The benefits of limiting your freedom

A tale of two cities

Detroit was a uniquely American success story. Originally a strategically situated trading post, it rose to its greatest prominence in tandem with the booming automotive industry. The city was home to several pioneering industrialists whose names still appear on car badges. Drawn by the thriving economy, the population swelled nearly tenfold from the late 1880s until it peaked not far from the two million mark in the 1950s.

That would unfortunately be the high point of the city’s arc. Social unrest and economic dislocations soon led to a dramatic exodus of jobs and people, which triggered a steady downward spiral. Increasingly drained of resources, the city was unable to provide basic services and blight began to consume whole neighborhoods. Many with the means to leave did so, amplifying the burden on remaining taxpayers. In 2013 the process hit its natural endpoint, when Detroit filed for the largest municipal bankruptcy in American history.

Although the causes were manifold, one of the most significant contributors to the problem was the unfunded promises made to city workers, both current and retired. It didn’t take much mathematical sense to recognize that the financial commitments the administration was making would be ruinously difficult to fulfill, especially as the rosy projections on which they were based evaporated. Yet politicians acted to keep the system superficially intact no matter how precarious its internal state. The best way to maintain voters’ favor was to keep the largesse coming, even adding to it, leaving the ultimate reckoning to their successors.

Like every other thing that cannot go on forever, this system didn’t either. A declining tax base, the breakdown of social order, and drying up of commercial activity created a vicious spiral. Today the city’s population is roughly one-third of its former level and while there are some emerging bright spots, it has a long way to go to recover its grandeur.

Halfway around the globe, at roughly the same time as Detroit began its descent, a fledgling city-state with minimal resources and little clout on the international stage was setting out on the path of independence. It had also grown up as a trading post, enjoying a similarly favorable position on key waterways. Singapore was forced to quickly find its footing amidst the flurry of decolonization and the establishment of a new political system. Its early decisions would set it on a very different path.

The government had ownership of several commercial enterprises, and decided to place them in a corporation whose profits were dedicated to the well-being of the general population. When the central bank was accumulating an excess of foreign reserves, another investment fund was set up with the same mission.

These two institutions were tasked with seeking out long-term returns, and annually began to contribute up to half of their income to the public budget while reinvesting the rest. They were set up to be insulated from short-term pressures, and politicians were unable to raid their hefty reserves to fulfill promises to taxpayers or overcome temporary difficulties.

The plan turned out to be wildly successful, with world-beating results.1 By 2019 the two main investment funds contained over $800 billion in assets and together contribute over US$12 billion annually, more than any other single revenue stream—higher than all individual income taxpayers combined. In effect the citizens of modern Singapore are joined by a behemoth that is unusually happy to write ever-larger checks to the national treasury.

Our hands are tied

Freedom to make certain decisions with long-term implications turned out to be a bad thing for Detroit, but constraining flexibility in a critical area had the opposite effect for Singapore. Sometimes keeping options open hinders enduring progress, or even derails it entirely. Governments in particular have to grapple with this challenge, as they are tasked with ensuring well-being across multiple generations even though in most democracies their positions depend solely on a narrow, time-bound slice of the electorate.

In response politicians write guidelines, sometimes codified into constitutions, which intentionally proscribe certain actions, knowing these will provide a framework for durable growth. Even with guardrails in place the temptation to bend these rules or interpret them in defiance of numerical realities often turns out to be irresistible, and many governments around the world are plodding steadily along on paths that are clearly unsustainable.2

This highlights the counterintuitive principle that options are not always better. The time will come when the natural, easiest thing to do will be the unhelpful one: cut back on an investment, spend the funds now, avoid the painful conversation, skip the workout. Removing that ability before the situation arises has the benefit of keeping you on the target path, no matter how unpleasant it may be temporarily.3

Constraints can also force creativity, in the process creating illuminating new perspectives. Singapore’s authorities have built up their own investment theses and trained staff oriented to their unique inter-generational investment horizon. A powerful technique for generating new ideas is to consider how to respond if the usual degrees of freedom were restricted. One National Geographic photographer discovered this when he limited himself to only one shot per day, in contrast to the thousands that normally support a feature in the magazine.

Closing off options can help ensure the momentum needed to ensure the long-term isn’t swamped by the immediate:

• Keep those funds ringfenced so you can’t touch them even if you want to.4 As a business leader, ensure that a certain level of investment is inviolate, to avoid short-term temptations to shift them around when the quarterly numbers don’t look good. As an individual, put money where its no longer liquid, removing the option of spending it before the intended time.
• Lock out or remove choices that can distract from unpleasantness. As many battling the onslaught of relentless digital choices have realized, sometimes it’s better to not have the option to waste time. Some companies now do a healthy business attempting to directly counter the tactics of other tech companies that are just too effective. Delete the app, let someone else own the password, unsubscribe to the streaming service.
• Add the regular feedback conversation to the calendar now, so it happens whether you’re ready to confront the problem or not. Commit to a single public presentation of your work, and crystallize all the various theoretical ways in which you could create accountability into one tangible one.

The intended goals of the leadership of both Detroit and Singapore were presumably similar—creating vibrant metropolises that attracted people and businesses supported by a well-run government. The paths they chose were extremely different, and only one was able to sustain its trajectory.

What options has your organization eliminated, and what have you removed personally, to ensure you achieve what you intend?

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References

In keeping with its reputation for competence, the Government of Singapore maintains well-organized finance information on its various websites.