Voters Beware: What's Good For Politicians Is Bad For You

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People upset with what they perceive as the unfairness of life are often quick to suggest solutions that involve financial losses for those interests seen as rich or powerful and gains for people who appear to be poor and badly treated. While the proposed solutions may seem to offer an improvement to the short term situation, generally long term costs are involved that end up far exceeding any immediate gain.

If we want to return to the American tradition of future generations doing better than the current one, we need to avoid these policies and think about the long term consequences of our actions. Three policies in particular can be used to illustrate the costs of such short run thinking.

Richmond, California is currently trying to use its power of eminent domain to seize mortgages from financial institutions so that the city can have them reissued to the homeowners with reduced balances. While this would provide large benefits to the selected homeowners who would have their debts greatly reduced, the costs to society at large should not be ignored.

If mortgage holders cannot trust their legal right to collect the principal and interest owed to them (or to foreclose on the house otherwise), then mortgage lending becomes a much riskier and less desirable business to be in. If mortgage lenders face the prospect of having mortgages seized in exchange for payments much below the full amount they are owed whenever real estate markets are struggling, then the expected returns on any particular mortgage are lower. Banks are taking this seriously enough to sue over the city's plan.

To compensate for those lower expected returns, lenders will either raise interest rates or tighten credit standards. Higher interest rates would bring in more revenue, helping to restore the previous profitability to mortgage markets. Tightening credit standards lowers the risk of the borrowers having trouble making their payments and thus lowers the risk of mortgages being seized by a local government. Lowering the risk of losses also raises profitability back to necessary levels.

These responses by mortgage lenders imply that while seizing some mortgages through eminent domain might allow Richmond or another city to benefit a select few of its citizens, it will come at a cost for everybody. People with lower credit scores will face greater difficulty in obtaining a mortgage. Everybody who does get a mortgage will pay a higher interest rate for the privilege of borrowing money to buy a house.

These costs will continue forever, because mortgage lenders have to maintain these changes when market conditions are good as well as when conditions are bad. They cannot simply change their actions during real estate recessions because by the time the trouble is apparent, the mortgage terms are already locked in.

A second common idea that demonstrates the allure of short term gains without thinking through the long term costs is the area of drug price regulation. Many liberals wish to regulate drug prices to make them more affordable for the poor and because they object automatically to companies earning profits. The short term gain is clear, lower drug prices would slow health care inflation and help people afford their treatments. Again, the long term costs are neglected.

Drug companies spend billions of dollars each year on research and development in an attempt to create new drugs, gain government approval, and bring them to market. Most of their efforts fail, sometimes after investing hundreds of millions of dollars in a drug that will never earn back a single dollar. The pharmaceutical industry has to earn enough on the few drugs that actually become successful to cover the costs of those drugs plus all the ones that never reach the market.

If drug prices are regulated to a level where the drug companies cannot earn sufficient profits to sustain their research and development programs or if the patent laws are changed in order to allow generic drugs to compete sooner, the economic viability of the drug industry would instantly disappear.

In exchange for lower drug prices now, we would lose the prospect of any new drugs later. Without high profits on the few successful drugs, pharmaceutical companies cannot afford to discover and develop new ones. Do we really want to forego potential future drug treatments in exchange for lower drug prices now? Given that spending on prescription drugs comprise only about 10 percent of total health care costs, that seems a questionable tradeoff.

A third questionable policy that elevates short term benefits while ignoring the long term costs is the continual call for current consumption at the expense of investment. Liberals think that we need policies to boost consumption and help the economy. While consumption does add to GDP (the measure of what an economy produces), so does investment. Thus, in the short run consumption and investment are equal in delivering economic growth.

However, in the long run investment makes us richer than consumption. Investment increases the productive capacity of the economy, giving us more factories, more machinery, more inventions and new technology. Consumption simply gives us stuff which is soon gone. While more investment now means we have less stuff to consume in the short run, in the long run all that investment means that we will have higher incomes in the future. Workers are more productive when they have more capital to work with which leads to higher incomes and the ability to consume more stuff.

Thus, government policies that are biased in favor of consumption impoverish us in the longer term. Regulating drug prices will cost us future drugs that might have cured diseases that cannot be cured today. Seizing mortgages through eminent domain will make future mortgages harder to get and more expensive when they are approved.
The long term costs of these shortsighted policies all hurt the little guy along with the rich and powerful. Tighter mortgage lending standards will hit the poor and middle class harder than the rich. Inventing fewer new drugs harms everyone. Lower investment today means fewer jobs in the future, lower incomes, and a bleaker future for the next generation.

When evaluating a policy, one needs to look beyond the short term. Policies that deliver a benefit now may not be good policies if the full, long term cost of the policy is carefully considered. These longer run costs are often neglected or hidden by the interests who stand to gain now from the policy. However, if we want a good future for ourselves and future generations, we need to learn to think longer term when we evaluate and design policies.

Politicians like these policies because the gain comes now and helps them get re-elected by bragging about what they accomplished. The costs come later by which time the politicians hope we forget who we can thank for those costs. Voters need longer memories and to think long term. What is good for politicians is usually bad for the country.


Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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