Sensitivity analysis

by John Quiggin on December 27, 2006

One of the points on which economists generally agree on is that sensitivity analysis is a good thing. Broadly speaking, this means varying the (putatively) crucial parameters of a model and seeing what happens. If the results change a lot, the parameter justifies a closer look.

In the case of the Stern Review of the economics of global warming, sensitivity analysis quickly revelas that the crucial parameter is the pure rate of time preference. This is the extent to which we choose to discount future costs and benefits simply because they are in the future and (if they are far enough in the future) happening to different people and not ourselves. If like Stern, you choose a value near zero (just enough to account for the possibility that there will be no one around in the future, or at least no one in a position to care about our current choices on global warming), you reach the conclusion that immediate action to fix global warming is justified. If, like most of Stern’s critics you choose a rate of pure time preference like 3 per cent, implying that the welfare of people 90 years (roughly three generations) in the future counts for about one-sixteenth as much as the welfare of people alive today, you conclude that we should leave the problem to future generations.

So, responses to a Stern Review provide another kind of sensitivity analysis. If you don’t care (much) about future generations, you shouldn’t do anything (much) about global warming.

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1

John Emerson 12.28.06 at 1:17 am

As I said on DeLong, this is an example of a case in which it is important to be able not to think like an economist. Are there any other cases in economics when either a.) the discount rate is zero or b.) it is normal to value unknown strangers’ utilities on a par with our own?

And to what degree should questions of this type be handled by ascertaining the present utilities of existing individuals? For a variety of reasons a high proportion of individuals will effectively prefer a high discount rate, making the individuals who have concerns into suckers making useless sacrifices.

This question was discussed by Cobb and Daly in “For the Common Good”. In “Filters for Folly”, by the rightwing environmentalist Garret Hardin, he concluded that environmentalists’ discussion should kick the economists out of the room right at the start. (He made the point that for economists 20 years in long term, and for environmentalists 100 years is short term.)

Not only has actually existing economics so far mostly taught environmentally destructive lessons, well-intentioned attempts to bring economics into contact with environmental reality often seem to produce chimeras which are only somewhat better than what they replaced.

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HC 12.28.06 at 1:18 am

Am I mistaken in thinking that this could as easily be phrased as a judgment about the likely resources of future generations relative to our own? Or about the opportunity cost of taking action now?

So, if you think future generations will be (much) richer, you shouldn’t do anything (much) about global warming.

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John Emerson 12.28.06 at 1:26 am

To elaborate, there are many kinds of discourse which show why we should think of future generations and care about global warming even if it won’t effect us personally. So far economics is not one of these discourses, and has mostly taught the opposite lesson (usually buffered by a serene but unproven assurance that the world will continue to improve forever.)

To date, then, people whose concern for future generations is large and who think that concern for future generations should be institutional and not merely a personal utility preference are reasonable in rejecting economics as a tool for discussing this question. Such people would welcome economists’ attempts to make economics less destructive, but given economics track record to date they would be foolish to take them at face value.

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radek 12.28.06 at 1:39 am

So, responses to a Stern Review provide another kind of sensitivity analysis. If you don’t care (much) about future generations, you shouldn’t do anything (much) about global warming.

This is one way to put it. Another way to put it is that a zero discount rate justifies spending fitty trillion dollars today to increase the wealth of all future generations by fitty cents (ignoring risk of extinction and the like). I think that indirectly this was Dasgupta’s point in exchange with Brad – bringing risk of extinction and exogenous TFP growth into it is just a way to side step the tricky moral question of “how much are we willing to sacrifice for future generations”. Zero discount rate pretty much means “everything”. Discount rate of 1 says “nothing”. Intuition and gut feeling tells you it’s somewhere in between. Even those Native Americans (Mohawk?) thought we only need to worry about the next seven generations.
Zero discount rate means we should always sacrifice ourselves for the sake of the utopia that comes only, discontinuously, at infinity.
I think the discount rate should be low. The future, even if we’re not around to see it matters, and we do have some kind of moral obligation to it. But it should be greater than zero.

So sensitivity analysis matters a lot here. If moving from a discount rate of .002 to .005 or even .01 changes the calculations drastically then we’re in trouble. If it’s still in the same ballpark then Stern’s good to go.

(I do agree that Nordhaus’ 3% is probably too high. On the other hand, Rogers argues that for good (partially cultural) evolutionary reasons we have discount rate of log2)

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John Quiggin 12.28.06 at 2:17 am

Radek, you’re confusing the discount rate with the rate of time preference. Stern’s parameters (eta=1, growth rate = 0.02, delta = 0.001) gives a discount rate of 0.021, so your income stream is worth $25 (ignoring the delta for extinction as you suggest). This is rather less than $50 trillion.

John, unless I’m misunderstanding you, your central claim is wrong. You say “there are many kinds of discourse which show why we should think of future generations and care about global warming even if it won’t effect us personally. So far economics is not one of these discourses”, but the fact that we are discussing the Stern Review (which follows an approach going back to Ramsey) shows pretty conclusively that this is not true.

It is certainly true that the alternative viewpoint that we should not care, or should not care much is also represented in the economic discourse, but I don’t think you can shut down discussion of the viewpoint simply by changing the terms of discourse. In fact, this viewpoint can be put at least as naturally in terms of political science frameworks like contractarianism, where future generations are supposed to be totally bound by the decisions of the past.

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John Emerson 12.28.06 at 2:18 am

Perhaps there are methods other than discounting by which we could preclude the obligation of infinite sacrifice.

If we have an obligation to unborn strangers, don’t we have an obligation to everyone? Doesn’t this set a bad precedent?

The Mohawks, of course, tortured people to death. Their opinions about a generation cutoff point for concern should be ignored.

7

John Emerson 12.28.06 at 2:23 am

Yes, John, it’s true that economics is finally timidly dipping its toe in the water. Good for economics. Perhaps economics, the most scientific of the social sciences, will soon bring itself to the point where the profession’s value-added to environmental discussions in non-negative, and on a par with Catholic theology and the Mohawk traditionalism.

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radek 12.28.06 at 3:05 am

John Q, I’m not. As with Dasgupta, this isn’t about actual values for eta and g but thinking about what kind of a rate of time preference (I might have been sloppy with the language) is “intuitive” or “justifiable”. Imagine a world with no income growth, g=0 so that future generations are exactly as rich as we are a priori. Then the rate of time preference is the discount rate (ignoring risk of extinction and other risk premia) – then with d=.001 the fifty cents is worth 500$. That’s some orders of magnitude – scale that up by 100; in a world with no growth would you be willing to take 50,000$ away from each person today so that each person in the future would have 50$ more? With d=0, that 50K becomes any finite amount, which was the point. Again, this is a thought experiment to sort of internally feel if you (generic you) is “ok” with a given delta.

As an aside and doing this quickly and sloppily; If you give equal weight (d=0) to the next n generations and then none to the rest (d=1) then the effective per generation discount rate is 1/n. Translating this into a per year discount rate is 1/n*30, approx. So if we take account of the next seven generations the discount rate is 1/7*30 which is .0047 which is still more than four times higher then Stern. I might be completely wrong on this one though – just doing it quick.

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radek 12.28.06 at 3:07 am

The Notorious John E; in economics the consideration of what the “proper” or “moral” way to weight the welfare of future generations is goes back at least to 1928 and Frank Ramsey. As I said above, the basic problem is that if you give all generations, present and future and equal weight then pretty much any sacrifice today is justified for the sake of “the future” – the sum of all future generation’s welfares is infinite which is always greater then the welfare of present generations. After all, there is potentially an infinite number of people in the future but only a finite number of them today and basic utilitarianism (whatever you may think of it as a moral philosophy) says they should all get an equal weight.
But this is intuitively unappealing and to make future welfare comparable with present welfare you do need some kind of a trick which will make the welfare of all future generations finite. Unless you’re willing to argue that we SHOULD sacrifice everything for the sake of the future, which Ramsey almost did – he actually decided that there was a “bliss point” of wealth/income beyond which welfare didn’t increase and that + some other stuff allowed him to do what he wanted while maintaining an assumption of a 0 discount rate.
The problem with that, as pointed out by Koopmans, is that if you’re close enough to the bliss point, then the “sacrifice everything for the future” problem comes back.

But almost none of this has to do with what the actual discount rate people have over their own welfare streams is (ay, that’s a messy sentence). People have the discount rate they have but that doesn’t mean it is necessarily the “right” or “moral” or the “socially proper” rate to use in situation such as these. In fact the “almost” part has two parts. First, since neither 0 or 1 seem like justifiable answers some people say “well, let’s just see at what rate people in the real world actually discount the future and let’s use that”. This is where all the talk and controversy over whether to use the risk free rate or the rate of return on equity, and the equity premium puzzle comes in. But the second part, is that the whole point of Ramsey was to show that the “socially proper” discount rate, even if not zero, is below the individual weight. Individuals may discount the future but society shouldn’t (or at least do so less). So I think at least Ramsey would agree with you.

(and technological progress and growth of per capita income do alleviate the present’s burden on the future – and as far as that goes the track record of the optimist economist is better then of the doomsayers like Ehrlich)

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John Emerson 12.28.06 at 3:30 am

On Ehrlich: as I said, for environmentalists 30 years is the short term.

The successes of the modern economies are unprecedented and spectacular, and environmentalists are saying that the environmental problems these successes cause (which appear with a considerable time lag) are / will be also unprecedented. “Track record” is thus less meaningful.

Whenever “economics” is criticized, there’s always a cherrypicked individual economist immune to the specific criticism. What I have in mind when I make criticisms is the real-world performance of the profession as a whole. During the last 50 years or so, if a standard average citizen had been following the advice of a standard average economist on environmental questions, would the citizen’s opinions on environmental questions have been, on the average, wiser or stupider? I say stupider. Am I wrong? (But professional self-reform is certainly welcome).

Economics is well known to be the most scientific of the social sciences, and I’m waiting for the moment when I say to myself, “Aha! Now, with the help of scientific economics, I understand environmental questions much better than I did before!”

But so far what I’m saying is “The most scientific of the social sciences is struggling to get up to speed on environmental questions. I wish them well”.

Besides the standard average economist, the worst performances by significant groups of fully-competent economists on environmental questions is also relevant to the estimation in which the profession should be held. It is my understanding that there is a considerable body of economists whose policy recommendations on future generation questions and environmental questions have been thoroughly loathsome.

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John Emerson 12.28.06 at 3:46 am

Far be it from from me to deviate from my unremitting negativism, but it would seem to me that thinking of environmental questions in a kind of wealth / income context, where the goal is for consumption not to diminish capital. (This is, of course, the economic metaphor behind Christian ideas of stewardship.)

A key problem is whether every resource is substitutible. There are no apparent substitutes for clean air, clean fresh water, and topsoil. (Global warming usually is shoehorned into the “air” category). Energy and minerals are relatively more substitutible; Ehrlich got himself in lots of trouble by going on too much about mineral reserves.

Thus global warming would be thought of as the destruction of capital rather than as a reduction of future consumption utility. And today’s prices aren’t definitive, since the price of cultivable land, clean fresh water, and clean air will increase enormously once they become rare.

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radek 12.28.06 at 3:47 am

Well, you’re commenting on what was essentially a throw away post script. I really don’t feel like going another round about the value of economics. Particularly since I really don’t know much about environmental economics and don’t really know what kind of stuff they’re working on these days. But things like analysis of risk (the probability that a nuclear meltdown occurs is low. Does that mean that people are irrational to not accept nuclear reactors nearby even if amply compensated? analyze analyze analyze etc.) and the issue of discounting I’m roughly familiar with so I was more addressing those. Also from what I understand a lot of environmental economics is about how to achieve a particular environmental goal in a most effective way. The more effectively you deal with any one environmental problem, the more environmental problems you can deal with. All worthwhile policy problems me thinks. If you really want to go through all this again then you gotta be way more specific. I mean, with Becker you sort of have a point (thought there’s some diamonds in all that ash). So who’s your bete-noire environmental economist?

And as John Q said, Ramsey’s pretty fundamental, not cherry-picked.

13

John Quiggin 12.28.06 at 3:52 am

“During the last 50 years or so, if a standard average citizen had been following the advice of a standard average economist on environmental questions, would the citizen’s opinions on environmental questions have been, on the average, wiser or stupider? I say stupider. Am I wrong?”

Almost certainly yes as regards environmental taxes and emissions trading. One of the striking features of the debate in recent years is the extent to which environmentalists have adopted policy proposals, made by economists going back to Pigou in 1924, that they formerly rejected.

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John Quiggin 12.28.06 at 3:56 am

“Imagine a world with no income growth, g=0 so that future generations are exactly as rich as we are a priori. Then the rate of time preference is the discount rate (ignoring risk of extinction and other risk premia) – then with d=.001 the fifty cents is worth 500$.”

This is a prime example of the bad appeal to intuition. Imagine a world radically different from our own, but in which we can forecast the future with certainty for thousands of years. I suggest that in such a world intuitions derived from our world are unlikely to be of much value. Maybe an income stream of 50c would be worth $500 and maybe not, but either way this exercise doesn’t tell us much about our response to global warming.

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John Quiggin 12.28.06 at 3:57 am

On #14, this all makes good sense and has been discussed at length in the economic literature on sustainability.

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John Emerson 12.28.06 at 3:57 am

If I had Cobb and Daly here I could find my bete-noire anti-environmental economists. But I can’t name names right now (except for Julian Simon, who’s not really an economist).

You have to understand that the rest of us (noneconomists) live in a world ruled by economists. We often doubt the wisdom of their dogmas, but what can we do? I’m a lowlife curse-the-darkness kind of guy, so the futility of throwing eggs against a stone wall doesn’t embarass me. It’s mean of me to say these things, I know, but economists should at least know that they’re not trusted by everyone, and that we have our reasons.

17

John Emerson 12.28.06 at 4:00 am

What was the standard average economist saying about environmental taxes and emissions trading in 1955? 1965? 1975? 1985? 1995?

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radek 12.28.06 at 4:10 am

Thus global warming would be thought of as the destruction of capital rather than as a reduction of future consumption utility.

Alright, so if understand you, what you’re saying is that the Weather (or temperature or some vector of weather variables) is an input into the production of other stuff (i.e. capital) and global warming represents a deterioration in that capital, rather than an autonomous fall in utility per se (you are up there in the cold). Or is that the view that you’re criticizing?
Anyway, this is the view pretty much taken in one way or another by economists, including Stern and also that other guy (the AER article that I can’t remember right now). Which isn’t to say that changes in weather, particularly drastic ones, can’t mess with our well being independently of how they affect our productive capacity.

Also, just to be annoying. The idea of Weather as an input into production goes back to 1880′s and Jevons (a kooky-but-makes-sort-of-sense early model of business cycles) and probably further back through the Physiocrats and others, and the idea of scarcity driven price increases of mineral resources discipling their use (and spurring innovation of substitutes) goes back to the 1920′s (or 30?) and Hotelling.

Your posts are a tad bit confusing because you seem to be arguing two things at once – maybe I’m just missing something. On one hand you seem to be bothered by the whole idea of discounting and its implications, on the other you wanna get your usual kicks in at economics as a discipline. These two seem to be at odds. It’s drama, but not clarity.

19

John Quiggin 12.28.06 at 4:20 am

“What was the standard average economist saying about environmental taxes and emissions trading in 1955? 1965? 1975? 1985? 1995″

A good 1950s statement is Bator, F.M., “The Anatomy of Market Failure”. Quarterly Journal of Economics, Vol.72, 1958, focusing on taxes

In the 1960s, Coase had a big impact, and this led to more attention to marketable permits.

I was taught out of

Baumol and Oates 1975 book.

While there have been some changes in emphasis, the views in this book have been mainstream ever since.

The emergence of the Pigou Club recently is a pretty good illustration of this. Note that in Henry’s post on this recently, economists get criticised for political naivete in their near-uniform support for emissions taxes. Maybe economiss are naive, but I guess we are at least erring on the right side of the debate in this case.

20

John Emerson 12.28.06 at 4:22 am

I have been aware for some time now that everything relevant has been discussed by some economist at some time in the past.

What I’m saying is that human life is dependent on agriculture, so that air, water, and topsoil (i.e. capital, endowment, what’s needed for production and life, what’s indispensable for life) should not be degraded. I shoehorned global warming into “air”, since it’s atmospheric.

So our rule should be “Don’t leave future generations with less capital (in my sense) than we have” — (i.e., with less clean fresh water, less topsoil, and a less habitable atmosphere).

Tis makes more sense to me than comparison of utilities and discounting.

21

John Emerson 12.28.06 at 4:34 am

Well, I do not remember any economists active in environmentalism before about 1985. What I was hearing was “It will cost too much”, and as I remember it has been shown that economists tended to systematically overestimate the costs of environmental protection by ignoring the economy’s adaptive powers (whereas economists emphasize these adaptive powers when talking about the costs of changes like free trade which they favor).

The form of economists’ inputs into environemntalism tend to be “If you want to do X, the way you should do it by method Y”. It often seems to be a fallback position for those who have no real committment to X, but faute-de-mieux prefer Y to some other method of attaining X.

One objection to emissions taxes is that they mostly don’t go to actual victims but just are funneled through various layers of government and lawyers. We’ve already seen this to a degree with the tobacco settlements, which have mostly gone to awyers and state governments. The kinds of payoffs involved in siting waste dumps on Indian reservations or in poor areas also usually don’t go to the actual victims.

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radek 12.28.06 at 4:46 am

This is a prime example of the bad appeal to intuition. Imagine a world radically different from our own, but in which we can forecast the future with certainty for thousands of years.

Well, no. Your post was about sensitivity with regard to the rate of time preference. It’s true that with economic growth we have more leeway. But the Stern report involves as much of a counter factual as anything above. Suppose we agree on eta and g (and for all intents and purposes we do), the only thing left is delta. From a philosophical stand point it’s really hard to say what it should be – and thought experiments like the one above illustrate it. So if the cost/benefits and policy implications don’t vary much with delta we’re good to go. But if they do then that itch needs to be scratched.
Stern has delta =.001. Nordhaus has delta=.03. Rogers has delta = log 2. Mohawks say .004. Depending on on how you view the equity premium puzzle, the real world says somewhere between Stern and Nordhaus. An increase of x dollars for all future generations is worth x/r dollars of the present generation. Given eta=1, g=.02 that’s between a multiple of 50 (Stern, r=approx .02) or 20 (Nordhaus, r=.05). Again, if the estimates fall within the reasonable range for these values of delta that’s great.
But this real world you refer to offers no more intuition about what delta is or should be then any imaginary one. Delta is.

If I recall correctly Stern did a sensitivity analysis for eta in a follow up – the highest eta he considered was 1.5. With that you get r=.031. Which means that if you kept eta at 1 and g at .02, you’d have to increase delta from .001 to .011 to get the same result. I think delta of .011+ should be considered, at least for sensitivity’s sake. Anyway, I do think (intuitively feel) that the discount rate used is “in the ball park” but only barely so (which contradicts the notion of a ball park but hey). If nothing else this is not an argument over whether, but rather how much and by whom.

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John Quiggin 12.28.06 at 4:54 am

“It will cost too much” does not sound to me like the way an economist would put things, unless you mean the kind of bank employee who appears on TV as a “market economist”. These types have about as much relation to economists as the guys in white coats on drug ads do to doctors.

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radek 12.28.06 at 5:04 am

“Don’t leave future generations with less capital (in my sense) than we have…Tis makes more sense to me than comparison of utilities and discounting.

All three – capital, utility and discounting play a role. In some sense, discounting is fundamental though. You can slap utility and capital into one some kind of variable/function but the issue always becomes how you weigh present and future generations.
I.e.
Why shouldn’t we leave future generations with less capital (in your sense)?

Because they won’t be able to make and enjoy as much stuff (including clean air, clean water etc.)?
But that’s utility.

Why should we care about whether future generations can make and enjoy more stuff?

Because we have a moral obligation to do so.
But that’s discounting.

25

Michael Greinecker 12.28.06 at 7:13 am

I found a excellent note on all the methodological issues:

Cameron Hepburn, Discounting climate change damages: Working note for the Stern review

@John E:

“One objection to emissions taxes is that they mostly don’t go to actual victims but just are funneled through various layers of government and lawyers.”

What exactly is a “victim”? In order to make sense of this term you have to define property rights- for the question in case property rights for future generations. If that is your aim, economics provides the perfect tools to model the otimal policy as an exchange problem (with philosophical difficulties that noone has solved so far in any are)

Btw: Why should you ask “the average economist” about a topic, when you can simply ask a specialist economist?

26

John Quiggin 12.28.06 at 7:14 am

HC, although the likelihood that future generations will be richer than us is relevant it turns out to be less relevant than pure time preference, which means treating the welfare of future generations as being less important than our own, even if they are no better off than us.

27

Daniel 12.28.06 at 9:46 am

Radek, your example seems to me to be self-contradictory. In particular, in an economy with g=0, you are assuming that $50 today can be converted into a stream of 50c forever. What is the investment technology that makes this possible, and why can’t it be used to give a growth rate greater than zero?

28

Neel Krishnaswami 12.28.06 at 11:17 am

John, when I look at my own behavior, I see that I have a non-zero rate of time preference, and I don’t seem particularly atypical in my rate of time preference. For concreteness, let’s say that it’s 3 percent, so that the reply you make to me will also apply to the typical Stern critics.

Now, assuming that I want to be a moral utilitarian who wants to value each person equally, why should I not discount other peoples’ future utility in exactly the same way I discount mine? Wouldn’t it be inconsistent not to discount? If the idea is that morally-justifiable social and individual rates of time preference can somehow differ (and if it is, I’d like to know how that happens, since I don’t know!), then I’m still not sure how you can get a zero discount rate when everyone in society has a positive discount rate.

FWIW, this is a genuine question, not an attempt to score a rhetorical point.

A related question I have is that treating “future generations” the same as present people seems wrong to me. For example, if I kill someone, I’ve committed a moral wrong because I’ve deprived someone of their life. However, if I wear a condom when having sex that would otherwise lead to pregnancy, then I haven’t committed a moral wrong — even though I’ve deprived a possible future person of a life.

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abb1 12.28.06 at 11:40 am

Hmm, the condom analogy seems wrong if they are talking about real, living people of the future, not some ‘possible’, ‘potential’ people. You are not harming any real future people by wearing condom.

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Michael Greinecker 12.28.06 at 11:48 am

“If the idea is that morally-justifiable social and individual rates of time preference can somehow differ (and if it is, I’d like to know how that happens, since I don’t know!), then I’m still not sure how you can get a zero discount rate when everyone in society has a positive discount rate.”

Why should they be related? Suppose there are three periods, each a lifespan long. You life in period one, A lives in period 2 and B lives in period 3. You have a good left at the end of your life and can give it either to A or B. If you use your own time preference to discount, A should get the good since A lives earlier. But there seems to be no ethical reason for prefering A to B, even though your own time preference is non-zero. Now the Stern report basically uses a zero discount rate. It is only taken to be non-zero because some future shock me simply kill off future generations and there will be noone left to enjoy what you have save for them. I’m not sure that the exact values of Stern can be justified on such grounds, but that’s the argument.

“A related question I have is that treating “future generations” the same as present people seems wrong to me. For example, if I kill someone, I’ve committed a moral wrong because I’ve deprived someone of their life. However, if I wear a condom when having sex that would otherwise lead to pregnancy, then I haven’t committed a moral wrong—even though I’ve deprived a possible future person of a life.”

In these models, decisions have no impact on the existence of future persons, so the problem is simply left out. It’s nevertheless a very interesting problem, but I’m clueless as to how to solve it..

31

John Emerson 12.28.06 at 12:57 pm

Neel, you come very close to one of the most reprehensible economists’ positions, which is that we have no obligation at all to people who do not exist yet and with whom we can have no relationship.

What I’ve been arguing is the idea that applying discounting principles, or economic principles generally, to long-term environmental questions is not very helpful. It is reasonable for you to discount your own future according to your own interest, but with global warming we’re not really talking about the interests of present people, individually or collectively, at all.

An environmental scientist would analyze this kind of question (long term environmental effects on humans) in physical terms: the need for air, water, topsoil, and a livable climate, together with an inventory of what we have now and an estimation of the long term effects of our present actviities on these inventories: global warming, loss of topsoil, degradation of air and water, destruction of fisheries, etc. He might also calculate the agricultural, health, and demographic effects of the changes.
What he would find would be physical facts, and he wouldn’t need to take into account present or future prices of anything. To me the environmentalist’s analysis should be central to the discussion, and the economist’s argument only becomes relevant in the late stages of the discussion.

To put it differently, air, water, and topsoil are greatly undervalued (to an unknowable degree) at present prices (air is still free), and comparisons between present dollar values and dollar values a century in the future are not useful.

I think that the water-diamond paradox is relevant here: anything that significantly reduces the stock of air, water, or topsoil would also significantly increase their prices (while also effectively reducing population and reducing the size of the economy).

In our present economy, agriculture is a small component, but in actual physical, biological terms it is more important than the whole rest of the economy.

A premise of mine (and of most environmentalists) is that we should not plan on infinite technological progress leading to usable substitutes or replacements of currently existing stocks of usable air, water, and topsoil. There are areas of the world (the Mediterranean area, central Asia, and others) which are already less productive because of overuse, and the ocean fisheries are in trouble right now.

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Neel Krishnaswami 12.28.06 at 1:02 pm

Thanks, Michael, that’s a beautifully simple (and extremely helpful) example! I think it answers my first question very well, but it raises another one.

Let me pose my new question by complicating it very slightly. Suppose that we have three periods, and as before, I live in period 1, A lives in period 2, and B lives in period 3. Now, let’s add a fourth person D, who also lives in period 1.

Now, assuming I have some excess good (ie, valueless to me, valuable to the others) as before, I can either share with D during my lifetime, or I can pass it on to A or B. If there’s no time preference, then I should be morally indifferent between sharing now or passing it on.

But this seems wrong to me; I think it would be more ethical to give it to D now, rather than saving it for A or B, because I don’t think it’s quite right for me to totally ignore D’s present need. This looks like a positive rate of time preference to me.

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Michael Greinecker 12.28.06 at 1:16 pm

This is actually pretty close to the criticism Partha Dasgupta made on the Stern report:

This is to adopt a very egalitarian attitude across the time dimension. But curiously, the Review adopts a very inegalitarian attitude with regard to the distribution of wellbeing across people when futurity is not the issue – for example, when comparing the well-beings of the poor and rich in the contemporary world.

I think there is no a priori reason to prefer anyone in your example. But intragenerational preferences are independent of the discount rate. I think there are reasons to worry more about redistribution now, but they are based on assymmetries not to be found in your example (growing economy, uncertainty about existence of future generations,…).

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John Emerson 12.28.06 at 1:30 pm

Environmentally we’re not comparing the utility of the present generation with the utility of some future generation. We’re comparing the utility of the present generation with the utility of all future generations indefinitely into the future (i.e., the whole human race).

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Michael Greinecker 12.28.06 at 1:30 pm

“It is reasonable for you to discount your own future according to your own interest, but with global warming we’re not really talking about the interests of present people, individually or collectively, at all.”

Do you want to completely ignore the standard of living of people today? You don’t have to be an economist to find that a little bit strange.

The rest of your post seems to be based on a completely mistaken view about environmental economics.

There is however a real incompatibility between most forms of environmentalism and usual economic discourse: Economists usually treat the environment only as a means to satisfy human needs and not as an end in itself.

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Neel Krishnaswami 12.28.06 at 1:34 pm

Hi Michael, I said “excess good” specifically to make it a purely intergenerational problem. The good has no value to me, but does to the others, so there’s no point in my keeping it, which eliminates the question of intragenerational transfers. Thus my choice is to share it with one of the other people in the three time periods.

My moral sentiment (not moral argument!) is that it’s better to share now, rather than to pass it on. There’s probably a virtue-ethics-ish argument to be made that ignoring suffering makes you a more callous person lurking somewhere down there, which is unfortunately not an argument that fits easily into a decision-theoretic framework, since it makes utility functions non-time-separable.

37

Michael Greinecker 12.28.06 at 1:43 pm

@John Quiggin:
“We’re comparing the utility of the present generation with the utility of all future generations indefinitely into the future”

Using a constant discount rate actually commits one to ignore the utility of all but a finite number of generations. It is what Chichilnisky has called a “dictatorship of the present” in her work on sustainable development.

@neel krishnaswami:
If you feel bad about suffering today, then this gives a reason to give the good to D. But then the situation isn’t completely symmetric anymore.

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Michael Greinecker 12.28.06 at 1:45 pm

Ooops. I confused John E and Q…

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John Emerson 12.28.06 at 1:48 pm

34 to 35 and 36.

Ultimately I would take concern for the long-term future of the human race as a prior or primitive value, and would regard forms of analysis for which the long-term future of the human race is more or less neutral or unimportant as defective and objectionable forms of analysis. I seem to be caught now between economists who deny that any economists have such objectionable views, and economists who actually have these objectionable views.

I wonder whether Joan Robinson’s questions about the definition of capital aren’t relevant here. As I understand, for some economists capital is just abstract investible dollar units, whereas for others capital is actual physical things used in production. “The environment” seems to be treated here as an economic abstraction, without regard for the actual concrete physical environment, and without regard for the fact that physically some commodities are more fundamental than others.

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Michael Greinecker 12.28.06 at 1:58 pm

“I seem to be caught now between economists who deny that any economists have such objectionable views, and economists who actually have these objectionable views.”

I don’t deny that any economist has such objectional views. I just think that most economists who have actually worked on such issues academically (and not for the Cato Institute either) don’t hold such views.

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John Emerson 12.28.06 at 2:07 pm

37: basically I’ve been saying on that discounting is not a useful tool here. Neither is the comparison of summations of the utility functions of groups of individuals.

A very simplified model, where the basic, most fundamental physical prerequisities for the continuation of human life and the effect of present activities on these physical prerequisities are the main two factors, with a committment to not degrading these prerequisites, would seem to be the best place to begin.

Sometimes this question is framed in terms of the third world poor. I’m actually sympathetic to this argument in some sense, but as used I think it’s close to a fraudulent argument. The non-poor completely dominate the world economy, pretty much by definition, and will continue to do so indefinitely. Their consumption is what we’re talking about. (The third world poor are dragged from time to time when other people need them to ground an argument, but they’re not who this is about).

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John Emerson 12.28.06 at 2:11 pm

Are the economists who have specialized in environmental economics dominant in economic councils discussing questions important to the environment? Do other economists defer to them on these questions? My sense of the profession as a whole is that it has always been a day late and a dollar short on environmental questions.

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leederick 12.28.06 at 2:13 pm

Can’t we just play the stacking up future generations’ utilities game with future generations’ CO2 emissions?

If we have lots of kids they’re going to be producing lots of CO2, and so are their kids, and so are their kids, and so on. These are going to add up. Given that, surely the biggest lifestyle change any of us can make to prevent C02 emissions is going to be not to have kids.

But if you start thinking like that your reponse to global warming will more likely be a direct transfer to present generations by funding birth control in the developing world than to future ones by cutting back on current CO2 emissions.

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Michael Greinecker 12.28.06 at 2:22 pm

John E, I don’t understand your obsession with sociological trivia about the economics profession. One should of course be critical about anything anyone says on policy issues. As for “economic councils discussing questions important to the environment”: Nicholas Stern was Chief Economist and Senior Vice-President of the World Bank.

Does the economics literature have valuable things to say on environmental issues. Yes!

Does that mean that you should uncritically accept everything on the issue someone with a economics degree says? No!

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John Emerson 12.28.06 at 2:35 pm

Michael, is economics not a profession? Are not economists highly influential in all policy councils? Is it mysterious to you that I ask myself what the general trend of economists’ policy recommendations have been, especially on environmental questions, over the last 50 years?

Suppose the medical profession included both killer doctors and healer doctors. Wouldn’t the reputation of the medical profession suffer from that?

My feeling is that the environmental economists themselves, while better than the bad economists, are still only halfway there, and I think that this discounting debate is a case in point.

The bad economists aren’t necessarily Memphis State graduates teaching at junior colleges. Some of thm are leaders in the field.

But wait — you were just using the word “sociological” because to economists “sociology” is a joke. Ha ha. Sorry for missing the point.

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Michael Greinecker 12.28.06 at 2:51 pm

“Michael, is economics not a profession? Are not economists highly influential in all policy councils?”

Yes, and so are laywers. Are you similarily fascinated about what they think on all the issues.

“Suppose the medical profession included both killer doctors and healer doctors. Wouldn’t the reputation of the medical profession suffer from that?”

Yes. But medicine as a science wouldn’t be worse off.

“Is it mysterious to you that I ask myself what the general trend of economists’ policy recommendations have been, especially on environmental questions, over the last 50 years?”

Yes.

“My feeling is that the environmental economists themselves, while better than the bad economists, are still only halfway there, and I think that this discounting debate is a case in point.”

Fair point, but then you should explain what being completely there means.

“The bad economists aren’t necessarily Memphis State graduates teaching at junior colleges. Some of thm are leaders in the field.”

And? Francis Crick has a Nobel price and yet his views on eugenics are horrible. Why should economics be any different?

“But wait—you were just using the word “sociological” because to economists “sociology” is a joke. Ha ha. Sorry for missing the point.”

No, I was using the point because only a sociologist or someone involved in science studies could competently do the research and provide answers to your questions. Your questions are about a sociological group, not about economics.

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John Emerson 12.28.06 at 2:58 pm

Well, in fact I’ve come to think of economists as (often) well-informed advocates, like lawyers, rather than as scientists. But most economists don’t think of themselves that way. They claim authority based on their professional expertise, and seem to think that economics is a profession with internal standards, rather than just a sociological grouping.

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radek 12.28.06 at 4:04 pm

…What is the investment technology that makes this possible…?

The same technology that is used in all WWSPD problems!

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Planeshift 12.28.06 at 4:20 pm

“to economists “sociology” is a joke.”

And to most sociologists economics is a joke ;-)

As I understand it the debate in economics over whether to prevent catastrophic global warming goes something along these lines:

Cost of Global Warming = X

Cost of avoiding global warming = Y

If X > Y then we should adopt measures to avoid global warming as it costs the least.

If X

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Planeshift 12.28.06 at 4:22 pm

(stupid thing cutting posts in half)

If X

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Planeshift 12.28.06 at 4:22 pm

If X

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Michael Greinecker 12.28.06 at 4:23 pm

“and seem to think that economics is a profession with internal standards, rather than just a sociological grouping.”

HEy! Most sociological groupings DO HAVE internal standards.

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radek 12.28.06 at 4:24 pm

John E, while I don’t want you thinking that Nordhaus is a “representative economist” on this issue, even he, quite critical of the Stern report had this to say, based on his own model and use of a higher discount rate:

“As Mr. Nordhaus says, “While the findings of such mainstream economic assessments may not satisfy the most ardent environmentalists, if followed they would go far beyond current global emissions reductions and would be a good first step on a journey of many miles.””
(from Varian’s article in the NY Times)

In other words economists are not extreme environmentalists but probably more environmental minded than the average citizen.

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Planeshift 12.28.06 at 4:34 pm

(try again, please delete the failed posts – and this one if it doesn’t work)

As I understand it the debate in economics over whether to prevent catastrophic global warming goes something along these lines:

Cost of Global Warming = X

Cost of avoiding global warming = Y

If X > Y then we should adopt measures to avoid global warming as it costs the least.

If X

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Eli Rabett 12.28.06 at 4:49 pm

Allow me to paraphrase the economists opposing Stern: Your kids ain’t worth crap.

Works better substituting another expelitive for crap, but this is a family blog.

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Michael Greinecker 12.28.06 at 4:52 pm

No. The debate is actually more about how to weight the cost of some generation against the cost of other generations. That’s what the debate about the Stern report is basically about.
And this are only the weighted utilitarian approaches. There are quite different ways to think about such issues that cannot really be put in a cost-benefit framework.

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Michael Greinecker 12.28.06 at 5:02 pm

“Allow me to paraphrase the economists opposing Stern: Your kids ain’t worth crap.”

Uh..no. Let me quote Partha Dasgupta:

I feel bad being having become involved in this debate. For the past thirty years I have tried to bring ecological concerns into contemporary economic thinking. I have believed for some time that climate change is the most all-embracing problem humanity faces today and would be happy to vote for a 1.8% of the GDP of rich countries on expenditure to confront the problem. On the other hand, I am too much of an academic economist not to force economic reasoning to bear on a document that is on the economics of climate change.

From here.

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Neel Krishnaswami 12.28.06 at 5:09 pm

Michael, isn’t “feeling bad about suffering today” just a way of restating that I have a time preference? I thought it was obviously the right idea, but you helped me see it wasn’t. Now I’m trying to figure out if it’s inconsistent, wrong, or somehow a morally bad idea.

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Michael Greinecker 12.28.06 at 5:33 pm

“Now I’m trying to figure out if it’s inconsistent, wrong, or somehow a morally bad idea.”

I think this is basically the tradeoff between doing the right thing and looking for yourself. I think this article is of relevance here:

Peter Singer, The drowning child and the expanding circle

It’s a very, very tough question.

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radek 12.28.06 at 5:38 pm

To expand a little on Daniel’s query. Like I said, the above was meant to be a social planner-like experiment where any wealth transfers across generations are possible and what we are discussing is the proper ranking of alternative income/consumption streams.

But we can do the thing that annoys Post Keynesians the most here and rope the horse of the Ramsey Exercise to the cart of a neoclassical growth model.

Assume g=0 and no depreciation (this makes it easy to increase the income of all future generations in one go – just increase the capital stock of the next generation). How much consumption do we have to give up today to increase the income of all future generations by 50 cents? Start in the steady state (this really biases the case against me since return on investment is really really low). The crucial parameter is of course alpha – the share of capital in income or the measure of diminishing returns to capital (of course this is always where the Solow/Ramsey model runs into trouble). If alpha is high – say 2/3 which could be true if one takes a “broad” view of capital – then increasing all future generation’s income by .5 is pretty cheap. It also depends on the steady state level of income. With g=0 it’s not implausible to assume something like 2000K. Then the cost to the present generation is something like 33$. Now this rises steeply as alpha goes down since the amount of investment needed is given by
(y+.5)^(1/a)-y^(1/a)
where y is the income you’re at.
(I might be screwing something up here, as always)

It’s easier to think about it in terms of percent changes. Then with an alpha of 1/3 (a lower bound on alpha, roughly, for any modern society) to increase the future generations’ income by 1% the present generation needs to invest (give up in consumption) 3% of its output.
In all of this there’s no income growth (steady state, g=0) and the technology for intergenerational transfers is the standard one of capital accumulation.

In other words paying 50$ and getting an annuity of 50 cents is a pretty lousy rate of return so the technology needed doesn’t have to be all kinds of fancy.

Now back to the original question, is this change worth it? Well, if you take Ramsey in the neoclassical view, then no, since at steady state the economy is already at its “modified golden rule”. If you take Ramsey’s own view then the answer is maybe since for him individual discounting meant that the true golden rule level was above the modified golden rule.

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Eli Rabett 12.28.06 at 8:11 pm

I’ll stand by what I said. Dasgupta is too much of an academic economist to say this, but he is also too much of an academic economist to question his academic economics. In many respects this is similar to the academic discussion of slavery, Jim Crow and federalism going on at Volokh.com. The fine points are ground into the dust without every reaching the issue of how to make up for the harm. They too are all in favor of no cost solutions.

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rpweo 12.29.06 at 3:37 am

Planeshift, I’m utterly intrigued by your mysterious disappearing posts. Can you explain it in words?

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Harald Korneliussen 12.29.06 at 5:49 am

Eli, are you saying like Thoreau, “If I have unjustly wrested a plank from a drowning man, I must restore it to him though I drown myself.” ? Because it seems to me that this was indeed and issue with slavery, with people like Charles Dickens (from what I’ve read, IANAacademic) theoretically opposing it, but saying that it would be irresponsible to abolish immediately.
Must the global warming question be answered solely from utilitarian arguments? Is it, to quote Thoreau again, a matter of expedience, or do we possibly have specific obligations beyond trying to maximise wealth, happiness or whatever?

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Roy Belmont 12.29.06 at 7:04 am

One of the problems with trying to incorporate the effects of our present actions on future generations into present-day ethical thinking and regulation is that the arbitrary cut-offs – e.g. seven generations, or one or ten or three or a hundred – are too obviously arbitrary, and thus have no real distinct weight. The people inhabiting conjecture are all the same stick-figures.
Seven generations as a metaphor for the whole thing, which is I believe the original intent behind the phrase, works, but only just that. The “whole thing” necessitating an image of a kind of bright cloudy vagueness up ahead there somewhere, or a recognition that really what we’re talking about is eternity.
But it’s taboo to talk about eternity in any practical sense, besides that it makes most of us feel silly to try, and the term itself doesn’t seem to have any real human component.
But that’s what’s there. Either that or a wall, a terminus, an end.
The undeniable record of evolution should convey the inevitability of mutation away from the human template – that is after all how we got here – and where’s your economic formulae in that?
What is there to us as we are to the chimpanzee – or more accurately to our common ancestor? And what loyalty does it call forth?
And what past that?

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Neel Krishnaswami 12.29.06 at 12:46 pm

harald, I don’t think you should do your moral thinking about global warming in utilitarian terms. (I’d stick with a more modest consequentialism, but pick your poison according to your philosophy.) However, I do think you need to couch your arguments in utilitarian terms, though. The problems with utilitarianism as a moral philosophy are fundamental and deadly, but utilitarian arguments are the only ones I know that a libertarian, a social democrat, a marxist, and a conservative will all be able to understand and respond to intelligently.

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Planeshift 12.29.06 at 1:33 pm

“Planeshift, I’m utterly intrigued by your mysterious disappearing posts. Can you explain it in words?”

No, I suspect it is due to using a dial up on an unfamiliar and old computer. I gave up and just put it on my own blog.

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John Emerson 12.29.06 at 2:16 pm

It’s probably because the software here interpreted the greater-than and less-than carets as HTML.

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aaron 12.29.06 at 5:52 pm

Ok, a libertarian, a marxist, and a social democrate walk into a bar…

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Michael Greinecker 12.30.06 at 11:29 am

@Eli Rabett:

“I’ll stand by what I said. Dasgupta is too much of an academic economist to say this, but he is also too much of an academic economist to question his academic economics.”

So he should question his own economics but not the economics of Nicholas Stern? That doesn’t make any sense.

@Roy Belmont:

“But it’s taboo to talk about eternity in any practical sense, besides that it makes most of us feel silly to try, and the term itself doesn’t seem to have any real human component.”

The Stern Report does talk about eternity in a practical sense.

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JK 12.30.06 at 1:09 pm

I’m trying to familiarise myself with the gruesome details, going through John’s document here:

http://johnquiggin.com/wp-content/uploads/2006/12/sternreviewed06121.pdf

Perhaps someone could tell me if I’ve interpreted this passage right:

“Nor is it sensible in terms of individual decisionmaking. For someone facing a zero real interest rate for savings (not an unreasonable assumption in many cases), the combination delta=2 per cent, eta =1 implies a consumption path that declines at about 2 per cent per year. To adapt Brad’s example, a person beginning such a plan at age 30 would plan to halve their consumption by age 65, and halve it again by age 90. Even allowing for the caution above about EU models and actual choices, this makes no sense.” (p13-14)

I think this says that if you hand me a lump of cash to live on forevermore at the age of 30 it makes no sense to blow it all straight away. Rather I should plan to spend a roughly constant amount each year to support myself over the rest of my life.

Did I understand this correctly?

If so, I don’t like the example. We have to be careful with these examples as many of them rely on checking plausibility by applying “intuition” to odd circumstances. With the particular example John has chosen I fear that intuition is “contaminated” by the common concern of planning pension provision, which the numbers make it superficially resemble. In that context it sounds terrible to contemplate the slow degeneration into poverty. But if I have understood the example correctly then this is nothing like a realistic comparison.

In plausible real life situations I rely on saving from an income each year until retirement. Assume in this case that I plan to retire at 60 until when I expect a constant income, have a life expectancy of 90, and want a constant expenditure. Consider the lump sum that I make as income in my 30th year, let us say 25000. I will spend half in the year it is recieved and save half of it. In my 65th year I will plan to spend 1/30 of the lump sum, that is 1/15 – much less than half – of the amount that I spent in my 30th year when I recieved it as income. Together with 1/30 of the income from each year up until retirement this will produce a constant income.

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Eli Rabett 12.30.06 at 6:11 pm

In response to Michael Greinecker, Stern’s choices arose not from an economic argument but an ethical one. This is clear if you read the report. Economic parameters were selected to best meet the ethical choice of equal value for all generations.

Perforce any such choice is social and ethical, and to the extent that people, including try to hide these choices as arising from economic roots, they are not being ethical. To give Dasgupta credit, he is fairly up front about his choices and hides them less behind the thicket of economic certainty.

It is also a basic rule that when confronting hard cases, the first thing any good analyst does is to confront assumptions to see if they are valid.

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radek 12.30.06 at 6:48 pm

jk – If I understand John and Brad’s example correctly, the optimal consumption path is given by
Growth of consumption = (1/eta)*(r – delta)

with eta=1 and r=0 this just simplifies to
Growth of consumption = -2%
By the rule of seventy (http://en.wikipedia.org/wiki/Rule_of_70),
if something grows at rate x it halves/doubles in 70/x years. So 70/2=35 years. So if you’re starting at 30 then your consumption would half by the time you’re 65. The “zero real interest rate” is a bit of a fudge, because as you say where does your income come from? So yes, in this case I think it’s best to think of it as getting lump sum at age thirty and running it down.
However, any eta>0 (eta=0 would imply that consumption today and tomorrow are perfect substitutes and in the presence of pure time preference would mean PARTY NOW!) will tell you “don’t blow it all at once” – eta determines how fast you blow it. Note that delta and eta work in opposite directions here.

The strange thing is that a higher eta SLOWS down this fall inconsumption. If eta is say 2 then that equation above becomes
Growth of consumption = -1%
Which means consumption would half only in 70 years. So while that example illustrates the problem with (an individual’s) delta=2% it only does so by assuming eta=1.
You grant me an eta=2 and then delta=2% doesn’t look that crazy.
(I think that what an economist thinks eta is actually equal to depends on their area since there’s several different ways to estimate it as it plays different roles; inverse of substitutability over time, measure of declining marginal utility of wealth, and a measure of risk aversion – I think eta approx = 2, but that’s a whole another debate and another post)

If you wanna know why the optimal path for consumption is as given above then you can get some idea from the Wiki article on the Ramsey model which I started once and never finished:

http://en.wikipedia.org/wiki/Ramsey_growth_model

Also, just to finish, I don’t think that for an individual a delta=2% or even 3% is crazy. But that doesn’t mean that’s the right delta to use when looking at it from a social welfare perspective as then delta also represents the weight given to future generations. As it’s been pointed out above delta=0 is also problematic though. Personally I’m pretty willing to grant a low delta in this particular case (though Stern’s .001 feels “too low”). I do think eta’s higher though – and I think Dasgupta agrees with me on this.

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radek 12.30.06 at 6:50 pm

Perforce any such choice is social and ethical, and to the extent that people, including try to hide these choices as arising from economic roots, they are not being ethical. To give Dasgupta credit…

This is true for delta, but Dasgupta was questioning the value of eta which is an economic parameter not an ethical one (though obviously its value has ethical implications)

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Michael Greinecker 12.30.06 at 7:22 pm

“Economic parameters were selected to best meet the ethical choice of equal value for all generations.”

Weighted utilitarianism does no treat all generations equally, so Stern may simply have chosen the wrong framework. I’m not an expert on extinction, but justifying Stern’s choices on treating all generations equally modulo extinction rates will probably not work. Why should extinction probability be equal in every period?

But as Radek mentioned, Dagupta wasn’t criticising the choice of delta:

I have little problem with the figure of 0.1% a year the authors have chosen for the rate of pure time/risk-of-extinction discount (delta) – although many economists would think otherwise. But the figure they have adopted for eta – the ethical parameter reflecting inequality and risk in human well-being – is deeply unsatisfactory to me. To assume that eta equals 1 is to say that the distribution of well-being among people doesn’t matter much, that we should spend huge amounts for later generations even if, adjusting for risk, they were expected to be much better off than us.

You still haven’t convinced me that Dasgupta’s message was really “Your kids ain’t worth crap.”.

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Eli Rabett 12.30.06 at 11:34 pm

Large asteroids.

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radek 12.31.06 at 12:58 am

Bottom line, to finish this thread off, I’m roughly in agreement with the Stern Report though I think that it does weight the case in favor of itself too much. The general practice in areas where there is as much ambigouity as in this case is to pick assumptions as unfavorable as possible and still make one’s case. This is what makes one’s argument “robust” and constitutes “sensitivity analysis” – i.e. even if you monkey with the parameters the conculsion still roughly holds. While probably roughly correct the Stern report is incapable of that for the host of reasons, both economic and ethical as elucidated above. It’s a “weak” result, but weak in the mathematical sense of “probably” true (a “weak” inequality). Given the nature of the topic though I don’t see why it should be expected otherwise.

What annoyed me is that at the beginning was the moral condescension of the original post:

So, responses to a Stern Review provide another kind of sensitivity analysis. If you don’t care (much) about future generations, you shouldn’t do anything (much) about global warming.

This is pure and simple ad hominen attack implying that folks like Dasgupta or even Nordhaus who questioned a particular value of a particular parameter (on pretty solid economic and ethical grounds) should be viewed as morally suspect or at least not “sensitive”. This kind of response would make sense if this was a conversation involving some crazy-ass global warming deniers but in this particular case it is nothing more than a bit of a cheap shot.
I care (much) about future generations, and I think we should to (much) about global warming but I still think delta>0 and eta>1. As Nordhaus notes this might affect the magnitude of “how much” and and as Dasgupta should have pointed out it affects the question of “who should pay” but the sentiment is the same.
Once we get past that though, it gets better, to give credit.

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a 12.31.06 at 2:23 am

“One of the points on which economists generally agree on is that sensitivity analysis is a good thing. Broadly speaking, this means varying the (putatively) crucial parameters of a model and seeing what happens. If the results change a lot, the parameter justifies a closer look.”

I’m late to the discussion, but this last sentence troubles me. Shouldn’t it be: “If the results change a lot, the *model* justifies a closer look?”

That is, here we have a very simple model purporting to tell us something about future generations decades if not centuries away. Does anyone really believe that such a model could tell us something useful?

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Michael Greinecker 12.31.06 at 10:06 am

“This is pure and simple ad hominen attack implying that folks like Dasgupta or even Nordhaus who questioned a particular value of a particular parameter (on pretty solid economic and ethical grounds) should be viewed as morally suspect or at least not “sensitive”.”

Well, Dasgupta and to some degree Nordhaus support doing more against global warming, so they are not really the issue. I think John Q was talking mainly about people like Arnold Kling and Bjørn Lomborg. Eli Rabett on the other hand does make such a cheap ad hominem attack.

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Eli Rabett 12.31.06 at 11:34 am

(a) pretty much gets it.

As far as ad hominem arguments I differentiate between Sadaam was an odious person and should burn in Hell and Sadaam was an odious person who killed many people to come to and maintain power and should burn in hell. YMMV.

With Kling, Lomborg, Nordhaus and Dasgupta much the issue goes to motive. Clearly the first two have policy driven motives, essentially all of their economics grows from their policy views. Nordhaus is more of a pure economist, whatever that means. For Dasgupta, much of his economics comes from his policy view (which I am sympathetic to), but to a lesser degree than Kling and Lomborg. Dasgupta is quite open about this.

However, my argument with Nordhaus and Dasgupta is that of (a), they should be looking to the models not the predictions of the models as should Stern. It may be that economics has nothing to offer here. Knowing that would be important as it would take economics off the table in the argument until the models improve.

In another context, think of the sages talking about the fine point of how the US should handle Iraq. Someone comes into the room and says that you folk are saying to the Iraqis your country ain’t worth crap. I submit that is a better and clearer statement of the facts than all the academic blather. Sometimes you have to be direct. It tends to concentrate minds.

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Michael Greinecker 12.31.06 at 12:17 pm

“However, my argument with Nordhaus and Dasgupta is that of (a), they should be looking to the models not the predictions of the models as should Stern. It may be that economics has nothing to offer here. Knowing that would be important as it would take economics off the table in the argument until the models improve.”

Why? There is enough literature on these issues already. And how exactly is that an argument against critics of the Stern report? Critics that have pointed out that it is not so clear what the right approach is?

“omeone comes into the room and says that you folk are saying to the Iraqis your country ain’t worth crap. I submit that is a better and clearer statement of the facts than all the academic blather. Sometimes you have to be direct. It tends to concentrate minds.”

You want to compare Dasgupta to some neocon warmonger?!?!

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George W 12.31.06 at 7:42 pm

Fascinating topic, though the discussion rapidly went over my head. At the risk of going to far in the *other* direction, though, this seems an example of the corporate finance principle that the easiest way to cook numbers is to futz with the discount rate. In other words, (1) decide what result you want and (2) rationalize a discount rate that gets you there.

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radek 12.31.06 at 9:53 pm

George, I think you’re right. If you wanna cook numbers then you’ll probably pick a parameter that fits the following two conditions;
1) It’s hard to get a precise value for the parameter for methadological reasons – no one really knows what it should be. and
2) The results of the analysis are very sensitive with respect to that parameter – monkeying around with it changes the conclusion greatly.

Delta (and to a lesser extent Eta) fits these two preconditions pretty good. Which is why going through the “sensitivity analysis” is important here.
As far as corporate finance goes, I’d expect that 1) above would be harder to fudge while 2) would still hold. But I really don’t know much here.

Anyway, as I think Daniel said somewhere there’s no reason for the real world to be cooperative and allow us to reach any precise conclusions. In the end we’ve done well if we can settle on a modest range for some parameters and should shy away from overstating our case(s).

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