The time-travelling policy maker

The hyperbolic discounter
The Hyperbolic Discounter

Bill Below, OECD Directorate for Public Governance and Territorial Development (GOV)

Are policy makers stuck in time? That may explain why incremental issues that cumulate and creep slowly across the temporal dimension pose such huge challenges. Politicians are clearly more comfortable in the here and now. Harder to deal with are slow-moving emergencies such as climate change, growing inequality and state pension reform, to name but a few. Rather than being the wolf at the door, these issues are the termites in the floor. Without action, the floor will collapse—guaranteed.

“Political short-termism”, “policy myopia”, “policy short-sightedness”… these are the terms of present-centric policy thinking, a phenomenon in which policy makers fail to use present opportunities to mitigate future harms. It’s all part of the freaky world of intertemporal policy trade-offs.

So why do we have such underdeveloped intertemporal policy chops? Neuroeconomists suggest that we may be born that way.

Situated in the ventral striatum, within the basal ganglia of the brain, is the nucleus accumbens or NAc, sometimes called the brain’s reward centre. A study published last month shows that interaction of the NAc with the hippocampus is critical in shaping decisions that involve time trade-offs. Compared with controls, rats with a disrupted hippocampal-NAc interaction lost their ability to select delayed food rewards.

Should we start examining the hippocampal-NAc interaction in the brains of policy makers? Probably not. But it does evoke the physiological and evolutionary function of intertemporal trade-offs. The fact we are still here as a species seems to suggest that we get it right at least some of the time.

Policy makers have company. Children, drug addicts and the poor also tend to be bad at intertemporal trade-offs, the latter because they have little choice but to deal with continuous and immediate crises.

Each group (along with the rest of us) exhibits what behavioural economics calls “present-biased preference”—the discounting of the future such that an immediate reward is preferred to the detriment of a more desirable future reward or outcome. A common symptom of present-biased preference is procrastination. We are “time inconsistent” the behavioural economists tell us, which means at different points in time we want different things. Economists even slice us into temporally and preferentially distinct selves. Freaky indeed.

But individual wiring may be just one factor in policy myopia.

In his speech to the UN last year, Yoshihiko Noda, the former Prime Minister of Japan, suggested that the very nature of our democratic system “comprised of representatives serving people living now” necessarily skews policy towards a present bias and “invites politics that burden silent future generations and puts problems off.”

Economist William Nordhaus predicted that “A perfect democracy with retrospective evaluation of (the economic performance of) parties will make decisions based against future generations” (Nordhaus, 1975).

But if the system is biased, what can politicians do? The spectre of electoral retribution is never far from the politician’s mind, and he or she will invest only within a zone of electoral safety. The OECD’s Regulatory Outlook (forthcoming) points to the conflict between election cycles and policy cycles, making it hard for politicians to focus on longer-term regulatory projects. The “rush to regulate” is one of the ways regulation stays rooted in the present, as politicians are pressured by current events and catastrophes to find regulatory solutions. But also, the benefits of regulatory policies tend to be dispersed and generally only evident in the medium term, where political signals are weaker, while groups that stand to lose are always brashly vocal in their opposition. Even policy makers who want to promote long-term social, economic or environmental policies (and there is reason to believe they are the majority), regularly face enormous electoral pressure to deliver short-term results.

But present bias is not destiny – necessarily.

In the intertemporal policy sphere, present costs tend to be more salient than future rewards, but not in every case. Perceived direct causal links between present action and future outcomes can overcome present-biased preferences and facilitate the task of the would-be intertemporal policy maker. If I believe that rising sea levels and storm surges will impinge on my family’s future well-being, and that by voting for stricter CO2 reduction objectives I can avoid or mitigate that outcome, then I will be motivated to make certain trade-offs. It may be difficult, however, for some to imagine that adjustments in the way they live today can have an impact on global temperatures tomorrow. Education can go a long way in helping citizens (and perhaps some politicians) understand important causal linkages. In the US, for example, Next Generation Science Standards encompassing global climate change science, are being widely implemented in elementary to high school curricula. Call them the seeds of tomorrow’s intertemporal policies.

But causal links can be blurred, by the length and complexity of causal chains or by deliberate intent. Special interest groups that seek to delegitimize broadly established climate science, attempt, among other things, to blur causal lines while appealing to our present-bias by evoking would-be short-term pain (job losses, high energy bills and business closures, etc.) should we attempt to limit the use of fossil fuels.

Indeed, research suggests that special interests may play a primary role in short-sighted policy decisions (Jacobs, 2011). It’s easy to understand why, with short-term financial objectives dominating business cycles and the prevalence of special interest groups in electoral and policy-making processes. The OECD’s Financing Democracy (forthcoming) points to the enormous challenges that remain in political finance reform.

Emphasis on biased political processes downplays the importance of citizens as agents of change. If short-term thinking is hard-wired into the electoral process, a shift towards long-term thinking in voter attitudes can force representatives out of their bias.

But also, citizens increasingly have an additional role to play, beyond voting, in shaping policy. The Regulatory Outlook reports that a growing number of countries are mandating stakeholder consultation in the creation and assessment of policies. This is based on the principle that policies best serve the public good when input is gathered from those subject to them—citizens, businesses, civil society, NGOs, public sector organisations… Ideally, citizen-consultants can evaluate policy for its impact on, or effectiveness in addressing long-term outcomes.

But can we ourselves be counted on to be reliable custodians of the interests of our future selves and those beyond us? Do we need, as author Jonathan Boston suggested, a High Commissioner for Future Generations or equivalent to give a voice to silent future stakeholders? And how might one go about embedding the interests of future stakeholders in a democratic process?

Whatever the answers may be, now-distant consequences of unmitigated issues will eventually show up on our doorstep and we will be obliged to respond with all of our courage, stamina, resources and intelligence.

Or we can get our intertemporal game on earlier when our options are immensely better.

Useful links

W.D. Nordhaus, The Political Business Cycle, The Review of Economic Studies, Vol. XLII (2), No. 130, April 1975, pp. 169-190

A. Jacobs, Governing For The Long Term, Cambridge University Press, 2011

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2 comments to “The time-travelling policy maker”

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  1. Per Kurowski - 13/10/2015 Reply

    You write that: Economist William Nordhaus predicted that “A perfect democracy with retrospective evaluation of (the economic performance of) parties will make decisions based against future generations”

    I do not know how to handle the representation of unborn generations, but perhaps we should at least handle better the representation of the born.

  2. William Below - 20/10/2015 Reply

    Mr. Kurowski,

    I definitely agree that if we could already make solid intertemporal decisions regarding policies affecting our own generation, it would a step towards better handling the generations that follow.

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