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When bad economics and climate science collide

By Climate Guest Contributor  

"When bad economics and climate science collide"

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One of my favorite economists, Stephen DeCanio, has a good piece at Real Climate Economics, reprinted below.  In addition to his many awards and publications, DeCanio was Senior Staff Economist at the President’s Council of Economic Advisers from 1986 to 1987.

When bad economics is applied to climate change, the result is often at odds with climate science. This tendency was on display at a recent series of panel discussions, “The Bloody Crossroads of Science and Policy” held by the American Enterprise Institute. During the Q&A following the panel on climate, a question from the room about discounting and the time scales of climate change elicited the following responses from two of the economists on the panel, Robert Mendelsohn and David Montgomery (direct quotes):

Mendelsohn:   “It turns out that this problem with discounting – this problem with looking into the future – I think is a failure by scientists to understand why society has a value on time. The scientists just basically don’t understand that you can invest things today and that they’ll be worth more in the future because of it. That actually is the reason why we discount – is because a dollar today is worth more than a dollar in the future. So therefore something in the future is worth less than it is today. That concept is a basic principle of economic analysis. And to ignore things like that is the same thing as an economist going back and saying, ‘Well I find it inconvenient that greenhouse gases trap heat, so I’m going to assume that they don’t.’ You just can’t assume things that are fundamental to a field away just because you don’t like the outcome.”

Montgomery:  “On discount rates, it’s not a conflict between science and economics. It’s a conflict between a rather amateurish application of utilitarian ethics to argue that discount rates should be zero versus kind of an effort in positive economics to explain what happens when you invest.”

The appropriate choice of discount rate in climate economic models has been widely discussed by economists, and important new insights have emerged in recent years. The low quality of the economic analysis exhibited in the quotations by Mendelsohn and Montgomery is notable.  Consider the following points which have been established in the economics literature:

(1) In a world of multiple goods, there is no single discount rate, but rather many discount rates.  If “the environment” and “produced goods” are not good substitutes, the discount rate for produced goods can be much higher than that for the environment.

(2) In the simplest standard growth model without uncertainty, the discount rate that emerges depends on the rate of growth of consumption.  Positive economic growth leads to a positive discount rate because the future generations will be richer than we are.  However, environmental disaster could lead to a decline in consumption, and thus even possibly a negative discount rate.

(3) In overlapping-generations models with only one good and without uncertainty, multiple equilibria with different discount rates are possible, even under the highly restrictive assumption of “rational expectations.”  There are even more possibilities for discount rates under other assumptions about expectations, and there is no scientifically agreed-upon theory of expectations.

(4) Going a bit deeper, there is no good reason to believe that simple growth models without uncertainty are appropriate for analyzing a world in which uncertainty is intrinsic.  With uncertainty, the discount rate(s) depends on the riskiness of the asset(s) being examined. Stocks have a higher expected rate of return (or “discount rate”) than T-bills, because stocks are riskier than T-bills and the higher return is required to induce investors to hold stocks rather than T-bills.  Insurance-type assets have lower (or even negative) “discount rates” compared to investments in ordinary capital goods.

(5) With the possibility of catastrophic losses, risk avoidance dominates discounting even in the most basic growth model because expected future losses can be very, very large.  (This has been demonstrated unambiguously by Martin Weitzman in recent path-breaking work.)

[JR:  For a discussion of Weitzman's work, see Harvard economist: Climate cost-benefit analyses are "unusually misleading," warns colleagues "we may be deluding ourselves and others."]

(6) All of the above points have been made within a very specific and limited utilitarian framework that includes the implicit assumption that it is possible, at least in principle,  for the beneficiaries of a policy to compensate the losers and still having something left over.  But for an intergenerational problem like climate in which such transfers are impossible (because time travel is impossible), there is no escaping the need to make moral judgments to balance the interests of those whose lifetimes do not overlap.  The “amateurish” application of utilitarian ethics is the common presumption in economics that the material standard of living is the sole yardstick of well-being or right action.  Many other moral standards have an equal or greater claim to our adherence. For example, the four classical cardinal virtues””wisdom, justice, courage, and moderation””are not based primarily on the material standard of living at all.

(7) Finally, as a purely practical matter, the future of the climate is linked to the path of economic progress taken by the least-developed countries, and to the foreign policy interests and actions of the great powers.  Economic analysis that ignores these elements fails to incorporate the first requirement of good policy””that it be feasible in the real world.

Mendelsohn and Montgomery were speaking at a panel, so allowance should be made for the fact that spoken arguments are usually not as tight as written ones.  However, the problem with their statements goes beyond style.  Their arguments are simply incorrect

Stephen DeCanio

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36 Responses to When bad economics and climate science collide

  1. Mike says:

    Thanks. Giving the public a better understanding of economics is as important to climate change issues as communicating the basics of climate science.

    On point (6) there is a small way future generations can reward or punish people from the past. Heroes are celebrated and bad guys are vilified. Some people today may care about what future generations think of them. This can effect behaviour.

  2. Ed Hummel says:

    As far as I can tell, most econmists live in a fantasy world where the only thing that counts is human civilization and economic activity. they don’t seem to realize that humans are just a “part of the scenery” as far as earth is concerned. Elephants have the ability to destroy their local habitats through over population and subsequent overeating and so just move on to anther habitat until they run out of them and see a sharp population decline through starvation. We’ve been doing the same thing since we’ve been here and have now just risen to a position of doing it all over the habitable world with no place left to go. That strikes me as an extinction event waiting to happen. I haope the econmists are happy with where their “science” has taken us and the world!!!

  3. catman306 says:

    “Science” indeed! Joe’s post “Is the global economy a Ponzi Scheme?” (linked on this page), was linked at Kevin Drum in Mother Jones and that brought me here. I was amazed to discover that some really good writers were thinking that maybe our economic system is a sham. The first families into a region or enterprise made all the loot and that left everyone else scrambling for crumbs.

    Great to read someone mentioning the cardinal virtues. What ever happened to virtue? Especially moderation?

    Cardinal virtues are more of Plato’s doing:

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

    Ed Hummel: No need to wait for that extinction event, it’s happening right now. Big, bottom-up events, just take a while, you know.

  4. I have yet to see a mainstream economist deal with the fact that growth is not sustainable. We are near the point where continued growth will be our downfall. What happens then?

  5. mike roddy says:

    We are headed into a period of contraction, for many reasons that reinforce each other- reduced resources, declining manufacturing base, overwhelming debt, more costly energy, and a less technically and verbally literate population. This piece says it all, and it’s funny, too:

    http://kunstler.com/blog/2010/09/scary-people-scary-times.html

    Economic models of 2-4% growth don’t work, and shouldn’t. We’ve exhausted too many resources as it is.

  6. Chad says:

    Economists rarely seem to think about WHY we, as individuals, discount the future, and ask whether it applies to inter-generational questions across humanity. The “market” rate for discounting is basically the average opinion of individuals, and has nothing to do with how we should treat subsequent generations.

    So why do I discount the future?

    1: I might not be around to collect. The odds of this are much higher than it is for humanity as a whole.

    2: My income will rise with time, at a rate FASTER than the general economy, because my skills will increase. So whatever your guess is about future economic growth, your own personal economic growth is likely to be larger, implying a higher discount rate.

    3: Outright stupidity, confirmed by a zillion and two psychological studies showing how individuals make contradictory, poor long-term decisions.

    It is obvious to me that my *personal* discount rate and the corresponding “market” rate are vastly higher than the one that is appropriate for inter-generational decision making. If you truly believe our grandkids will be fantastically rich compared to us, some level of discounting is probably appropriate, but not more than a percent or so.

  7. Mitch Golden says:

    Actually, I would love to see the context of these remarks. While what Mendelsohn is simple nonsense (for one thing it isn’t “scientists” engaging in these discussions, e.g. Nicolas Stern is an economist), it seems to me that Montgomery may have been trying to correct him.

    I think we can all agree that that the economy is likely to keep growing for some few years at least, so a positive discount rate is appropriate initially. But (as we know) if we go out to 2050 and beyond, assuming anything in particular about economic growth is risky at best, and perhaps it is more reasonable to avoid basing critical aspects of the analysis on any particular value (or even the sign) of the discount rate.

  8. Mulga Mumblebrain says:

    Rightwing, neo-liberal, market fundamentalist economists not only believe several unbelievable things every day, as part of the sacerdotal obligations of their cult, but preposterously assert that their religion of magic thinking is a science. Of course, in fact, it is the exact antithesis of real science, in that all theory and hypothesis, plus all ‘research’ is aimed, not at reaching a steadily improving understanding of reality or better and better approximations to the ‘truth’, but in affirming pre-ordained, quasi-religious, axioms.
    These axioms are legion-greed is good (therefore putting itself in conflict with most religious and moral philosophies), all market participants enjoy perfect knowledge of market conditions (so laughable that you question their sanity as well as their intelligence in believing it)the economy must grow forever and environmental damage is merely an ‘externality’, etc. They are so deranged that they see the environment as a sub-set of the economy, not the other way about.These axioms do, moreover, have one inescapable corollary. They always and everywhere lead to greater concentration of wealth, and growing inequality.
    The market fundamentalist religion,like all the other cults of the Right,like ‘faith-based science’, ‘creationism’,'intelligent design’ and anthropogenic climate change denialism, appeal to the more ignorant and intellectually challenged members of society. They are easily led astray by lies and disinformation, which Rightwing ‘think-tanks’ are masters at peddling. They are also easy to manipulate along ideological lines, and painting climate scientists as evil Communists bent on world domination, might leave us laughing, but the Dunning-Krugerites lap it up.
    In the end, which is nearer than most people dare admit, the inter-generational reality will be that the psychopaths of this generation of capitalist overlords will have had their existential revenge on those living when they are dead. From beyond the grave they will have delivered our descendants the ultimate ‘discount rate’ of 100% as the planet goes through millennia of catharsis before it returns to some equilibrium, sans its upstart, uptight, upright apes.

  9. rick says:

    Re #4, no economist has, but here is a physicist (?) attempting to put economics into the climate model. The results are not good:

    http://arxiv.org/abs/1010.0428

    “Maintaining atmospheric CO2 concentrations below a level of 450 ppmv that might be considered “dangerous” necessitates rapid civilization collapse and unrealistically high rates of decarbonization. There are no plausible, thermodynamically supported solutions that avoid inflation rates less than 100% and lead to stabilized atmospheric CO2 concentrations within this century. It is only with very rapid decarbonization that current economic growth conditions can be sustained while keeping CO2 levels below 1000 ppmv by century’s end. “

  10. homunq says:

    You can translate point 5 (catastrophe avoidance) into economist-speak as follows:

    Historical data shows that, in certain limited examples of economic contraction, a negative discount rate would have been appropriate. If you incorporate that insight into forward-looking uncertainty, not only on temporary variations of the discount rate, but on the long-term average, you will find that negative discount rate scenarios exponentially dominate positive discounts for the purposes of current cost-benefit analysis. Since the overall thesis of climate disruption inevitably leads to consideration of negative growth, it would be irresponsible not to incorporate that possibility in the analysis.

  11. john atcheson says:

    There is another problem with discounting environmental services and commodities. As population increases, there is more demand for the services — and as the services/commodities are used up or degraded, their supply decreases. The most fundamental law in economics is the relationship between supply, demand and price. Therefore, the real price of environmental goods and services should go up in the future, even relative to today’s dollars.

    Take the value of wetlands as nurseries for fish stock. As more and more wetlands are used up, there are fewer and fewer fish — ergo the real price of both fish and wetland services goes up in time; yet discounting makes it go down.

    This is what Daly and others have called money fetishism. Currency is a surrogate for value– to discount is to assume that the surrogate is worth more than thing it represents. You can get away with this when the thing being valued is substitutable or replicable — when trade offs can be made. But some things can’t be substituted or traded off — like a viable climate for life.

  12. homunq says:

    That bit of economist-speak is essentially the argument that Weitzman makes, to try to convince his colleagues. Of course, he also puts it in everyday language about catastrophe avoidance, for the rest of us. But if you’re dealing with an Austrian/Chicago School cultist, it’s worthwhile to be able to make the mathematical as well as the moral case.

  13. Jeff Huggins says:

    Going Deep, Examining Assumptions, and So Forth (and a Rant)

    First of all, thanks for the great and helpful post, Stephen DeCanio. Very informative.

    Second, the comments from Mendelsohn and Montgomery are revealing but not at all unexpected, of course. Although I agree with your point (Stephen) — that verbal comments are often not as tight as what one would write in a paper — those comments show a substantial lack of understanding and the presence of some pretty poor assumptions. And those folks are providing policy advice? Goodness help us!

    That said, even some of your own observations, of points from the literature, leave me with a suspicion that some of them aren’t going deep enough, to bedrock, to (real) first principles, and to the point where all poor assumptions are cleansed out.

    In the end, there is the physical environment — nature’s own warp and woof and limits.

    Life (of course) lives within that, is subject to nature’s principles, and subject to nature’s limits and the limits of nature’s resources. So too with human life.

    Those two considerations provide the starting point.

    Then, of course, we have “human nature”, which includes some universal aspects and tendencies but also comes in a fairly wide range. And what we call “economics” happens as a subset of all these things.

    Far too many times, people begin to “build up” or “build down” from this and begin to make invalid assumptions, often very quickly in the process. My impression is that very, very few economists have much of any appreciation for some of the biggest assumptions and incorrect premises built deeply into their own thinking about discount rates. The whole understanding needs to go back to considerations of science and the NEEDS of life, and build up from there, making sure to not make ANY poor or unwarranted assumptions along the way, and (also) noting any strong and compelling assumptions just to keep track of those too.

    Just as one example, one (very real) ethical question is, Where there are assumptions to be made, of some sort that seem necessary or desirable, who (which people or groups of people) would be the most ethically appropriate to make such assumptions, if they are to be made at all?

    Economists talk of risks and make assumptions about those, and (many) assume “improvements” in different things — productivities, the discovery of new resources, new inventions, and so forth. Often, the way we assess these risks and (assume) these improvements all counts to our own advantage — i.e., to the advantage of present generations. When we make assumptions (and they are assumptions) about improvements, and combine those with our use of discount rates, analytically the result is often to permit us to do more things that WE’D like to do, or to avoid cleaning up our own messes, assuming that “improvements” will allow future generations to clean up messes that we’ve created. In other words, assumptions about future improvements, and our own use of discount rates (and here, I’m talking about “real” discount rates) all usually act in our own favor. Put another way, as we proceed with life today, we don’t “balance” the natural-physical budget with nature, so to speak; we don’t balance the “life” budget with the rest of the biosphere, so to speak; and we don’t balance the financial budget, so to speak. Our actions, in more ways than one, create debts and liabilities and risks for future generations. How do we justify that? Well, (among other ways) via our assumptions that future generations will discover improvements that will allow them to play “catch up” and clean up our messes, and also via some of our less-justified uses of real discount rates.

    So you see, there are two different questions, at least: Many economists and analysts will say that, “we need SOME assumptions, or else how can we do the analysis”. But when you point out that ASSUMING improvements (and especially if you go too far), combined with discount rates, mainly serves as analytic permission for us to avoid making inconvenient choices under the (now formalized) assumption that “future generations will be fine”, then things get sticky. Who would be the most appropriate people to make such assumptions and make such estimates? Future generations aren’t even in the room when we readily make assumptions about the inventions that they’ll come up with, and the work they’ll do, in order to address the various messes that we leave them with. So, although it might be true that “we need SOME number to put into the spreadsheet”, it’s also true that some assumptions are better than others, and it’s also true that some assumptions (about some sorts of things) ought to amount to NOT assuming that future generations will be able to clean up our messes, if we leave them those messes. In other words, we ought to balance our own budgets, in real time. It’s also correct, at least directionally, that there are ethical problems with us making certain assumptions without the “future generations” being in the room with us, to concur. In those cases, because future generations can’t be present, the ethical answer is NOT to simply go ahead and make the assumption anyhow. Instead — and again — it’s to make sure that we balance our budgets ourselves — in real time — and not leave them to have to deal with our messes. Here again, I’m talking about our “budget” with nature, with the biosphere, and also financially.

    Put another way, very much of what we do, and assume, in so many of our financial analyses loses much of its validity — and (in some cases) becomes near meaningless — if not done in the context of genuine sustainability or (at least) if the decisions don’t genuinely and substantially LEAD US in the direction of genuine sustainability. In other words, we can’t move from our present situation to perfect sustainability over night. That’s not realistic or possible. But, I would argue that financial analyses that use techniques and make assumptions that perpetuate and routinize un-sustainability are completely invalid, and indeed dangerous. I’m not “merely” saying this from a “theoretical” standpoint or from a humane standpoint or from an ethical standpoint. I’m also saying it from an analytic, economic, intellectual standpoint.

    Put another way, major financial analyses that (via their techniques, paradigms, and assumptions) perpetuate and normalize UN-sustainability (in any real sense), and that leave problems that WE create to future generations to solve, are incorrect and unsound analytically, scientifically, and ethically. Period. How can it be any other way?

    And, it seems to me that far too many economists don’t realize this. In fact, I’m not even sure how many economists (15%, 20%, 40%, 5%?) would even understand what I wrote in that last paragraph, and what I mean by it?

    Most economists understand what it means to spend more than you earn. Most economists understand what financial bankruptcy means. But quite a few economists can’t seem to apply those same notions to the physical environment, to the biosphere, or to the social environment when it comes to essential aspects of human life that can’t be monetized. Many economists, it seems to me, also can’t think across generations: They don’t seem to realize that “Joe”, who will live in San Francisco 300 years from now, will be (when he’s alive) just as real a person as I am, alive today. So, often, in various ways, we take it upon ourselves to discount Joe’s needs and reasonable wants, or we take it upon ourselves to assume that Joe will work and invent his way out of the messes that we continue to create for him! But after all, it’s all analytically sound, because we need to put assumptions and discount rates into spreadsheets, in order that we can make economic arguments for why we shouldn’t bother to stop pouring GHGs into the atmosphere. Joe can worry about it, right?

    You can tell (sorry) that I have big doubts about much of what passes for responsible economic analysis these days. And although I’m not an economist, I’m an excellent mathematician, I was a scientist, and a Baker Scholar from Harvard and a McKinsey consultant. I’m sorry to mention those things, but I’m doing so because a great number of economic analyses these days, and even some of the techniques, are off track, and the damaging consequences are real, and I think it’s time we all said “enough!”

    Well, sorry for length, and time for coffee!

    Jeff

  14. None of this deals with the central ethical problems entailed by discounting future benefits. The justification for discounting pushed by economists is that failure to discount results in efficiency losses because of lost opportunities to invest in projects that would produce higher returns on investment. This makes sense when it is one person’s money which is at stake and if the money invested in alternatives will lead to higher returns and the higher rates of return will be enjoyed by all who will benefit by decisions to lower ghg emissions.. Yet in the case of climate change, those who will be harmed by climate change will not necessarily benefit from alternative investment strategies. Therefore as a matter of ethics discounting can be deeply ethically problematic because harms and benefits are so disaggregated in the case of climate change Economists seek to maximize efficiency but ignore questions of justice. This is the real ethical problem with discounting. There are also numerous other ethical problems of procedural and distributive justice with discounting. The economists quoted in this article nor most of the responses to this article deal with distributive justice issues raised by discounting.

    Donald Brown, Penn State

  15. Dan says:

    David Montgomery? Didn’t he set the economic foundation for cap and trade, like, 40 years ago? What’s he doing at AEI?

  16. _Flin_ says:

    Thank you for this article.
    I’d really like to read a few more of these on this blog. Since the question of damages is really central to the whole issue, being the only really measurable and understandable variable.

    The whole discounting issue, however, fails to connect to reality.

    Uncertain temperatures +
    uncertain effects being caused by higher temperatures +
    uncertain damages +
    uncertain timescale +
    uncertain resources and prices +
    uncertain discount rate +
    long timescale =
    a total mess.

    Add to that the interdependance of the input parameters (temperature rising slower, effects later damages lower, more growth, less discount rate – and vice versa) and you end up with an incalculable model.

    And, another interesting thought, what about the interest rate of natural ressources? Natural mutations create new life which has a value. Lowering biodiversity now seriously affects biodiversity in 300 years. Where is the interest rate on that one?

    Economic modeling with discounts is not the answer to the questions regarding climate change. Basic reasoning helps.
    - Don’t spend more than you have
    - Don’t spend your whole pocket money on one day
    - Close the window, don’t heat the garden
    - Don’t touch the stove. It will hurt.

  17. Jeff Huggins says:

    Thank You (as usual) to Donald Brown (Common 14)

    Well put, Donald. Bravo!

    Parts of my comment (Comment 13) were intended to raise the same issue — although I didn’t put it as clearly as Donald did.

    Given all this, it’s quite interesting that some or many economists critique some version of utilitarianism or another even as their own methodologies amount to a sort of financialized/monetized utilitarianism that makes a number of incorrect assumptions, skews things, whitewashes differences between different sorts of goods and different constituencies, and so forth. In important senses, it would not be very easy to pick a worse version of adjusted and monetized utilitarianism, that discounts the future no less, than the one used by many economists.

    Also, the first quote in the post itself places lots of emphasis on the fact that investments grow — earn returns on themselves and become greater than when they started. This is, according to him, the thing that scientists don’t get.

    That’s a very revealing comment, and rather amazing. Many intelligent people understand that aspect of financial investments, of course, and many understand the near-term orientation of human nature, and most all of us understand the different fact that biological beings reproduce: i.e., put two people together, and you might well end up with three of four or five after awhile, if you give the first two some privacy and wine and romantic music. But, the quote from the first economist misses the larger contextual point — that the economy is part of the environment and subject to nature’s laws and limits, not the other way around. Here’s the point: Atoms themselves (and whatever their smaller parts or waves are) DON’T exhibit the “an investment earns interest and becomes larger than itself” trait. In other words, the Earth itself is NOT growing, and the Earth’s fundamental resources are not growing. The entire “investment earns a return” perpetual growth paradigm must live within, and take place within, the larger reality of things — and THAT is a point that most economists don’t seem to understand. So, we have, in the first quote, a quote that proposes to “justify” the discounting of the economic flows of entire future human generations, and indeed the future itself!, on the basis of this whiz-bang “investments yield returns”, and also informing scientists that they don’t get it, of all things, without considering the reality of two things: The real natural world does not just “grow” and become bigger and bigger. In other words, it does NOT exhibit the trait that this economist sees as justifying all else. And, on top of that, the needs of future humans (humans who will live in the future) are NOT less than the needs of today’s humans.

    In any case, my impression is that a very great deal of what we presently call “economics” has to be erased, and we have to start over or (better) invite the economists who actually “get it” to the forefront of economic thinking and policy-making. AND, to be clear, at no time should an economist be allowed into a room, with a policy-maker, without also being accompanied by an excellent natural scientist or two, an excellent life scientist or two, and an excellent ethicist or two.

    That much should be crystal clear by now.

    Thanks again, Donald, for your comment.

    Cheers,

    Jeff

  18. _Flin_ says:

    @Jeff Huggins: I disagree with you concerning investments and growth.

    Mankind creates. With work and thought and ideas. Therefore there is growth. Nothing to do with atoms.

    And Earth grows, indeed. From nothing to a rock to a snowball to a garden.

  19. Andy says:

    Incredible post. Thanks much!

    The point about the potential for negative discount rates is especially important and should be a real wake up call for our political and civic leaders.

    Al Gore illustrated the fallacy of infinitely substitutable resources best when in An Inconvenient Truth he showed the earth on one side of a scale and a pile of gold on the other.

  20. Jeff Huggins says:

    (A Bit More) On Distributive Justice, and Also On The “Expected Value” (so to speak) of Future Persons

    Just a couple additional comments on this important matter:

    First, in a broad sense, the matter and considerations of “distributive justice” apply to people living today and to future generations. In other words, when we talk about “who benefits, and who suffers, and who makes the choice, and so forth”, saddling a presently living human with the negative consequences of another person’s actions is unjust, as is saddling a person-of-the-future with the negative consequences of a presently-living-person’s actions. The person “in the room” makes the decision and gains the benefits, and the person “not in the room” gets unjustly saddled with the negative outcomes, or at least disproportionately so.

    Also, on a different but related note, we too often think of “persons not yet born” as being unreal in too many senses. Of course, being not yet born, they’re “unreal” in the sense of not yet born, and thus not yet real. But, analytically speaking, where we are dealing in terms of expected values, estimates, and calculations that by definition must span generations, future people are (analytically) very, very, very, very likely.

    In other words, I’m alive, so I’m real and get a “1″ IN THAT SENSE, and a person who might be living in San Francisco 200 years from now is not yet born, so he gets a “0″ in that sense. In THAT sense. But, if we ask, “What are the chances that there will be any person living in San Francisco 200 years from now?”, the analytic answer is 99.9999999 percent, unless of course WE undermine those chances by making bad decisions using the same tools that we are trying to improve. In other words, just because there is no specific living person — a “Jeff” — that we know (alive today) who will be alive 200 years from now, we can be nearly as certain, in a probabilistic sense, of the likely reality of “a person 200 years from now” as we are of me living today. I’m not talking about specific individuals or names or etc., of course. Instead, I’m talking about the probability of the existence of future people who be real people with real needs at the time.

    That probability is extremely high, especially within any time-frame considered by our decision-making tools. So, within that time frame, if I (being alive) count as “1″ today, then some future person living in San Francisco 200 years from now would count, in a probabilistic sense, as at least 0.99999999999999. In other words, no real difference. Put another way, no component of “real” discounting should have anything to do with the “intuition” that future people are “not real” and present people are real. In terms of probabilities and expected values, the difference (if any) is nil. So, if future persons are to be considered real, then we get to the matter of the REAL needs and desires they’ll have. And (there again) no component of any “real” discount rate should be somehow related to diminishing the importance or value that a future person places on a gallon of water (needed for survival) relative to my need for a gallon of water. In other words, the future person is (in a probabilistic sense) very, very, very, very likely to be real, and his real need for a real gallon of water, or daily caloric intake, or whatever, will also be very real and should be considered so by us, making decisions today.

    So, do we see any room for, or justification for, “real” discounting so far? The future person will be real. His needs will be real. He’ll be just as real as I am. And his needs will be just as real as mine are.

    I realize that’s not the whole story, but I just wanted to mention those two factors in the whole story. “Real” discounting, in addition to being different for different sorts of goods (if it’s warranted at all), and in addition to making sure that all problems associated with distributive justice are avoided, as Donald indicates, should also NOT derive any component(s) of the quantitative “real” discount rate from a notion that future people are “less real” than present people, nor from any notion that their physical needs will somehow be “less real” relative to the basic needs of real humans living today. Any quantified “real” discount rate should be based on other considerations, when they exist, IF they exist, and (also) not be based on mere flimsy assumptions that amount to “we’ll just assume that those future people will invent ways and work ways out of the messes that we leave them as a result of our present selfish decisions”.

    In short, much of economics needs to be reinvented, in my view.

    Cheers,

    Jeff

  21. Jeff Huggins says:

    To “_Flin_” (Comment 18)

    Flin, it seems that you’ve missed my point and its significance. I understand what you are saying, and I agree with you in those ways and in that sense, but those points don’t override the fundamental contextual point that I make in my earlier comment. Humans can (and do) create things, and there is human growth, human economic growth (to a degree), and all sorts of other growth within the whole scheme of things, but the whole scheme of things itself also has very real physical limits and laws, so to speak, and many economists often appeal to ideas and principles that DON’T acknowledge or reflect that fact in order to justify techniques that assume perpetual infinite growth even in the physical senses. So, in short, although I understand the points you make and the senses in which they’re correct, they don’t address or override the point of my earlier comment. That’s about the best way I can explain it in the time given. Some economists (though not enough) do understand the point.

    Thanks, Cheers,

    Jeff

  22. David B. Benson says:

    Stephen DeCanio — Well done.

  23. Leif says:

    I ran across this poem by Wendell Barry that was posted by another commentator on CP but lost the thread. However Thank you, whoever you are. Very appropriate for this discussion.

    “Some Further Words” by Wendell Berry

    http://www-personal.umich.edu/~pfa/poemquot/berry.html

  24. _Flin_ says:

    @Jeff Huggins 21:
    Thank you for your answer.
    As far as I see it, however, the problem is neither infinite growth nor discounting, nor an ethical one or one of justice.

    It is a rather simple one of survival of mankind on a level of civilisation without major setbacks. To do so we need to take into account the physical realities of our habitat. In this case we cannot allow an energy imbalance to happen that will change our habitat in unpredictable ways, while wasting our resources to gain a short term advantage that will hurt us in the long run. Here I totally agree with you.

    But I do not think that we have to change our lifestyles in a big way. Just switch to renewable energy sources and stop wasting so much energy, e.g. with ACs running 24/7 in badly insulated house etc.

  25. Jeff Huggins says:

    Hi “_Flin_” (Comment 24),

    Thanks for your comment.

    I agree with the points in your second paragraph, in which you also note that we seem to agree.

    That said, the points in your second paragraph are very much interrelated with the four things — growth, discounting, ethics, justice — you mention in your first paragraph. The “survival of mankind on a level of civilization without major setbacks”, amidst “the physical realities of our habitat”, has very much to do with how we think of “growth”, where it fits into our overall scheme of priorities, what sorts of growth we promote, how we use discounting in making major decisions (such as those related to addressing climate change and shifting our energy sources and infrastructures), and — assuming we want the whole thing to actually be sane and responsible, and minimize wars and so forth — with considerations of ethics and justice. In other words, we can’t accomplish the aims in your second paragraph without acting smartly and responsibly with respect to the matters you mention in your first paragraph. All of those things are intimately interrelated, of course.

    Regarding your third paragraph, my response would be, “it depends on what you mean”. I don’t think we have to stand on our heads, of course, or change our names or paint ourselves purple. I agree with your thoughts about renewable energy and about not wasting so much energy. But, those changes won’t be sufficient. For example, the planet can’t support 12 billion people living civilly if we all live at the same level of consumption we “enjoy” in the U.S. today, even if we’re smart about our energy choices and efficiency. There are some limits other than energy. Yet, I don’t think we all need to live like Diogenes, but I do think some rather big changes — especially in terms of our thinking — are in order.

    In any case, it sounds like we are mainly in agreement, at least on the energy stuff, so that’s good enough.

    Be Well,

    Jeff

  26. James Newberry says:

    Fossil Fuel Era and Fossil Fool Error. We just (over a hundred years or two) contaminated our garden via the economic ideology that geologically buried matter (carbon) is energy, thereby reversing billions of years of photosynthesis and reverting our atmosphere to a prehistoric state when today’s extent of polar ice caps did not exist. Note: planet ice caps contain about eight million cubic miles volume (and it is headed our way).

    Economics is man-made. It attempts to argue with natural law. Wonder which one wins. Game over. The national insecurity state.

    We’ll get the discount down at the bankrupt store (and planet).

  27. Dan B says:

    Stephen DeCanio;

    Excellent post and comments!! These issues have been bothering me for quite some time. I’ve had discussions with John Cobb Jr. Co-author, with Hermann Daly of ‘For the Common Good’ a book that dealt with many of the issues that are at the core of your post. The book has not been discussed with the same vigor and enthusiasm as neo-liberal economics. It’s a shame that it’s been around since the 80′s. I’m considering asking Dr. Cobb to start a simple blog. You and he have what is lacking in most blogs about economics its intersection with global warming, the recession, and the “jobless recovery” – Content. A clear analysis of the underlying, and mistaken, assumptions of neo-liberal economics, and a vision of a dynamic, durable, and sustainable market economy would be of the greatest value.

    Would you be interested in collaborating with Dr. Cobb and others on a blog focused on the issues raised here?

  28. Donald Brown says:

    Thanks to Jeff and others for your comments. The failure of some economists to deal with questions of distributive justice is quite remarkable. Of course, not all economists fail to see these issues but most do, in my experience. Sir Nicholas Stern in his report acknowledges in his report some limits of CBA when applied to climate change and gets visciously attacked by some economists on the discount rate who at the same time completely ingnore Stern’s s claims that you may not be able to set climate change on the basis of efficiency maxmization alone because of these justice issues . Stern goes on to ingore his own disclaimers about justice and argues that as a matter of efficiency taking strong action on climate change makes sense but to do this he uses a lower discount rate than others. Yet it is the justice issues that make CBA and discounting so ethically problematic. Don Brown, Penn State

  29. Jeff Huggins says:

    A Question — and (I think) an interesting and important one?!

    For those economists and ethicists and other analytic folks reading this, here’s a question to (please) consider and let me know what you think and what I’m missing:

    Consider a real person living today in California. Call this person LTC.

    Consider another person who will (most likely) be living in California two hundred years from now. Call this person L200C.

    We don’t need to worry about real proper names — “Sally”, “John”, etc. — I think. Of course, a real person living today does have a name already, and the person who will most likely be living 200 years from now doesn’t. But A person — and many of them — will be living 200 years from now. The specific one doesn’t really matter, for present purposes.

    The probability that LTC is real is 100%. He or she is already a real person. Let’s take that as given.

    The probably that some person L200C will be a real person is 99.99999999999%. In other words, the probability that there WILL be A real person, who we can think of as L200C, living in California 200 years from now is immensely high — unless of course through our own decisions we entirely mess up California. My point here is that, from a probability and analytic standpoint, there is no substantial “probability” difference between LTC and L200C. Even though L200C is not born yet, so (from a daily human standpoint) he doesn’t seem real, nevertheless we must count him as real — or at least 99.99999999999999% that way — in any accurate analysis we propose to do that supposes to cover the period 200 years from now.

    For simplicity’s sake, let’s forget that 0.00000000000001% difference. For the most part, we have both LTC and L200C fully counting as “1″ — each of them — in their respective lifetimes in the analysis that covers from today through a long time from now.

    Now, let’s consider a person’s basic need for healthy water. Here, we are talking about real water, not (yet) some sort of monetized value of water stuck into a financial analysis and discounted or not discounted. Let’s consider the physical situation first.

    When it comes to a basic need for real water — for survival and thirst purposes — person LTC’s need for water is the same as person L200C’s need for water. In other words, unless human beings are somehow reinvented between today and 200 years from now, or unless we evolve rather dramatically so that the basic human need for water is substantially different then than it is now, the need for water of person LTC and person L200C will be the same. Let’s call a person’s annual need for healthy water “W”. So, “W” in 200 years will (for the most part) be the same as “W” today.

    So, LTC’s annual need for water will be 1 x W. Let’s call this quantity LTCW.

    Similarly, L200C’s annual need for water will be 1 X W. Let’s call this quantity L200CW.

    Of course, in real terms, LTCW and L200CW are the same.

    So, in a financial analysis, if LTCW is going to be reflected monetarily (the financial value that represents the production and consumption of that much water, to represent that much necessary economic activity, so to speak) in the appropriate column (e.g., representing this year), let’s imagine whatever that figure might be, monetized. Similarly, in the same financial analysis, imagine the monetized figure representing L200CW in the column representing the year 200 years from now.

    So far — before discounting, because that’s what we’re trying to figure out in the first place, i.e., whether and how to discount — the figures would be the same, at least before we consider other possible factors. In other words, one real person needs one year’s supply of real water in both cases. So, BEFORE discounting, our “placeholder” figures so far would be the same.

    Let’s also talk about matters in “real” dollars, i.e., set aside the matter of nominal prices and the nominal component of discount rates set only to return us back to real prices. Let’s just consider the financial values in “real” terms, so to speak.

    As far as I can tell, the only real justification for the financial figure representing L200CW to be any less (in numeric terms, in the analysis) than the financial figure representing LTCW would have to do with the following: If the REAL productivity of producing and delivering the (clean and healthy) water to L200C, considering the actual human time and effort required on the part of people living 200 years from now to do so, were better (substantially improved productivity) than the productivity of people today producing and delivering water to LTC, then the real numerical monetized figures representing the two matters could be different by that degree. In other words, if REAL productivity (of producing and delivering the water) improves, then the real monetized figure sitting in the column for 200 years from now could be that much less than the figure sitting in the column for this year. In other words, 200 years from now, it might only take 30 person-hours of labor to produce and deliver L200CW to L200C. Today, perhaps it takes 33 person-hours of labor to produce and deliver LTCW to LTC. Of course, the real labor embedded in the capital equipment required must also be reflected, but let’s keep things simple for now.

    So, in other words, the figure in the column for 200 years from now would only be different from that in the column for this year, if (and to the degree that) the REAL productivity (in terms of human labor) involved in producing and delivering the same real quantity of clean and healthy water improves.

    OK now, in economic analyses that mix together all sorts of things, and that simply “assume” productivity improvements across the board, merely because “they’ve happened before”, people doing such analyses would make such arguments in defense of their “assuming” rather impressive productivity improvements.

    But, consider providing some quantity (say, 1,000 gallons) of healthy water to a person 200 years from now, compared to providing 1,000 gallons of healthy water to a person today. Will the task 200 years from now REALLY be more productive (efficient) than the task today? Water may be less accessible. Populations may be somewhat higher. More cleansing, treatment, and recycling may be required. More overall processing (pumping) may be required. And indeed, it may be that the REAL cost of the energy involved might be higher. In my view, it’s NOT AT ALL CLEAR that the human labor-hours involved in producing and processing and distributing 1,000 gallons of water to L200C two hundred years from now will be any less than the labor-hours involved in producing and processing and distributing 1,000 gallons of water to LTC today. Indeed, it’s not unlikely that MORE labor-hours might be required for the task 200 years from now.

    So, where does that leave us when it comes to the idea of using any substantial REAL discount rate to discount the figure in Year 200 relative to the figure in Year 1? Of course, as has been noted (by Donald Brown, for example), the issue is different for each type of good. I agree. But, just considering this example (involving water), on what basis would the Year 200 figures be discounted relative to the Year 1 figures? After all, L200C is (will be) just as real as LTC, with an utmost degree of likelihood. The quantity of water “W” then will be just as real as the quantity of water “W” today. And, there’s no very good reason to believe that the human labor involved in producing and processing and distributing “W” to L200C (in his day) will be any less than the human labor involved in producing and processing and distributing “W” to LTC today.

    Of course, we can all make assumptions about general productivity increases, if we like. But on what genuine basis? What assumptions? Why? What about all the basic goods that will become harder to come by and require processing?

    And, WHO would be making such assumptions? What are the ethics involved? Realize, of course, that if we sit here and make optimistic assumptions about future productivity increases, the net result of many of those is just to give us permission to continue messing stuff up — e.g., the climate — under the assumption that future productivity increases will help future people take care of themselves. That’s how the math works out. So, to the degree that proposed real discount rates are presumably justified by assumptions about future productivity increases, those ASSUMPTIONS should be solidly justified — very solidly — and also conservative, if we make them and include them at all. And, as mentioned, they should be done for different key categories of items, not in one fell swoop. And, what do I mean by “justified” and “conservative”? I mean that the assumptions shouldn’t merely be based on “this has been the historic rate of improvement, and we’ll just project that forward or at least some substantial portion of that”. Nonsense. We’re dealing with real decisions here, and real living conditions of people in the future. UNsound assumptions will do REAL harm. It’s not a game. If we’re going to argue that producing and delivering water to someone 200 years from now will involve any fewer actual human labor hours than producing and delivering water to someone today, we should (be required to) spell out exactly why, and how, that will be the case before discounting on that basis. Otherwise, the problem becomes an ethical one as well as an analytic one. And the economists don’t have the answer to the ethical question. The only real answer to that question would involve inviting the person L200C to participate in the estimate and negotiation, to protect his own interests. That not being possible, any assumptions should be fully justified and rigorously conservative.

    Now, the question: What am I missing? This is not my area of expertise — to this detail anyhow. So, am I missing some (valid) argument that justifies (or is thought by some to justify) any substantial component of so-called “real” discount rates? If so, what is that argument, that I’m missing?

    Thanks for your time and consideration.

    Be Well, (and by the way, if you don’t discount me, I won’t discount you!)

    Jeff

  30. mike roddy says:

    Here’s a practical example of the fallacy of discount rates:

    Timber economists, like most accountants, look only to ROI. Growing trees large enough to produce timber in volume takes a long time. Money that is gestating for the 80 years required to produce thick and productive trees cannot be justified by discount rate calculations. Result: a timber stand in the Northwest is now harvested in 40 year rotations. These two rotations produce approximately half of the total wood that would derive from one rotation, with less carbon sequestered and fewer diverse soil and plant species.

    In Sweden, the government accounts for this, and subsidizes the cost of money to encourage the longer rotations. This results in more wood and more true wealth for the landowners in the form of value delivered. We need to begin to reorganize our own economy along these lines.

  31. Chris Winter says:

    Leif,

    Thanks for the link to that free-verse poem by Wendell Berry. I don’t agree with every sentiment there, but it is a powerful poem.

    The world is babbled to pieces after
    the divorce of things from their names.
    Ceaseless preparation for war
    is not peace. Health is not procured
    by sale of medication, or purity
    by the addition of poison. Science
    at the bidding of the corporations
    is knowledge reduced to merchandise;
    it is a whoredom of the mind,
    and so is the art that calls this “progress.”
    So is the cowardice that calls it “inevitable.”

    Indeed.

  32. Jim Prall says:

    Thanks to everyone commenting for a really lively discussion. Inspired by Jeff #13 and others, here’s my 2 cents [in 2010 USD?]

    Supposing you make a case that any significant positive discount rate entails that it is “better” for us to pollute now and leave it for wealthier future generations to pay for the cleanup out of their greater resources [ignoring the question of whether cleanup might cost more than avoiding the initial pollution].
    Why would this same logic not also justify the future generation in putting off even further the cleanup, since their successors are expected to be even more weathly still?
    This suggests an infinite regress, that nobody would ever be able to justify spending anything to clean up the pollution because future generations will always be better equipped to do so that the present one.
    This leads to the absurd conclusion that pollution should build up perpetually without limit, as it will never be “economical” to clean it up.
    The infinite regress could break down at some unknown point in the future if the unwanted effects of the pollution became intolerable for the current generation, and cleaning up was cost-effective for their own well-being, never mind that of future generations. Of course, I’ve left unquestioned some key assumptions such as a linear relationship between amount of pollution and amount of damage, or between size of pollution build-up and cost of remediation.
    One other thought: emitting carbon today incurs some uncertain amount of “bonus” carbon emitted by the biosphere in the future in response, due to carbon-cycle feedbacks such as melting permafrost. So even if we admit a wild assumption that removing a ton of carbon would cost the same as avoiding emission of that ton, putting off the removal has a compounding problem due to the (highly uncertain) positive feedbacks in the carbon cycle. If there is much chance those feedbacks compound faster than the optimistic discount rate, the whole economic calculation goes out the window as well.

  33. Jeff Huggins says:

    To Jim Prall (Comment 32)

    Well put! Thanks for that — and also thanks for the kind thought.

    Because of all of those considerations, the time for correcting the incorrect aspects of present analysis approaches is now. In other words, the present approach (in too many ways) allows the problems to just build and build, and the solutions to be delayed indefinitely, and thus (eventually) the negative consequences to build and build. Sooner or later, people will be forced to see and correct the underlying problems in our analysis “tools” and decision-making approaches, but a very great deal of harm will be done in the meantime, some of it irreversible. At that point, most people will look back and say “why did earlier generations mess us up?!”, but anyone involved in economics and so forth will also say, “why did economists and analysts who lived back then not see the obvious problems in their approaches; why were they so ______ (fill in your own word here) to not see the obvious problems?”

    Anyhow, thanks for the great comment. That’s a good way to put important parts of the issue.

    Be Well,

    Jeff

  34. Mike says:

    The following economic question was raised on WUWT:

    (From Canadian Mike paraphrasing Richard Holle) “Even if you are convinced that human caused CO2 emmissions are causing harm to the environment, can’t you see that the proposed solutions are having the exact opposite effect of what you purport to desire??????

    Adding taxes and regulations to western nations which generally have better technology and environmental regulations simply forces production to nations with much less efficient technology and very little regard for the environment. Do you honestly think China and India are going to agree to or abide by any environmental restrictions? Until you can give me a reasonable explaination as to how this benefits the environment, your “precautionary principle” is a fool’s errand.”

    My answer was this: “We could impose a ‘carbon tariff’ on goods from countries that do not comply with negotiated agreements if this were to become a problem.”

    Anyone have a better or more detailed answer? Has anything been published on this?

    [JR: China will have a carbon price before we do.]

  35. Peter Sergienko says:

    Isn’t Jeff Huggins’ thought experiment playing out right now, at least in a way, in Hungary? Hasn’t it played out in the past couple of years with the failure of the coal ash impoundment in Tennessee?

    I don’t know the planning time frames for these facilities. The Hungary plant’s operating history seems very short. However, fundamentally, when decision-makers decided to store toxic waste in an impound at these facilities, wasn’t part of the thought process to push more expensive treatment and disposal decisions into the future, and perhaps the distant future, knowing that treatment and disposal would be dificult and expensive? Did they assume that treatment and disposal would become cheaper in time? If so, why?

    In the meantime, the impounded toxic material is literally a ticking time bomb. An engineering failure or an extreme weather event can cause a worst-case scenario resulting in catastrophic damage. The cleanup costs from these failures will be exponentially higher than the planned costs of impoundment and eventual treatment and disposal.

    Given our track record on failing to anticipate future environmental costs on comparatively small scales such as these, I don’t understand why we don’t consistently consider the possibility that future action could prove more expensive rather than less expensive? Similarly, I don’t understand why we don’t adequately factor in reasonable worst-case environmental risks in our decision-making.

    On a smaller scale, businesses can manage these risks by insuring or self-insuring against the most likely financial risks, relying on the protection of the bankruptcy courts and the government to socialize costs if they experience a catastrophic failure. On a macro scale though, and in thinking about how to address the unique problems posed by greenhouse gas emissions, I don’t see how this type of thinking can ever work. The risks are simply uninsurable and the costs of catastrophic failure cannot be socialized.

    Bottom line, Jeff’s basic point seems critically important–we need a new way of thinking here that better recognizes the value of risk avoidance.

  36. Jeff Huggins says:

    To Dan B (Comment 27) and Peter Sergienko (Comment 35)

    Dan, I think your idea regarding a blog focused on these sorts of issues is a great one. I hope you can get a few folks involved. Please let us know how it progresses. I’d be happy to toss in a few questions (mostly) and some thoughts and some tested (and untested!) intuitions. This is all a vital subject, of course. Good luck.

    Peter, thanks very much for the info, thoughts, and kind comment. Yes, I agree that we seem to need a new way of thinking. I’m not quite sure how many people are thinking about these things, and where they are, and how to connect. It seems to me that future people will (most likely) exist and be real; and their real needs will be real; and unless there are very good reasons to be confident that specific sorts of productivity will improve, I can’t see where the real justification for real discounting comes from? As you say, discounting just seems to put problems onto future generations and excuse our inactions.

    I was once an engineer in the oil industry, and (as you imply) discounting can apply well in conventional instances — where the benefits and costs are borne by the same person or entity, when you’re just comparing one piece of equipment to another, when considerations of intergenerational justice aren’t at stake, and where big consequences aren’t irreversible, and so forth.

    The nagging frustration I have is that I don’t know who is thinking about these things, and where, and how far they are, and whether there is a way to “help” by chipping in an occasional observation or insight or question. All I see, usually, are conventional financial approaches misapplied to these larger world-problems. And, it’s downright scary.

    Anyhow, thanks again for the comment.

    Be Well,

    Jeff