Next to the contraceptive pill, the mightiest agent of social change in our age has been the credit card. Urged on by such friendly invitations as "Fly now, pay later" with a self-assured swipe of our magic card we get instant gratification of our wishes for whatever money can buy, at least within a reasonable order of magnitude. For wishes of a higher order, we can use the mortgage on our house as a credit card, topping it up if it had been paid down or if the value of the house has gone up. The "pay later" part of the formula is not just trickery meant to reassure you, though it does mean to do that, too.
For more on time preference, see the biography of Eugen von Bohm-Bawerk in the Concise Encyclopedia of Economics (CEE).
If "fly now, pay later" is so often chosen instead of "fly when you can pay," it is because of time preference. Future goods are worth less than present ones, they are devalued by a time discount. Despite its commonsense appeal, many economists and philosophers have condemned time preference as irrational or non-existent. In the burgeoning environmentalist literature, the damage a given amount of global warming would do to future world product is either not discounted, or discounted at only 1 or 1.5 per cent. This justifies a much higher expenditure to prevent future damage than if future world product were discounted at, say, 3 or 4 per cent.
Time preference cannot rationally be less than the expected marginal productivity of capital. If it were less, a rational person would contradict his own preference if he consumed his marginal dollar instead of saving it and thus augment his future product. A rational person with a low or zero time preference would, in other words, starve himself to death. He could only escape this sad fate decreed for him by his zero time preference if the marginal productivity of capital fell to zero or was expected to do so. It is, of course, problematical whether the market interest rate is a good proxy for the expected marginal productivity of capital, and if it is, which is the relevant interest rate that balances the marginal dollar saved against the marginal dollar consumed? The real medium-term rate may be a reasonable candidate, and thus 3 to 4 per cent could be the minimum annual rate by which "fly later" might be worth less than "fly now". While it can hardly be much lower than this, it can very well be higher.
Credit card interest rates are, of course, much higher than 3 or 4 per cent. One reason on the supply side is that credit card debt is of poor average quality. A flight, a good restaurant dinner cannot be repossessed if the debtor defaults, recovery by other means costs too much, so that the average debtor must pay both for himself and for the defaulter. On the demand side, the time preference of certain types of card-users may be almost astronomical. Weakness of will, or simply a failure to realise what they are doing, might plausibly explain the behaviour of habitual heavy credit card borrowers.
Time preference incites to overspend, i.e. to dissave. It is usual to cite the precautionary motives as the main incentive to save. We save to cushion us against unemployment, illness and old age. Some primitive peoples used to take care of the infirm and the old by gently taking them by the hand, leading them to the deepest forest and leaving them there. Mostly, however, care was incumbent on grown-up children, and families with many children and many relatives fitted well into that system. Modern China's one-child rule is its opposite pole. A corollary is that Chinese household saving is now extraordinarily high. Another corollary is that in order to stimulate consumption, the Chinese government is advised to introduce state provision of health care and pensions. Gradually but inevitably, this will be done.
There are, of course, alternatives. In Continental Europe, where state paternalism is deeply rooted, both health care and pensions are provided by compulsory social insurance, but not generously. Household saving, typically between 10 and 20 per cent of GDP, supplements them. In the UK, health care provision by the state is supposed to be as comprehensive as it can get, but the state pension is rudimentary, and is supplemented by corporate pension schemes. Household saving has been shrinking, approaching zero but moving back to about 5 per cent under the shock of the 2008-2009 recession. In the US, health care is mainly employer-financed, basic pensions are a federal responsibility and are largely supplemented, as in the UK, by private pension schemes, some of which are corporate, others individual.
What members of a society do not do for themselves in these domains either by saving up for it or by having their credit cards do it, is done for them by the state. Having the state do it is like using a great big collective credit card which allows them to have public goods, social services, subventions and tax breaks simply by voting for them. Getting the state to furnish these good things is the equivalent of "fly now". The "pay later" is understood to come at some point—maybe.
For it is only "maybe". One is not really sure. Though the national accounts balance in the aggregate, the accounts of particular individuals need not; some end up as suckers, others as free riders. Well over a century before "public choice" or "rent-seeking" have become passwords among the initiated, Frederic Bastiat described the state as the instrument by which everybody is trying to live at everybody else's expense. All cannot succeed to ride free, but many will. Political economy and political science analyse these sub-surface goings-on as the product of rational opportunism, the calculating exploitation of voting strength, the sale of souls to the highest bidder and so forth. All that is valid enough, but tells only half the story. The other half, perhaps the more important one, is about the un-calculating, unconscious and unwary manner in which the majority of people regard and handle the collective credit card. It is as if they sincerely believed, without consciously believing it, that the state is sitting by a vast reservoir of good things and useful deeds, rivulets and avalanches of which are regularly released. The stock has perhaps all been paid for beforehand, or need never be paid for—the question does not arise. If the state is on the side of the people, it lowers the floodgate releasing more milk and honey, if it is Scrooge-like and ungenerous, it restricts the flow. The people is not divided by divergent interests, trying to live at each other's expense. Rather, it is united in the purpose of bending the state towards more liberality and generosity. It is "fly now", and there is no "pay later" at all. Any attempt to "cancel a flight" is fought tooth and nail by all as arbitrary and unfair, even if it is in the real interest of some that some expenditures should be restricted.
If the public can have a split personality, this is one of them. The other is conscious, calculating and even crafty. Each of its sub-groups benefits disproportionally from some good or service, some subsidy or other privilege that the collective credit card can procure and that will be collectively paid for at future dates. Clearly, each of these sub-groups can only be a successful parasite if it steals a march on the others. If half of the sub-groups—say, the railwaymen, the teachers and the fruit growers—successfully claim favours and the others do not, it is the former who will be parasitic on the latter. Hence it is a matter of elementary self-defence for the latter—say, the dairy farmers, the policemen and the pensioners—also to agitate and make strong claims of their own. In fact, pre-emptive attack may be the only effective defence they have.
None of this rational but sterile and self-defeating roundabout would be really feasible (or at least it would have little scope) if there were no "social credit card". It is because a government can borrow from the future that it has little hope of resisting popular pressure for expenditure today. Through most of history, royal treasuries were emptied when ambitious kings made foolish wars, and got filled up in periods of peace. Modern democracies function differently: big budget deficits in rough times alternate with smaller ones in better days. Big or small, the deficit is endemic, a surplus quite exceptional. When society works with a great collective credit card and can yield to its own time preference, it would be hard to expect a different result.