In the blogosphere, anti-Stern, high discount rate advocates tend to come from the political right. The left is more pro-Stern and pro- low discount rate. In a forthcoming article in the University of Chicago Law Review, I argue that this distribution of opinion does not follow naturally:
Counterintuitively, a concern for the distant future sometimes will militate against some environmental investments. For instance some of the costs of global warming appear to be "one-time" in nature, such as the costs of relocating coastal and inland settlements…At the same time stopping or limiting global warming might lower permanently the rate of economic growth. When the rate of intergenerational discount is sufficiently low, maximizing the growth rate tends to take priority over avoiding one-time expenditures and one-time adjustments. Even if those one-time expenditures are large, we will earn back that value over time and more, due to the logic of investment compounding.
Alternatively, other environmental issues will become more important. For instance many scientists have argued that global warming will increase the number of virulent and persistent storms. This can limit the prospects for economic growth (this is illustrative; I am not seeking to debate the facts). [Insofar as we are utilitarians] when it comes to global warming, we should be more concerned with the growth-affecting elements of the phenomenon, and less concerned with the one-off effects.
If the costs of moving away carbon are one-time in nature, and the benefits of energy alternatives show up in the growth rate, a zero discount rate encourages global warming activism. Alternatively, to the extent the costs of moving away from carbon lower the growth rate and the benefits are one-time, the logic flips and a zero discount rate encourages passivity.
I am aware how much a low discount rate can skew expected value calculations. I nonetheless believe that current debates are overestimating the importance of the choice of discount rate. I hope to soon discuss the truly important factors in reaching a policy decision.
By the way, here is some rhetoric on global warming.
Good points Tyler. It’s also struck me as interesting that the a greater preference for redistribution should lead us to be less enthusiastic about attempts to mitigate global warming, because they are essentially transfers of utility from people in the (relatively poor) present, to people in the (relatively richer) future. Of course, this seems to be precisely the opposite of the way people’s opinions correlate in practice.
(Cutting against these arguments somewhat are considerations of hedonic adaptation and reference effects, which suggest that economic growth may not make people in the future that much better of in utility terms.)
Diamond has a 1965 Econometrica showing that social welfare fns, whether one chooses a positive or a null discount rate, all have undesirable properties. Though I’m inclined to agree with Ramsey that the only “ethical” choice of discount rate is zero, a positive discount rate/”tyranny of the present” is the only way to ensure that we don’t choose a SWF that makes us the worst off generation from now forward.
I don’t think I agree with the assumptions Diamond imposes to reach his result. His (S1) and (S2) seem to require us to value the utility of partially-existent persons (persons who exist in one possible history of the world, but never exist in another). If we only care about people’s utility conditional on the fact that they exist (as myself and others have argued in the earlier thread on zero discounting and abortion) then the result won’t follow.
What is absent from most of these discussions is opportunity cost. What other problems could we solve with these resources. How can you asses the risk of a problem without considering the risk of other problems? While Bjorn Lomborg and others have done some of this their work does not seem to have gained currency in the debate.
If one developers a model about how to value some distant future event today it seems that one should consistently apply that model to other known problems. In particular, unless new treatments are developed there is an ailment that will kill everyone reading this blog and most of the other 6 billion people on the planet, namely ageing. Vast quantities of knowledge is and will be wiped out of the universe, like a thousand libraries of Alexandria getting burned every year. The decline in mental and physical function will take billions of people from being net producers to people who require enormous resources to care for.
I assert that if Global Warming is a problem worth spending tens of billions on, then Ageing must be a problem worth spending trillions on.
Exactly Sperry, oppurtunty cost.
People have to understand that global warming is not some doomsday apocalypse, just some medium size practical problems and some medium size bonuses.
Cowen mentions sea level rising. Yes, but they are predicted to rise by 30 centimeter (88 centimetres in UN climate panel worst case scenario). If you want to put this in perspective the sea already has risen by 20 centimetres since 1900, without any major problems.
With regard to the interest rate we will (within these intermediate levels) always have the option to put the money in the bank, so to speak, at 4% return, and pay off the problems when they arrive.
How can someone motivate 0% interest rate when taking this into account?
On the other hand Stern is the kind of guy that includes the increased deaths through heat waves but not the larger reduction in deaths by colds.
Tyler, the damages compound too. This is all explicitly accounted for in the majority of the work being done on the economics of climate change. Read it, man! (Start with Nordhaus’ DICE model)
Tyler,
You are hitting on what was the key to the old Cambridge
capital theory controversies, an issue also understood by
Hayek in his Theory of Capital (probably his least read
book). The problem is exactly if the stream of costs and
benefits goes back and forth from positive to negative over
time, especially when comparing alternatives. So, one can
get reswitching, where one alternative is preferred at low
and high discount rates with the other preferred at intermediate
ones. I published a paper on this with Ray Prince in 1985
in Growth and Change showing using actual data that one
could get such a situation for reasonable discount rates
when comparing strip mining of coal with cattle grazing in
the US Southwest. Strip mining of coal, with costs up
front and in the future to clean up, compared with the more
steady flow of cattle grazing, was preferred at rates below
2% and above about 7%, while cattle grazing was preferred
for the intermediate rates.
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