The conventional wisdom says some choices facing our society are between:
- Competition versus Regulation;
- Private Interests versus Public Interests;
- Exploitation versus Conservation;
But isn’t the real issue incentives? Getting the balance right?
- Short Term Incentives versus Long Term Incentives;
It appears to me that every conflict in our society boils down to this choice.
For example: Municipal energy and water utilities (munis) versus private utilities.
The private utility has a short term focus - quarterly or annual return on investment. These organizations have, in fact, a fiduciary responsibility to their owners to maximize profit each and every quarter. Traditional business methods discount future profits (a net present value calculation) in favor of current profits. Here is the capitalist system in the face of an uncertain future in a nutshell - a bird in the hand is worth two in the bush.
The fact that the muni’s owners are also its customers forces a long term view on the muni. Their job is to stay profitable but to also manage the financial load on its citizens. A private utility, with its non-local ownership, frequently has an adversarial relationship with its customers.
In other words, the muni does not have an incentive to charge what the market will bear. Because of its longer term focus, it wants to manage the financial load on its citizens. It has a vested interest in diverting some of its cash flow towards conservation efforts. In other words, the best energy bill for consumers is the one they no longer need to pay. The muni, because it depends upon municipal bonds approved and guaranteed by voters, also has a more difficult path to making large capital investments. In other words, the muni has a strong incentive to avoid capital investments. Conservation and modest physical plant paid for out of cash flow are, hence, easier for a muni.
The muni has an incentive to choose energy fuels that support the long term health of their owner-customers. They manage emissions because they cannot just file bankruptcy to avoid pollution expenses and sneak away with the cash.
The muni has an incentive to make fuel choices that bring long term certainty to energy costs. For example, business interests in Austin are the largest consumers of ‘Green Choice’ energy.
Munis serve the long term interests of their owners who are also their customers.
Another example: Poverty.
Poverty is a long term problem. In fact, it has been the norm of existence for most of the human population for all of recorded history. It is only in these relatively affluent times that we even notice poverty. Before now, everyone was poor. How do we solve this? Isn’t education the most effective path out of poverty for both individuals and our society? Isn’t that why we don’t allow child labor?
Education in all of society’s children - the longest term investment we humans can make with, coincidentally, the highest return.
Summary:
The balance between long term choices and the short term will be a recurrent theme on this blog. We always need to be mindful of Keynes - “In the long run, we’re all dead.”