The default operating model today for seemingly all economics, business, social policy and environmental decisions is "extend and pretend," colloquially known as "kicking the can down the road." This approach brings forward benefits or gains, often based on cosmetic solutions, and defers risks or costs into the future. It's a convenient model for many reasons. But it's now in danger of breaking down.
Extend and pretend is predicated on financialization, especially time-value concepts that favor the near term while discounting future events. It may also be a consequence of the human predilection for immediate gratification. To adapt Thomas Hobbes, we seem to have decided that only the present is real because the past is memory and the future has no reality.
Despite the financial crisis of 2009, the world remains dependent on increasing levels of debt to bolster demand, ignoring an uncertain ability to meet future obligations. Global nonfinancial debt increased to a record $175 trillion in the third quarter of 2017, equivalent to 238% of global gross domestic product (an increase of 46% since 2007). This excludes unfunded pension and health care commitments which would, for example, triple the U.S. government's debt of about $20 trillion.
(Related: On the Third Hand: Clawblind)
Businesses, too, follow this model. They emphasize short-term performance using accounting tricks to increase current income while deferring expenses and using debt-funded stock repurchases to boost earnings per share. General Electric Co.'s current problems reflect, in part, the extend-and-pretend model: Its now-discredited expansion into finance relied on leverage and underpricing of future risk, which has necessitated payments of $15 billion over the next seven years to cover continuing liabilities.
Even Berkshire Hathaway Inc. relies on extending and pretending to some extent. Its core insurance business generates premium income against promises to cover future risk. From time to time, it also sells options to generate upfront premium income. Risk is deferred until the contracts are unwound or expire. Cash flow finances the company's investments, much of which goes into financial institutions.
In politics, extend and pretend has become standard procedure. Underinvestment in health, education and training saves money today but creates future costs and problems that may exceed any current benefit. Policies are focused on short-term growth and the maintenance of current living standards while longer-term issues are ignored. The Paris Agreement may have offered a political victory for leaders claiming to address climate change. But it will probably prove inadequate to limit severe changes in weather, agriculture, mortality and economic conditions.
