Notions of time in economics are as slippery and as faith-based as campaign commercials. One relevant duration in economic theory seems to be the time required to attain equilibrium. Stand back and let markets clear, my friends, and all will be well. But, alas, the more time that passes, the more crap rains down upon markets, making the theoretical equilibrium dance like a flea on steroids, or spawning multiple equilibria, or (rarely but memorably) bringing everything down with a crash. Besides, define long term and short. Despite their interest in higher math, few economists quantify those terms. Short term and long term are kicked around like Hacky Sacks. Austerity represents short-term steps "necessary" to ensure long-term health. But what about harm perpetrated by short-term austerity? This inevitably summons forth the John Maynard Keynesianism that in the long run (undefined) we're all dead. When, in short, does a cyclical problem congeal into structural woes? When does my favorite new word come to visit: "hysteresis," the idea that once unemployed long enough, workers lose skills, motivation or health and drop out of the labor pool, creating structural unemployment and a run on burial plots? If hysteresis is real, then isn't saving the patient a necessary step to long-term health? Discuss.
All this long-term, short-term folderol erupted after University of Chicago economist Raghuram Rajan, famous for getting beaten up after predicting the financial crisis, wrote an essay in Foreign Affairs arguing that America needed to tackle its long-term fiscal problems today. The usual souls lined up on the usual sides to cheer on or rain garbage upon Rajan. We're still waiting for this particular market to clear; and since these arguments have been simmering since Adam Smith, it may well be that equilibrium really is a theological concept like God. What is the real fear of long-term fiscal issues? That any day now, markets will rise up and smite us left and right. That we'll end up like Greece. That time will compress like a tin can beneath a tire, and long term will become short. (Paul Volcker pulled off this trick when he jacked up interest rates to impress the point that he was serious about inflation.) But are there signs that long-term woes are about to wreak short-term damage? Not yet -- U.S. rates are historically low -- but this is where belief creeps in. The austerity crowd senses long-term huffing and puffing at the door; the growth crowd shrugs. Just a wandering breeze.
The subjectivity of long and short term in macroeconomics coexists uneasily with realities of time in the markets, the ultimate microfoundation. In two marvelous speeches last year, the Bank of England's Andrew Haldane tackled the issue of shrinking trade-execution periods in stock markets and, more broadly, the extended fall in holding times for equities. In both cases, he was tracking the often-elusive effects of economic time. Haldane nicely distills some of this in his discussion of high-frequency trading: "Regulation has thin-sliced trading. And technology has thin-sliced time. Among traders, as among stocks on 6 May [the Flash Crash in 2010], there is a race to zero. Yet it is unclear that this race will have a winner." Facebook anyone? Haldane worries about systemic risk, volatility, abnormalities, evanescent liquidity in HFT. But his exploration of the effects of short-termism in the aptly titled "The Short Long," from deviations in efficient markets to evidence that short-termism leads to excessive discounting of future cash flows for corporate projects, is more fundamental -- short-term "market myopia" produces long-term effects.
All this sets up an odd, even paradoxical situation. On the macroeconomic end, we have politicians, policymakers and economists insisting we take the long view of fiscal probity, despite short-term collateral damage and uncertainties that proliferate over time. Get real, they say. Suck it up. On the microeconomic end, we have many of the same crowd arguing for efficiency and liquidity provided by increasingly low-cost, dauntingly short-term stock trading measured in milliseconds. (Haldane questions these benefits over the long term, but whatever.) This short-termism can be precisely measured; it's of the past. Does it make sense to say these two views of time, one future, one past, don't exactly align? Isn't it strange that on the long end, the cry is to face facts and focus on practicalities of running a government like a Swabian household, while on the short-heading-to-zero end, you have traders operating in a world of such onionskin increments you end up with bizarre effects, not to say buying and selling on perturbations that may utterly lack substantive economic meaning? Is there a magic bridge between short and long, past and future, microfoundation and macroeconomics? Hope so, though, as the ancient wisdom instructs, only time will tell. It just may take awhile.
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