Reading about why people have a tough time delaying gratification, I started to think about countries.
A part of your brain–the insula–becomes more active when faced with an unpleasant task like dieting or seeing your team lose. Two MIT professors discovered that you can add paying with cash to the “unpleasant list” but not credit cards. As one of them said, “The nature of credit cards ensures that your brain is anesthetized against the pain of payment.” The result? You buy a lot more when you postpone payment (and pain) by charging it.
Countries also have been postponing payment and pain. Greek and Spanish pension obligations will soar during the next 40 years. Currently averaging between 20-30 percent of GDP for most euro zone countries, entitlement spending on public pensions, health care, and unemployment insurance is rising. Like cash vs. credit, aren’t overextended entitlement programs examples of current pleasure that will generate considerable future pain?
The Bottom Line: Will it ever be politically viable to realign incentives so that current gratification can be delayed in favor of future economic growth?
My facts about the insula and our shopping decisions, and my quotes, came from Jonah Lehrer in Wired and his book, How We Decide (p. 86). For the graphs and analysis of overextended entitlements, I consulted this NBER working paper. You might also want to look at economist Allan Meltzer’s new book, Why Capitalism.
By Mira Korber, guest blogger.
They say “cash is king.” But these days, perhaps cash was king.
Sweden is becoming a “cashless society.” Commuters pay bus fees via credit card and text message. Religious institutions take electronically transmitted donations.
The positives? Certain crime statistics have decreased. In 2008, Sweden experienced 110 bank robberies. In 2011, that number had shrunk to 16.
The negatives? Cybercrime has increased. In 2000, computerized fraud cases totaled 3,304. In 2011: almost 20,000.
Being cash-free would certainly lead to a lighter pocketbook. Or might it lead to no pocketbook at all? What would happen to wallet sales? Money clips? Restaurant tips? Jewelry purchases (as in Italy, for example)?
Read here to learn the implications of a cash-free America.
The Economic Lesson
Paying with cash or credit/debit represents a tradeoff. While a cashless society would remedy tax evasion and counterfeiting, it would diminish cash-dependent transactions.
An Economic Question: When do you use cash and when do you use a credit/debit card? Why?
To a Yap islander, in 1903, a 12-foot limestone wheel had considerable value. Described by NPR’s Planet Money, the wheels, as small as a foot in diameter and as large as twelve, composed the islanders’ monetary system. With smaller transactions, you just inserted a pole through the wheel’s center hole and took it to whomever you owed money.
With larger wheels, you did not even need to move them. In a 1991 paper, Nobel Laureate Milton Friedman tells us that when one valuable massive wheel was lost at sea, its owners could still use it. The islanders “…universally conceded…that the mere accident of its loss overboard…ought not to affect its marketable value…The purchasing power of that stone remains, therefore, as valid as if it were leaning visibly against the side of the owner’s house…”
Fast forward to 2012. Increasingly, transactions have become cashless. A phone swipe can pay for a cup of coffee. We can pay bills online. We’ve got credit and debit cards and PayPal. Currently at Slate.com, one journalist is investigating a cashless life. And, in one 2004 study, researchers concluded that although consumers benefit more than merchants, “the shift to a cashless society will improve economic welfare.”
Sounds like the Yap’s big wheels.
The Economic Lesson
To be called money, a commodity needs 3 characteristics:
- It should be a medium of exchange. (People willingly use the commodity for exchange.)
- It should be a store of value. (In the future, it still will have relatively comparable purchasing power.)
- It should be a measure of value. (When someone says one dollar, you know what that means.)
Today, in the U.S., the basic money supply includes cash, currency, travelers checks and demand deposits (checks). Thinking of ATM payments and a phone swiper at Starbucks, the traditional examples of the money supply are not quite working anymore.
An Economic Question: How has the increased use of credit and debit cards since the 1950s affected our purchasing habits?