resources set aside by savers. Instead of offering savers a part of the proceeds from a productive, long-term project, they offer savers a claim on future taxpayers. They do not require the consent of future taxpayers, so government debt is not generally a mutually beneficial proposition. Government debt may be mutually beneficial to savers and to future taxpayers if the government issues bonds to make long-term investments in things such as sturdy bridges and highways or educating the next generation of workers. However, this presumes that the bridges will be built where people need them and that children will be educated in the subjects that they really ought to learn. Since people do not pay for public bridges and public schools, we have no way of knowing their true value. More often than not, governments issue debt to finance current consumption for the political reasons outlined above. When they do this, the effect is the same as that of the CPP: They tax one generation to pay the previous generation not to transact with them through private investment.

Even at the local level, politicians deliver benefits to present constituents at the expense of future residents through land-use regulations (e.g., zoning laws) that restrict the construction of new buildings. These restrict the supply of indoor space for various uses, driving up the prices of existing buildings. Existing housing spaces, basement suites for instance, are more valuable when regulations limit the construction of new apartment buildings. Not only are these regulations a particularly perverse form of redistribution, from poor renters to wealthy homeowners, they are another example of politicians intervening in the market to benefit a current interest group at the expense of future consumers. Future generations will find that entrepreneurs are unable to build to meet their housing needs, and they must pay exorbitant prices to own or rent the limited stock of housing.

The recognition that politicians’ incentives are inherently myopic while the market rewards the forward-looking is a powerful tool for understanding a wide range of legislations. The voter turnout among the unborn is always zero, so it should surprise no one that unborn generations lose out in the political process. The political impetus to override market incentives to save and invest can be seen everywhere; it is not confined to one end of the political spectrum. What this all means is that politics is a particularly perverse tool for interacting with future generations; our political representatives have no strong incentive to pass genuine benefits on to future people. If we care about future generations, we should reject the idea that the state has a legitimate role in managing our economic lives. Just as Canadians have soundly rejected the state’s role in regulating what consenting adults do in their bedrooms, we should reject the state’s role in regulating what consenting adults do in the marketplace. Consenting adults, with the guidance of market incentives, are better motivated and better equipped to serve each other’s needs than are any cadre of politicians and bureaucrats. Market incentives have created an entire class of people, known as investors, whose sole purpose is to act on behalf of future consumers. Thus, through the market, the unborn can have their indirect say on the use of scarce resources in the present. To curtail the market is to deny the unborn their voice. This is both unjust and undemocratic; our collective grandchildren deserve better.

~

Garrett M. Petersen is an economist living in Victoria, BC. He holds an MA from Queen’s University and a BSc from the University of Victoria. He runs The Economics Detective channel on YouTube.

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