Wednesday, November 14, 2012

Marshmallows and Budget Deficits

One of the most interesting parts of Boomerang was Lewis's discussion of Americans' inability to self-regulate, and our insistence on sacrificing our long-term self interest for short-term rewards. As Lewis puts it, "the boom in trading activity in individual stock portfolios; the spread of legalized gambling; the rise of drug and alcohol addiction; it is all of one piece." I agree. In fact, I would also add obesity and the federal budget deficit to that list. Both are symptoms of Americans' inability to make short-term sacrifices for long-term gains. If we have truly lost this ability, it bodes ill for some of the greatest challenges we face. 

Economics has a term for the phenomenon we see in so many areas of American life: the "time inconsistency problem." A decision-maker's preferences change over time, in such a way that a preference at one point in time is inconsistent with a preference at another point in time. So, for example, there is my today self, who wants to eat the chocolat cake, my next Friday self, which will regret the weight the chocolate cake has caused me to put on. The inconsistency occurs because the preferences of these "two selves" are not aligned with each other.

I would argue that part of the reason our budget debt woes are so difficult to solve politically is because politicians are forced to grapple with the time inconsistency problem on a national scale -- to at once satisfy two Americas. Today's America does not want to raise taxes or reduce spending; it would hurt he economy, we say, or just unduly harm our national security, health, or our less fortunate citizens. The America of 2020, however, desperately wants a solution the debt, which has to include tax increases, spending cuts, or both. A similar "two Americas" analysis can be applied to our failure to tackle climate change, to conserve energy, and to address many other societal challenges. 

There was a famous psychology experiment on delayed gratification, called the Stanford marshmallow experiment, conducted in 1972 by psychologist Walter Mischel. A marshmallow was offered to each child. If the child could resist eating the marshmallow, he was promised two instead of one. The scientists analyzed how long each child resisted the temptation of eating the marshmallow, and whether or not doing so was correlated with future success. In a follow-up study, researchers found that preschool children who delayed gratification longer in the self-imposed delay paradigm, were described more than 10 years later by their parents as adolescents who were significantly more competent. A second follow-up study, in 1990, showed that the ability to delay gratification also correlated with higher SAT scores

One way of viewing America's problems of political will is that we as a nation are failing the marshmallow experiment -- big time. We have been eating the marshmallows in front of us for the last ten years. Arguably, the baby-boomer generation has been doing so for their entire lives. Now we must decide whether we will keep eating marshmallows, or whether we will finally face our challenges, swallow the tough medicine, and thereby secure a brighter future. 

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