In May, a rich guy in Australia said the reason Millennials don’t have money is they’re spending it on avocado toast. Previously, a U.S. congressman said people can’t afford healthcare because they’re buying iPhones.
These incidents and others like them have been ridiculed. They’ve been held up to show how out-of-touch the speakers are. They’ve been panned as misunderstanding the relevant costs.
But I actually think they’re worth taking seriously. They fall into a genre I would call “If I Could Have Done It Again.”
People make mistakes. Looking back, they often regret those mistakes and think they should have done differently. We all understand this.
But a bit trickier to grasp is the role of things that “Seemed Like a Good Idea At the Time.” That is, cases where we do something, but then, looking back, have changed our opinion of it. Maybe we got a haircut that we thought was so awesome, but looking back ten years later think, “What on earth was I thinking?!?!?” Our own past self becomes a kind of stranger to us as our attitudes and mental states engage in the constant re-creation of our identity.
The same holds true for future selves. I am kind of a hardass disciplinarian when it comes to my nieces and nephews. And I know lots of other people who have been very tough with other peoples kids… who then get steamrolled by their smiling daughter as soon as they have kids. And you know what? I’m probably going to be the same. As much as I abhor limp-wristed-can’t-discipline-his-own-kids-Future-Lyman, I know that’s what the future holds for me. I can’t imagine that being me because my present mental states don’t match that, but I rationally reach the conclusion that I am probably going to change.
That is to say, there are preference differences across age. And even when those preference differences may be predictable, it may not be beneficial or possible to accelerate the change. That is, even if I know that Future-Lyman will end up liking the taste of cranberry juice, I may be an unwilling participant in that change. It may arise from external conditions or the natural aging of my body and changing of preferences on a sub-conscious level.
When I look at a kid, I don’t necessarily want that kid to adopt fully adult preferences and behaviors, because childhood is a good thing, within its proper limits, and I want that child to have a good childhood. Even if I observe and know the desired end-state, hastening arrival at it might not be good.
This is all some fairly straightforward stuff. But let’s think about it economically.
Some things are fairly consistent in economics. One of those things is the economic life-cycle. In terms of our net earnings vs. net consumption, the middle-class American life cycle might look something like this:
So your consumption exceeds your income up through your 20s, then that switches. By your 40s, you’re in net-positive-asset-land, and by your 50s you’re really preparing for retirement. I cut the graph at 75 years old; arguably the asset line should fall faster, but you get the general shape here.
If you’re near retirement, or already retired, you are facing supporting yourself off of stockpiled savings in a large part. Savings are the accumulation of historic income minus historic consumption, plus the return on invested savings.
When a person near retirement looks back on avocado toast, they see a terrible hairdo. That is, they may be more likely to look back and say, “What was I thinking??” And the person enjoying their fancy toast (and, for the record, avocado toast actually is delicious, especially with some dried berries, goat cheese, a sprinkling of salted sunflow seeds, and just the smallest dab of honey: breakfast in the Stone household is a fancy affair) looks at their future self and cannot imagine thinking that avocado toast was the important budgetary item.
But here we run into an interesting piece of reality that is very obvious but here helps us understand how we should weight preferences: time, for now, remains linear. You move along it in one direction. That is, I will become old, I will not become young again. I know how my future preferences are likely to change.
But avocado toast is so good. My body cries out for it. My rational will is overpowered, and I feast upon its NAFTA-enabled goodness. My revealed preference is at odds with the preference I will hold in the future. And at the time I hold that preference, I will be facing serious consequences for my past actions.
What I want is a way to interdict my avocado-mania, a way to restrain the concupiscence of the flesh and prevent myself from being tantalized by the weird Is-It-Fruit-Or-Veggie mysterious delight of the ‘cado.
What I want is a commitment device.
Commitment devices are tools I set up at a given time to prevent a future action. Past-Lyman had a moment where he decided that Near-Future-Lyman would probably make bad choices, so Past-Lyman put all his money in a fund that Near-Future-Lyman can’t easily withdraw money from. The result is that Near-Future-Lyman is miserable. Poor Near-Future-Lyman, a victim of Past-Lyman’s paternalism. But, of course, Far-Future-Lyman is very happy with this commitment device. Also, the as-yet-unconceived heir of my domains, Constantine Aurelian Martellus Tennessicus Stone (did I mention I’m an awful person to be married to? My wife is a saint.), is very happy that my avocado toast addiction didn’t raid the college fund.
The question here is about utility-discounting. How much do I value the utility of myself in the future? The reality is, most people value their own individual future utility lower than society would value it. That is, when the future arrives, society values the current person’s utility more than what you’d expect if you took that person’s revealed value of their future utility, and multiplied it out by some plausible discount rate. People systematically deprive their future selves in the name of the current self.
Which is why we need commitment devices! But the truth is, commitment devices have flaws. Sometimes you need to pull money out early for “good” reasons. Plus, the hard rule of commitment devices may not be something you want to set at a high-threshold due to liquidity constraints. So your “forced” saving rate might be low, lower than what Far-Future-Self would prefer. That means you need a way to induce extra near-term self-deprivation in the name of the good of the Far-Future-Self, and of society on the whole which, if you fail to save, will probably have to subsidize you, because suffering old people is something society dis-prefers.
How could we induce more near-term self-deprivation for savings?
Norms! We can establish social norms! We can look down our noses at expensive stuff, demand fair prices, and treat people who act like their fancy food is worth taking $5 out of their future kids’ college funds with a degree of judginess. Now, we don’t want to publicly pillory people. The goal is not actually to heap ignominy on individuals; I’m strongly opposed to that kind of shaming. But we do want to heap ignominy on practices. We should in ever instance concede to individuals that their individual practices are fine and dandy and we’re not criticizing them, but seriously People Should Eat Out Less and Eat In More.
The classic refrain here is “But small expenditures don’t matter!” No amount of avocado toast pays for healthcare. True! When people say, “Well if you didn’t spend on that avocado toast you could buy that house this year!” it’s wrong. But these costs do add up over time.
I’m a non-drinker. I also don’t drink soda (except for this, which is just patriotism for God’s Commonwealth in a bottled form). I abstain for religious reasons and for simple preference reasons, not financial ones. But nonetheless, the savings do add up. Let’s say the average American consumes 3 drinks a week of alcohol, and 6 of soda. Say you pay $0.75 for each (too high for home consumption but of course low for restaurant consumption), so you pay $6.75 a week in these low-value items. That comes to $351/yr. Let’s assume you’re 25, assume some normal inflation, and asssume some normal investment returns. Let’s assume, at age 25, you cut purchases to flat zero. By the time you’re 65, the nominal value of the saved money that you invested will be $46,000; real value of about $22,000. Depending on standard of living, that could be a year of retirement income for a person.
So if you phrase it as “For $6.75 a week you can add a year’s worth of income to your retirement savings,” our avocado-toast-hating-old-person suddenly sounds pretty rational. And if your answer is, “But that’s not that much money, and besides, it’s a long way away, there’s time to save; plus, the avocado toast is really good” then don’t come whining to society when you’re $46,000 short on your medical bills at age 68. Right? Right????
Well, no, because nobody can perfectly anticipate the future. And, as my dad says, “Shoulda, woulda, and coulda will always do better than done.” You’ll always look back and think, “I wish I’d spent less on this stupid thing.” A degree of stupidity is sort of priced in.
Which is why we just need norms. Not mass-shaming of individuals, but norms. We need culturally shared views that certain practices are not desirable. We need to make a norm of not going to the bar, but going to a friend’s house. We need norms where it’s socially encouraged to say, “Actually that restaurant is expensive let’s have a picnic.” We need to be skeptical of people who are good cooks by means of buying really expensive ingredients (as skeptical as we are of good schools who are good by virtue of zoning out bad students). There’s no policy argument here (other than some degree of forced saving is good, as we have with social security), but a suggestion that maybe just maybe Team Old People is right that Millennial spending on consumables is fairly high, and it seems to substitute for more affordable spending at home, and even spending on home food is inflating with rising quality expectations, and maybe just maybe engineering social norms to increase food expenditures is a project to undo the hard-won gains of the last century.
Spending less on food is a good thing. Look, I love food. I eat out a lot. Less than I’d like, more than I should. And it would be nice if society could help out by culturally pushing me on that “more than I should” a bit more and pushing me on that “less than I like” a bit less. Because if you think $6.75 a week on food adds up, let me tell you. Dropping food consumption from, say, $70/wk to $45/wk nets you $25/week… which adds up to $172,000 nominally by age 65, or $82,000 in real terms. Real money, kids. Real money