The Now Generation: Making Sense of the Fiscal Cliff Compromise

 

Takeaway

  • The current employment recovery lags all others in the post-World War II era, when stimulus spending was considerably lower

Over the past five years, the government has spent stimulus money in heroic proportions in its epic battle against The Great Recession, yet we have not returned to pre-recession employment levels. In fact, this recovery lags all others in the post-World War II era — recessions during which stimulus spending was considerably lower.

At this moment, we need to realize that continuing to run deficits to win the recessionary battle is compromising our ability to win the war of fiscal sustainability. It’s time to accept that there is a trade-off between immediate gratification and future prosperity.

As former Wells Fargo CEO Richard Kovacevich puts it, at the end of the day, the fiscal cliff compromise continues to put the stimulus on the overstretched government credit card.  According to Kovacevich’s calculations, if the federal government were a family earning $22,000 per year, it would be spending $38,000 per year with an existing credit card debt of $143,000.  The next leg of the saga is to raise the debt ceiling so we can continue to max out a higher credit card limit.

The fiscal cliff negotiations revealed in plain sight that our leaders, who are likely a reflection of our population at large, are members of the Now Generation. 

This is a classic test of immediate vs. deferred gratification. This trade-off was memorably tested in Stanford psychologist Walter Mischel’s 1972 “Marshmallow Experiment,” in which he offered children a choice between receiving one marshmallow immediately or two at a later time. He found that children who were capable of deferring gratification eventually went on to earn higher scores on their SATs and achieved other life accomplishments that required some front-end investment. 

It is important to note, however that the “one today, two tomorrow” promise was made by Professor Mischel, not the U.S. fiscal system. In today’s societal trade-off, Congress likely has already put us in an environment in which one marshmallow today will only perhaps generate a fraction of a marshmallow tomorrow. 

To read the full version of this article, visit Dr. Spellman’s blog, The Spellman Report.

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.

About The Author

Lew Spellman

Professor, Department of Finance, McCombs School of Business, The University of Texas at Austin

Lewis Spellman received his BBA and MBA from the University of Michigan and his MA and Ph.D. from Stanford University. His research interests include...

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