Resist the marshmallow

What a mess we’re in.

Ordinary people are struggling with wages that fail to match rising prices; the cost of energy is escalating at an alarming - if not downright scary - rate, a phenomenon that analysts say could last a few years; and we’re starting to really experience the effects of climate change in catastrophic natural disasters. In response, the UK seems to have a vacuum where there should be effective leadership.

All these problems were avoidable, if our society weren’t blighted by that most human of failings: short-termism.

Short-term thinking, or an inability to conceive of delayed gratification, is a very common human problem that was best demonstrated by an experiment involving marshmallows (Toxteth O’Grady wasn’t involved), conducted by researchers at Stanford University in the early 1970s. Pre-school children were each given a marshmallow and told that they could choose between eating it or waiting for a researcher to return - about 15 minutes later - to earn an additional marshmallow. In other words, take a reward instantly or wait for a larger one. The findings were published in 1972, but the Stanford team also monitored the subjects when they grew into teenagers and adults: what they found was that the kids who waited to eat the first marshmallow had better academic results, lower body mass and were less likely to abuse alcohol and drugs. The conclusion? Being able to forgo a short-term treat in favour of a higher reward in future leads to greater well-being.

This truism extends to the world of business, too. The McKinsey Global Institute (MGI) studied 615 publicly traded US companies, comparing financial results over the period 2001-15 and found that companies with a more long-term focus had, on average, 36% greater earnings growth than other companies, as well as higher revenue, market capitalisation and profits. They also created 11,600 more jobs, on average, during the period than companies with a shorter-term-focus. Admittedly, the companies with a long-term-focus were hit harder than their shorter-term counterparts during the 2008-09 financial crisis, but they also recovered more quickly.

There’s a more topical example of this, closer to home, too.

Energy company Bulb grew quickly to become the UK’s sixth-biggest supplier, attracting 1.7m customers before it went bust last November. It is one of 28 energy companies that have gone bust in the last year, which has added £94 to the energy bills of every UK household, as suppliers taking on stranded customers pass on additional costs. The government will recoup the cost of the Bulb bailout from consumers’ bills - £150 per household, according to energy consultancy Auxilione.

Bulb was forced into ‘special administration’, because another energy retailer couldn’t absorb Bulb’s customers. The administrators, Teneo, had a choice between buying energy in advance – hedging, in other words – or taking a pay-as-you-go approach. Teneo asked the government for funds to take the hedging option, as it expected energy prices to rise. It was a wise decision, as wholesale gas prices are now 10 times what they usually are at this time of year. However, the government refused to fund the hedging strategy, which means its support of Bulb could end up costing £4bn. And guess who will have to pay for that? Yep, us, the energy consumers.

There are some enlightened investors who see the problem with short-term returns on capital. Larry Fink, billionaire CEO of BlackRock, a company that manages $10 trillion worth of assets, has argued for new forms of corporate governance, pointing out that short-termism results in knock-on effects such as climate change, underfunded pensions and societal problems. Warren Buffett, widely seen one of the most successful investors of all time, has suggested that public companies stop issuing quarterly earnings guidance, because it “often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.”

The short-termism of neoliberal economics, the market-led orthodoxy that has held sway for the last 40 years, has made a lot of rich people even richer, earning money from the dividends paid out on their shares in profitable companies. Money has flowed into their pockets instead of companies investing those profits in, say, paying their staff living wages that keep pace with the cost of living, or investing in new technology or infrastructure (are you listening, water companies?).

The same goes for the UK government. Every single problem that the UK is facing would be alleviated by governments investing for the long-term. Housing? Invest in a programme of building affordable public housing. Climate change and energy security? Build solar and wind farms. Education and skills? Fund our schools better. Health? Pump money into the NHS.

Now, if you’re economically conservative, you’ll probably be rolling your eyes and muttering about magic money trees. But government borrowing for this kind of investment will bring returns that pay off public borrowing in the long term. Constructing affordable public housing creates jobs, those workers paying tax to the Treasury, plus it brings in income from house sales or rents; cheaper renewable energy from solar and wind lowers bills and CO2 emissions, helping to mitigate the impact of global warming; and a better-educated, healthy workforce is more productive, leading to increases in tax yields and GDP.

Sadly, we’re ruled by politicians who only see the marshmallow of victory at the next election, rather than the two marshmallows of a strong society and a successful economy.

Perhaps it’s time for us to expect s’mores (sorry) from our elected representatives.