The time value of money
CATHOLIC NEWS AGENCY
October 11, 2005
TODAY'S COLUMN
The time value of money
By Dr. William R. Luckey *
Most people think in static terms. That means that they think only of
the
here and now, and not of, not only of the future consequences of their
actions, but also of the relationship of money to the future.
Lets take an example. Suppose I offered you the choice of� $100 now or
$150,
a year from now; I suspect that most ordinary people would take the
$100 now
even though if you put that $100 in the bank at a 5% interest rate for
the
year compounded monthly, you would only end up with $105.12, not $150.�
This
is because they have what economists call a high time preference.
Unfortunately, most people have this high time preference.� In the
Encyclical Centesimus Annus, the late Pope John Paul II bemoans the
widespread consumerism in Western society.� One of the reasons for this
consumerism is that the society (i. e., the people around us) places
great
store on having things, and having them now.� The result is that we
exchange
the money we make today for things today, not just food, clothes or out
rent, but bigger stereos, cars we cannot afford, designer sunglasses
and
such. We frequently go into debt, meaning that we spend our future
income,
to buy these baub! les now.� It's not that we are spending our future
income
on, let's say, going to school, which will result in a higher income in
the
future.� No.� We are trading, as economists put it, future consumption
for
present consumption.� When we need large amounts of money in the future
for
an operation, to send our children to college, to buy grandma a
vacation or
to provide ourselves with a decent retirement income, the money will
not be
there!� One of the more socially detrimental results of this attitude
is
that those who have lived above their means and failed to accumulate
money
for the future will demand that the government cover their improvidence
by
social security programs, government financed college loans, government
run
retirement homes, gover! nment sponsored medical care, etc.� But, and
this
is important, where does the government get the funds to give to the
people
who have a high time preference?� The money is transferred from those
who
have a low time preference (those who have not spent themselves into
massive
debt) to those who have (those who spent their money on stereos, fancy
cars,
etc.).� This is done by taxation-what economists call transfer
payments.
This, then, rewards those who think only in the present and even
encourages
others to tell themselves, "BAAAH!"� I don't have to put off
consumption-the
government will take care of me."� The politicians are all too glad to
do
this because they trade these entitlemen! ts for votes.
One of the sad things is that many Catholic clerics encourage this
behavior.
They incorrectly blame the free market and business for "making" people
materialistic and having a high time preference, and at the same time
demand
that the government extend the social welfare state, which encourages
that
very thing. No true Christian doubts the value of a government "safety
net"
as a last resort for those upon whom hard times have fallen.� But the
virtue
of charity is a virtue possessed by individual people.� Transfer
payments
are not the virtue of charity, and can make people worse off.!�� WE,
you and
I, are responsible for those who are in trouble.� This means even
giving
counseling to young people while they are under their parents care, not
to
have that high time preference.
Catholics must stop rewarding those who have traded future consumption
for
present consumption and calling it Christian compassion.
* Dr. William R. Luckey was born in the south Bronx, New York City,� he
is
Professor and Chairman of the Department of Political Science and
Economics
at Christendom College and is on the advisory board of the Center for
Economic Personalism.
He has been married for 30 years and has four children; he has also
been a
member of the Third Order of St. Dominic for over 27 years.