Why time preferences are a problem in politics
Good morning from Berlin,
Most people, me included, tend to immediate enjoyment and quick consumption.
The beer in the evening is opened quickly, even if the resolution in the morning was not to drink alcohol today.
The other side of the same coin: we tend not to invest. We have good intentions, but we often don't put them into practice. Instead of doing sports and getting fit and healthy, we stay on the sofa.
There seems to be a universal preference for earlier over later. Evidence for this thesis: interests. When we invest money, we expect to get more back in the future.
Interests compensate us for forgoing present consumption.
A branch of economic theory, namely the Austrian School, has dealt with this thesis. Accordingly, the interest rate is not primarily determined by the supply and demand of investors and borrowers but by the subjective decision of individuals to spend money now or in the future.
Why am I writing so much about time preferences here?
While time preferences generally are not a problem at the individual level, they are in politics. Because politicians are interested in financing the voters' wishes now and paying the price later. That often gets the most votes.
Why is this a problem?
There is a crucial difference between individual and political decision-making. If I drink alcohol every night, I largely bear the consequences myself. Not so with political decisions. The consequences of debt-financed benefits often have to be borne neither by those who voted for them (voters) nor by those who decided them (politicians) - but by the following generation (of politicians).
This is intergenerational unfair.
Since politics tend to give benefits in the short run and lack a long-term perspective, it can be appropriate to restrict the freedom of decision of politics and society and, for example, to anchor a balanced budget amendment in the Basic Law as in Germany.
Another example of time preference problems in politics: climate change.
Politicians have long done, and often still do, too little to combat climate change. The consequences laid too far in the future. Only since the negative effects have arrived in the present, politicians have reacted stricter. Late, partly too late.
The problem with fighting climate change is that it is a relatively new phenomenon (in contrast to the debt problem). So no mechanism has yet been established that repairs the issue of wrong time preferences in politics as described above.
Isn’t it high time to think about such a mechanism?
Onwards,
The Strolling Economist