by Jerome a Paris
Mon May 23rd, 2011 at 05:50:05 AM EST
The FT had a timely article over the week-end about Short Long (pdf), a recent research paper on the irrational discounting of the long term by markets:
Andy Haldane and Richard Davies of the Bank of England show clear evidence of increasing short-termism in the pricing of companies’ shares across all industrial sectors. In their words, “myopia is mounting”. Their paper is not for the faint-hearted – it is stuffed with equations and complex charts. But what it shows is that investors place irrationally low values on the returns from long-term investment projects. Cash flows more than 30 years ahead from investments made today (...) are scarcely valued at all.
(...)
Mr Haldane and Mr Davies rightly conclude that this short-termism is a market failure of a sort that raises big issues of public policy. It leads to investment being too low, especially in those long-term infrastructure and high-tech projects on which future growth depends.
In other words, markets (as they are structured today) are unable, on their own, to fund infrastructure and other similar public goods which underpin our prosperity. This has been hidden for a long time because the post WW-2 generations embarked in a massive infrastructure investment binge which still serves us to this date, and allows us to believe that infrastructure investment is not that critical. We see it's slowly fraying at the edges in various places.
But big infrastructure can only be done by public authorities, and since the mantra today is that whatever public authorities today is wrong, such projects no longer take place, or they happen in ways that ensure that the priority is financial investors making money today - thus the craze for PPPs and PFIs and other similar schemes, which end up costing more money to governments (but it's "rents" and not public "debt," so it's less visible), further reinforcing the notion that such projects are inherently wasteful while enriching a whole new world of parasites (including yours truly) - bankers, accountants, lawyers, consultants, which assess, fund, document and manage these big projects with the purpose of making money now rather than providing a service to all for the long term.
And that means building gas-fired power plants rather than renewables, new roads rather integrated public transport and private clinics rather than public hospitals - to the extent anything gets built, of course, because it also means, naturally, the privatisation of existing infrastructure, typically at startingly low prices (because you look at generating private-sector type returns from direct income rather than public-sector returns which take into account the positive externalities of infrastructure). In other words, profiteering rather than investing.
