First, if we’re going to compare our discount rules to the “real interest rate,” uncritically or not, issues of loss-aversion and hyperbolic discounting inevitably arise, because of the equity premium puzzle. Should we think of the “real interest rate” as the 2% return to bonds or the 6% return to stocks? I note that Nordhaus seems to favor a return much closer to the stock market return, not the return to T-bills.

Second, if the Stern Report is supposed in influence policy in, for example, the US, I don’t see what sense it makes to say that US interests only get 5% weight, since we’re only 5% of world population. I don’t particularly see this as a moral basis for US policy: in some contexts we call those who weight the interests of foreigners equal to national interests “traitors,” which (rightly) implies moral condemnation.

In practical terms, I don’t think such an analysis is going to be persuasive, unless the assumptions are hidden behind a lot of Greek letters. When I worry about global warming, I’m especially concerned about possible effects on the Gulf Stream, even though it affects only a relatively few Westerners. Maybe Stern would tell me that’s an immoral way of deciding policy, but who wants economists to be the world’s moral philosophers?

A useful way to look at this, but also a source of some confusion, is that, with eta =1, a 1 per cent increase in income now has the same value as a 1 per cent increase in income at any point in the future. Since income is growing this means a given (constant dollar) increase in real income now is worth more than the same increase in the future.

Lombard, though, has a good counter-point. He says: okay, use whatever delta and eta you want, but apply them consistently to all questions of sacrifice for the benefit of future generations, not just for CO2 emissions. Then when we are done calculating how much our generation should sacrifice, and we see how much our generation actually will sacrifice, direct those dollars to the projects that buy the most future welfare. Lombard claims that curing third world diseases, per dollar invested, buys more future welfare than reducing CO2 emissions. I don’t know if that’s true, but it is certainly possible.

2. The formula rho = eta (c’/c) + delta gives a discount rate for welfare, not a discount rate for money. If utility is not proportional to money, those aren’t the same. So testing whether a particular choice of eta and delta are emperically reasonable is not as simple as computing rho and comparing it to the interest rate. Fitting eta and delta to observed investment patterns involves seeing how much of their income people set aside in long-term investments and how that savings rate varies with income, not just looking at the rate of return on those investments.

It seems to me that it’s just not possible to make these intergenerational transfers, the way you can between people currently existing, because you can only hold out the posibility of a contingent benefit for future generations in return for a real investment. You can’t be certain that the transfer you want will take place.

I actually think that something like this process is happening—the polity is gradually deciding that we have some collective responsibility to spend something today, this conclusion is based on a wide range of evidence gathered from different sources, and people currently feel they want the spending to be fairly limited as yet. The big econ models come in around the edges of the process, as one other form of rhetoric.

I figured someone was going to make that exact counterargument (normative v descriptive). heres the question though.. where is the intuition for whats normatively correct coming from? doesn’t the debate about whether it’s proper to discount this much or that much come from some intuition? and if all you are doing is appealing to moral intuitions when advocating for this discount rate or another, then it seems that what people do descriptively when they are assessing time preference matters. unless you have an a priori standard for discounted utilty which does not appeal to consequences that our intuition tells us is tasteful or distasteful.

Paul

1)Risk of extinction
2)Accounting for the declining marginal utility of benefits we provide to future generations because they are richer
3)Reasonable expectations upon any generation.

The third reason recognises the fact that once we get into long-term intergenerational cost/benefit analysis of the climate type saying, as welfare economists generally do, that the efficient thing to do is to maximise total welfare becomes hugely problematic. If costs now entail gains for several future generations and the avoidance of costs now entails costs for several future generations then the fact that there are many more people in the future (i.e. future generations 1+2+3+4+5…) makes the welfare interests of the future much more important than the welfare interests of any single generation (i.e. the current generation).

There is enormous debate over how to model the first and second reasons for discounting, but it seems to me that what is really going on is that welfare economists intuitively reject as unreasonable the demands imposed on any current generation for maximizing intergenerational welfare. They then engage in various kinds of tinkering with how the model deals with 1 & 2 in order to produce a CBA that gives them an answer on “efficiency” that seems reasonable (as opposed to welfare maximising) based on what they estimate current costs and future benefits to be and on how rich they estimate future generations to be. All this to avoid questioning their underlying utilitarian normative assumptions, assumptions that more often than not only serve to simplify analysis or to make the presentation of results seem more scientific (i.e. giving a clear single answer on what is efficient).

As it stands the debate between economists over what is intergenerationally “welfare efficient” when it comes to climate change only gives us a lot of second rate theorising about intergenerational justice discussed under the guised of empirical assessment, which in turn is distracting and confusing.

An analogy might be that we all (more or less, when talking in ethical terms) agree that the geographical discount rate ought to be zero – that it is arbitrary and wrong for me to discount the utility of other people based on how far away they live from London (we could even make assumptions about a racial discount rate, whereby I assigned a lower weighting to other people’s welfare based on their genetic distance from red-haired Welshmen). This is based on a fundamental ethical principle of equality. Given that, it seems hard to justify “pure time preference” because there is also a fundamental equality at work there; future generations will be people just like me. The only justification for a positive delta is if we are allowing for the possibility of extinction or some such.

So, hyperbolic discounting doesn’t really enter into this discussion – I don’t think anyone is prepared to defend it as a sensible basis for planning, or as a social welfare function, are they?