I've just finished up another semester of school (huzzah!), and now that I've got a bit more free time I wanted to post a few thoughts that have been on my mind recently. Be forewarned: this is a post about politics and economics. I don't really have another forum to share this stuff in (maybe I should create one?), but there's this odd part of me that likes to throw this stuff out there, and so it ends up on here. And, I think this stuff is kind of important. So, if you read this post, I'd love to hear your comments. If you don't read it, I don't blame you! Here goes:
I don't like politics. I really don't. I rarely read or watch the news because I get so sick of it. What bothers me about it all is that it seems like politicians are always pandering to voters whose focus is always on the short-term gain, often at the cost of long-term losses. For example, congress recently extended both the Bush tax cuts and unemployment benefits. Short-term gain: help for unemployed and economic stimulus. Long-term loss: Higher interest payments, and more debt to pay off later. I'm not saying that either of these things were necessarily bad ideas (we really don't know if they were good or bad, to be honest), but they are definitely measures that are focused at helping people out NOW, and dealing with the consequences LATER. And doing that too often can be a really bad thing.
You see, congress is made up of real people. Even worse, they are (in theory, at least) doing the wishes of voters, who are also real people. And real people are not very good at doing what is best for themselves TODAY. In fact, we're notoriously bad at doing anything unpleasant if it can be put off at all. We often want our future selves to do things that our present selves aren't willing to do. I really want my future self not to be fat, for example, but my present self really likes brownies a lot. So, I tell myself that tomorrow I'll stop eating brownies. In behavioral economics they call this kind of behavior "hyperbolic discounting," and you see it all the time.
In many ways, it seems like congress has this same hyperbolic discounting problem. We know that we need to balance the budget at some point, but this year isn't looking like the right year to do it. Maybe next year. We know that social security really needs an overhaul, but this year has been tough. Maybe next year. Our education system appears to be falling further behind other developed countries, but we just don't have the money to tackle that right now. Maybe next year. Anything that can be put off often is, until the system is in such bad shape that we're forced to do something about it.
It's understandable, really. Tackling all of these issues would require unpalatable changes: increasing taxes, raising the retirement age, budget cuts, additional red tape, firing teachers, etc. etc. etc. Voters hate that kind of stuff. Politicians hate that kind of stuff. All of us, collectively, can see that we need to do something about these issues, and yet somehow we keep putting things off because change is hard. We are all hyperbolic discounters, to some degree at least.
What is to be done? Perhaps there are lessons to be learned from what we know about what individuals can do to overcome hyperbolic discounting. Let's take the example of an individual who knows he needs to save for retirement but has a hard time setting money aside. One program that has been proven to work incredibly well is called the "Save More Tomorrow" program (you can learn more about this program in Thaler and Sunstein's book Nudge). In the Save More Tomorrow program, individuals commit that at each of their next 4 or 5 pay raises they'll increase the percentage of their income that gets put in to their 401(k). In this way, the individual doesn't have to see his (nominal) paycheck reduced at all, but he'll automatically start saving more for retirement. The key here is that the individual is committing his future self to doing what his present self isn't willing to do.
It seems to me that congress could do something along those same lines. That is, they could enact legislation that goes in to effect sometime in the future. For example, they could vote to raise taxes in 5 years, rather than right now. Voters that are hyperbolic discounters will applaud this action, recognizing that we need to raise taxes and balance the budget, even though they aren't willing to pay more in taxes today. For lack of a better term, I'll call this "post-dated" legislation.
Post-dated legislation would force congress to take a long-term view. They would have to do what they think is right for the country in the long-term, rather than pander to what their hyperbolic-discounting voter base wants them to do this year in order to get re-elected. Of course, we can have serious disagreements about what is best for the country in the long run, but at least we are arguing about what really matters when we do that.
A side-benefit is that post-dated legislation gives everyone plenty of time to prepare for the changes to occur. If I know that taxes are going up in five years, that should be plenty of time for me to prepare for that change so that it's not a huge problem for me. Now, whether I do that or not might be a different story, but it at least gives everyone a better chance to adjust to changes more gradually.
A major issue with post-dated legislation is that it would have to be completely binding in order to be effective. If there was any kind of a loophole, then when the time came to actually raise taxes, for example, it seems likely that congress would just use that loophole to avoid the issue. In other words, there needs to be a strong commitment device. However, legislation that is completely binding is by definition completely un-flexible. Post-dated legislation would do a very poor job of handling emergencies or special circumstances. For example, we could commit to reduce the defense budget by 20% in ten years, but what if we end up in a major war ten years from now? Post-dated legislation that is completely binding would force the budget to be reduced by 20% regardless of whether we're in a war or not, but if it's not fully binding one worries that congress will wriggle out of it somehow when that's not the optimal thing to do.
One way around this would be to make the legislation contingent on the state of the world. For example, we'll raise taxes by 5% in 5 years if the unemployment rate is below 7%, but it if is above 7% we won't raise taxes. Conditioning post-dated legislation in this way would allow it to be both flexible to specific circumstances, but completely binding (as long as you don't condition on something that congress can change). It might be very difficult to find conditions for all types of legislation, but for many of them I think it could be done.
So, there you have it: My proposal to change the world. I realize that there are lots of flaws in it, and it wouldn't work for everything, but I think the basic idea would be an improvement on our current situation. What do you think? Could some version of this idea ever work?
