Bound by Time

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In 1970 on the campus of Stanford University, psychology professor Walter Mischel conducted a study that has come to be known today as the Stanford marshmallow experiment. If you have taken any coursework in psychology, it may sound familiar. In the study, a child was left alone in a room for 15 minutes with one marshmallow on a table. If the child was able to resist eating the marshmallow, they would be rewarded with another treat on top of the original marshmallow.

This is a classic example of time preference in action. In its essence, it is the subjective valuation of consumption of certain goods/rewards at an earlier date versus a later date. Transcending the boundaries between psychology and economics, time preference is a big answer to why we make certain decisions as humans. 

Someone with a low time preference is willing to forego immediate reward in return for potential future benefits. On the other hand, those with a high time preference are more concerned with the needs of the present moment, and are willing to sacrifice some aspect of the future to satisfy current demands. 

Time preference is both complex and dynamic. It is influenced by a myriad of factors. These include psychological (patience + impulsivity), biological (fertility + death), and societal (economic conditions +  institutional structure). 

Time preference is all around us. We are generally taught that having a low time preference is a good thing. In the context of personal finance, putting money on a routine basis into a 401k is a consensus strategy in trading the present for the future. Same with investing in the S&P 500, buying a house, or even paying for college. These are seen as good things, and instances where we can personally manage time preference to our hopeful advantage. 

However, the forces of time preference are not limited to just the decisions we make as individuals, but its impact extends to those who are in charge of controlling the strategic direction of the collective communities we are a part of. 

The most notable example is how the current structure of the political system in the U.S. impacts ordinary Americans. The nature of our democracy dictates that the people who make decisions on behalf of 300 million plus constituents are constrained by definite amounts of time in office. And in our political sphere, time constraints mean high time preference. 

Given self-interest is an inherent part of human nature, the time limits imposed on these policy makers drastically influence how and why leaders make decisions. Politicians tend to want to reap the rewards from the seeds they sow in a timeframe that makes most sense for them. Many are looking to boost re-election chances. Others are continuing their ascent up the political hierarchy. Putting points on the board while in office is crucial to the success of any American politician. 

Unfortunately, the timelines of our leaders can differ from the timelines of their constituents. This is problematic. 

Americans want to see strategic thinking that helps shape their future, and their kids' future, for the better. Decisions that allow American exceptionalism to continue for decades to come. However, in this current structure, incentives are askew. A flaw of our democracy that we have to live with. 

Let’s look at some examples of this dynamic in action. One of the more recent instances of how incentive misalignment impacts our democracy is the rapid depletion of the Strategic Petroleum Reserve (SPR) in 2022. Designed to be an emergency supply of petroleum maintained by the Department of Energy (DOE), the SPR is the world’s largest crude oil stockpile in the world with a total capacity of 714 million barrels. 

Traditionally the SPR has been depleted for emergency purposes only. As the DOE states, the intent of the SPR is to “primarily reduce the impact of disruptions in supplies of petroleum products and to carry out obligations of the United States under the international energy program.” Such disruptions have been deemed to occur only three times in history prior to 2022. 

Following the outbreak of the war in Ukraine, Russian crude supply was taken out rapidly. This shock sent oil prices skyrocketing to heights it hadn’t seen in a decade. This prompted the Biden administration to authorize the depletion of what ended up to be 180 million barrels of oil from the SPR. An unprecedented move. 

Even in 2008, when oil prices were at an all time high (inflation adjusted), the SPR remained untouched. 

The Biden administration ultimately touted this move as a success, and in hindsight, it was. With Americans enduring high gas prices during the summer of 2022, and the crucial midterm elections rapidly approaching in November, getting the price of gasoline down became paramount for the administration. The SPR release helped neutralize the impact of the supply shock from the war, ultimately lowering average gas prices by nearly $1.15 per gallon in 3 months (June-September). Timely indeed, as the 2022 midterm elections have since become known as the “Red wave that wasn’t”. 

A counterargument can be made that since the U.S. is now a net exporter of energy, something it has not achieved since before the beginning of the SPR, it can use the reserves to balance fluctuations in oil prices and mitigate influence of OPEC+. Effectively redefining the role of the SPR.

Regardless, the current administration has now set a precedent that reserves can be tapped for domestic political leverage. While lowering gas prices is something that benefits all Americans in the present, at what risk does this create for the future? In an increasingly volatile world, these are important questions to be asking. 

Infrastructure is another victim of the divergence in time horizons in the institutional structure of our democracy. As mentioned earlier, politicians want points to be put on the board during their terms. Given most large-scale infrastructure projects take more than four years to complete, there lies minimal political incentive to actually pursue them. Leaving office with a half built rail line is not a speaking point for re-election. 

This has left our infrastructure in a poor state compared to other developed nations that have longer term foresight, like China. The American Society of Civil Engineers recently gave the U.S. a “C-” rating in its most recent report card. Amongst individual scores, roads, dams, levees, and and stormwater systems were given dismal “D” grades. This leaves millions of Americans and ecological systems vulnerable to unexpected natural disasters, while also reducing the productivity of our economy. 

While there are plenty of examples of attempts from politicians to try and fix our infrastructure, we all know that nominal dollars allocated are nothing but numbers on a spreadsheet. What matters is what has been actually built. And when politicians seem more keen to point to “jobs created” than foundations laid in the ground, we see again the cracks in the alignment.

Strong infrastructure is the backbone to the economic, social, and cultural wellbeing of America. Despite this known reality, the high time preference of politicians makes it difficult for our decision makers to preserve and innovate our built environment. While the messes of bureaucracy and a proven inability to execute don’t make matters easier, it is unfortunate to see how term constraints disincentivize infrastructure improvements.

Lastly, and arguably most importantly, is the ballooning debt issue. A total that will likely surpass $35 Trillion by the end of August. Debt is nearly 98% of our total GDP, up from 40% in 1990. Given the total has nearly doubled in 10 years, it is starting to look like a runaway train with no signs of slowing down. In the next couple of years yearly interest payments on this debt will exceed the annual defense budget. 

The ultimate example of kicking the can down the road, our political leaders have deemed this problem “out of sight, out of mind”. Ultimately sacrificing long term pain for near term gain. The 2008 Great Financial Crisis, the Covid-19 pandemic, and similar instances have forced the hands of our political leaders, leaving the nation with a massive debt crisis we can no longer ignore.

The government is now borrowing more money, at a faster pace and at higher rates, to pay off previous debts. A credit card holder opening more lines of credit to pay off prior dues. What happens when the music stops?

Neither party currently has a solid plan to solve this problem, and frankly, why would they? It is objectively politically unfavorable to implement austerity measures. Cutting social welfare spending will not sit well with many. Cutting defense spending in face of increased geopolitical tensions is probably unwise. Cutting education, healthcare, and emergency services are also objectively bad. Raising taxes on businesses and individuals is definitely unpopular. 

With an aging population that will rely heavily on these budgets, there are plenty of questions of the like with no clear pathway to a solution in sight. So the plan? Let the next generation figure it out. 

No elected leader will be bold enough to risk political suicide in return for the long term well-being of the nation. What matters most is the present state of the nation and its constituents in their respective terms. The future beyond a political leader’s term is subjectively trivial. An unfortunate reality. 

Time preference is a phenomenon unlike any other. The laws of physics and psychological factors that ultimately drive us to our decisions. Sometimes it is within our control, and sometimes not. What is most important however, is our understanding of why and how the world around us is bound to the constraints of time, and how individuals may use it to drive personal gain. An important intellectual pursuit for us all.