Opinion and Economic Analysis

HICKS: Fathers influence the personal discount rate

June 16, 2012

Simple solutions to complex problems are seldom useful, but it is an irony that fairly elementary explanations often hold the key to complex economic outcomes. Inflation is solely caused by an excess supply of money, for example, and economic growth can occur only through greater efficiencies.

But drawing easy prescriptions from these truths is frustrating.

One example: Economic outcomes for individuals are largely determined by the rate at which they discount the future. Put simply, the world appears to treat more kindly those who value the future more highly than the present.

As a thought experiment, suppose we have two teenage girls of equal talent and opportunity. Both have dreams and hopes for the future along with immediate interests in the things teenage girls seem to like. This is normal fare that our abundant society encourages, and it is a delight to watch (but not necessarily listen to). Now, we do not know directly how much each girl values the future. We can only rely on observations of their actions, or what economists refer to as their “revealed preference.”

The girl who values the future more highly will defer some current pleasures to do things that improve her future prospects. She will study more, take harder classes, and participate in sports and social activities that ready her for a future as an adult. And the girl who cares more about the present will discomfit herself less in the short run.

Of course, how much the future matters changes with time, experience and how much you love people who might be living in the future when you are not.

A long history of morality has developed across cultures to encourage a focus on the future. One reasonable explanation for this is that it is quite easy to do things when young and inexperienced that severely limit one’s long-run options.

The distinction between the girl who values the future greatly and the one who does not is more than just a tautological exercise. If you were to loan money to these girls, to whom would you assign more risk and thus a higher interest rate?

A synonym for an interest rate is a discount rate, so it comes full circle. The more you value the future, the more highly you are apt to be valued by the economy, and vice versa.

It is worth noting that all these valuations are fair, just not equal. Only a child thinks “equal” and “fair” are the same thing.

The policy-press prescription for all this remains vexing, of course. Some of the best new research on poverty suggests that the absence of hope (or low future valuation) perversely reinforces behaviors that ensure a less hopeful future.

The research is still new, but if true, suggests we re-explore some fairly antediluvian instructions for growing up. And that is what fathers are for.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.
 

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