We received this article as a rebuttal to our earlier post by David Middleton: “The Nobel Prize for Climate Catastrophe”… Seriously? ~ctm
Guest post by Mark Freeman
“’The Nobel Prize for Climate Catastrophe’… Seriously?” (WUWT, 21st December 2018) highlights the crucial role that the discount rate plays in determining optimal climate policy. Because of the compounding effects of interest over very long time periods, small changes in the discount rate can lead to very large differences in the present value of mitigation projects and therefore the economic case for pursuing them. $100 discounted at 5% for 100 years has a present value of only 76 cents. By contrast, using a 2% discount rate, the present value is almost twenty times higher at $13.80. Disagreement over the discount rate can be as significant as uncertainties about the natural sciences in the climate change debate – even if the latter dominates the former in press coverage on this issue.
In reference to the co-winner of the 2018 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, the earlier WUWT article states that “Dr. Nordhaus’ model suggests a ridiculously low discount rate of about 2.5%”. This critique is motivated by comparison with the rates of return offered by fixed income securities (“The minimum discount rate is currently usually 3%, about what you can get in US 30-yr Treasuries”) and other corporate rates (“In the oil & gas industry, we use a 10% discount rate when valuing proved reserves”). Using a higher discount rate would lead to a lower Social Cost of Carbon, meaning that fewer mitigation initiatives would receive policy support.
My co-authors and I have recently published (Drupp et al., 2018) the results of a survey of almost 200 economists who have expertise in intergenerational social discount rates (discount rates to be used by governments when, for example, determining climate change policy). From this we can conclude that, as far as most economists in the field are concerned, Nordhaus’ rate is too high and not too low.
First, it is important to note that the 2.5% rate that is attributed to Nordhaus in the earlier WUWT article is a growth-corrected discount rate, which “equals the discount rate on goods minus the growth rate of consumption” as given in the caption to the figure in that article. For a non-growth-corrected rate, Nordhaus recommends a much higher value. In a related article he states that “I assume that the rate of return relevant for discounting the costs and benefits of climate-sensitive investments and damages is 5% per year in the near term and 4.5% per year over the period to 2100” (Nordhaus 2014, p.280). Yet in our survey, the median response from our participants for the appropriate very long-term social discount rate is just 2%.
How can this be reconciled with the much higher rates offered by US Treasury bonds and the discount rates applied in the private sector? There are a number of rationales behind this.
First, it is important to distinguish between nominal and real rates of return. In the latter, inflation is stripped out and the discount rate is applied to cash flows estimated in $2019. In practice, nearly all governments apply real discount rates and Nordhaus follows this practice. By contrast, corporations in the private sector generally use nominal discount rates and then apply an estimated inflation rate to their expected cash flows – I suspect this is true of the 10% rate quoted from the oil and gas reserves sector in the earlier WUWT article. Treasury bond yields of 3% are also nominal; at present Treasury Inflation-Protected Security (TIPS) yields are considerably lower at about 1.2%.
Second, we need to consider whether we are using a risk-free or risk-adjusted discount rate. Corporations will generally adjust their discount rates upwards for risk. For social discounting, some countries also do this (notably France), while others, driven largely by the Arrow-Lind Principle, do not. Our median survey response of 2% is explicitly risk-free, comparable with the 1.2% yield offered by TIPS. Nordhaus’ 4.5% rate is risk-adjusted (“I assume that the consumption beta on climate investments is close to one” Nordhaus 2014, p.280) as would be the rate in the oil and gas reserves sector. It is important to make sure that, whatever approach we take to incorporating risk premiums into social discount rates, we are comparing like-with-like. Even ignoring risk, though, Nordhaus’ preferred discount rate remains above that of most economists we surveyed.
Third, one of the most heated debates within this literature is about whether financial market rates should influence the social discount rate. There are many who believe that markets provide the most appropriate indicator (this is called a “positive” or “descriptive” approach to social discounting). Others, though, believe that it is the government’s ethical duty to work out, from first principles, how discounting should be undertaken across generations rather than inferring this indirectly from the limited number of participants who influence market yields (the “normative” or “prescriptive” approach). This is because those in the future who will be affected by climate change, and those in poorer countries that are most at threat from rising sea levels, have no say over current US Treasury yields. International policy advice on this matter is mixed; for example, US government guidance is largely positive while UK guidance is largely normative. Our survey shows that economic experts are also divided on this matter, although most recommend putting greater weight on normative considerations. But whatever our own views on this, we must recognize that many believe it is unethical for international governments to purely outsource the determination of the social discount rate to US financial markets which are concerned with the current allocation of private capital and not matters of intergenerational and international fairness.
Fourth, there is a technical literature (e.g., Cropper et al., 2014) that argues that, all else being equal, real risk-free discount rates should decrease as the time horizon increases. This is a mathematical consequence (via Jensen’s inequality) when uncertainty increases over time. As climate change damages persist well beyond the maturity of the longest-lived Treasury security, this suggests that real risk-free intergenerational social discount rates should be below TIPS rates.
The earlier WUWT article cites the Office of Management and Budget (OMB) real social discount rate of 7%, but this is not the rate that the Interagency Working Group on the Social Cost of Carbon in the US recommends. “The interagency group ultimately chose three certainty-equivalent constant discount rates: 2.5 percent, 3 percent, and 5 percent per year. The two higher discount rates are principally informed by historically observed interest rates. The central value, 3 percent, is consistent with estimates in the economics literature as well as guidance from the OMB (2003) concerning the consumption rate of interest. Moreover, 3 percent roughly corresponds to the after-tax riskless interest rate. The upper value of 5 percent is included to represent the possibility that climate damages are positively correlated with market returns …The low value, 2.5 percent, is included to reflect the concern that interest rates are highly uncertain over time. Furthermore, a rate below the riskless rate would be justified if climate investments were negatively correlated with the overall market rate of return. The use of the low (2.5 percent) value is also consistent with certain prescriptive judgments and ethical objections that have been raised about higher discount rates” (Greenstone et al., 2013, p.34).
There is one other important point to raise about the earlier WUWT article, which was particularly scathing about the proposed use of a 0% discount rate. To understand this, it is necessary to distinguish between the utility discounting of, for example, health and life itself, and the consumption discounting of future income streams. The discussion above and the original WUWT article are concerned with consumption discounting. In this case, only a small minority of our survey respondents believe that a 0% discount rate is appropriate. But for utility discounting, the most common response from our experts was a rate of 0%. This is because many believe that the intrinsic worth of life itself should not be discounted. So, when the earlier WUWT article states that “A discount rate has nothing to do with the value of ‘future generations’ versus ‘nearer generations’” this is not strictly true. Such considerations are central to determining utility discount rates and, within a normative setting, these form a component of consumption discount rates.
For those with further interest in these issues, my colleagues and I have recently co-authored reports for HM Treasury (Freeman et al., 2018) and the Office for National Statistics (Freeman & Groom, 2016; Freeman et al., 2017) in the UK, where more detailed discussions are given. Getting to some consensus on these issues, as well as on the scale of climate threats themselves, is absolutely crucial if we are ever to reach agreement on climate change mitigation policy.
Mark Freeman is Dean of The York Management School, University of York, UK, where he is also a Professor of Finance.
References
Cropper, M.L., M.C. Freeman, B. Groom and W.A. Pizer (2014), “Declining discount rates”, American Economic Review (Papers and Proceedings), 104(5), 538–543.
Drupp, M.A., M.C. Freeman, B. Groom and F. Nesje (2018), “Discounting disentangled”, American Economic Journal: Economic Policy. 10(4), 109-134.
Freeman, M.C. and B. Groom (2016), “Discounting for Environmental Accounts”, Available on the Office for National Statistics website: https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/methodologies/naturalcapital
Freeman, M.C., I. Clacher, K. Claxton, and B. Groom (2017). “Reviewing Discount Rates in ONS Valuations”. Available on the Office of National Statistics website: https://www.ons.gov.uk/economy/economicoutputandproductivity/output/articles/reviewingdiscountratesinonsvaluations/2018-07-11
Freeman, M.C., B. Groom and M. Spackman (2018), “Social Discount Rates for Cost-Benefit Analysis: A Report for HM Treasury”. Available on HM Treasury’s ‘Green Book’ website: https://www.gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-central-governent
Greenstone M., E. Kopits and A. Wolverton (2013), “Developing a Social Cost of Carbon for US regulatory analysis: A methodology and interpretation”, Review of Environmental Economics and Policy, 7(1), 23–46.
Nordhaus, W. (2014), “Estimates of the Social Cost of Carbon: Concepts and results from the DICE-2013R model and alternative approaches,” Journal of the Association of Environmental and Resource Economists, 1(1/2), 273-312.
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Mark Freeman;
Your second point, using the Arrow-Lind principle, is a serious non-starter. It doesn’t meet the first requirement, that the government foots the bill until the benefits accrue. There is no magic way for governments to do this, since their only source of income is taxes, and if they simply print more money…well, as an economist, you should know where that leads.
Yep… Governments never “foot the bill.”
I also do not, personally, agree with the use of the Arrow-Lind principle in the context of climate change discount rates. I think there is a compelling argument that governments should adjust rates for risk. The problem is that it is very difficult to quantify this – even getting to the risk-free social discount rate is hard enough – although I think governments should try. The French and other governments in Europe do and, as quoted above, the Interagency Working Group agree (although they are not sure if the risk adjustment is positive or negative).
This Nordhaus character is patently in orbit around Planet Lala but still making himself irksome.
Not least as all he has to suggest is a feeding frenzy for Government Cronies resulting in rampant inflation and erosion of living standards.
Those in The Establishment know this and that they’re headed to generously rewarded consultancies and fake directorships when they retire or are de-selected – that’s why many of them do it.
They just don’t want the Hoi-Polloi to know.
Hence would it be uncharitable to suggest that (some) Nobel prizes are handed out as ways of getting ‘annoying people’ to ‘cease be annoying’ by potentially letting the cat out of the bag?
Exactly as you would give a small troublesome child a dummy/soother?
“Here kid, take that and stfu”
Some kids are so dumb they simply cannot take the hint – you know who I mean,
Dr. Freeman,
Thank you for your thorough and professional response to my post. I will certainly read through some of the references you cited.
I’m not a complete idiot, just mostly. Anyone care to unpack this statement ? :
…..”this is not strictly true. Such considerations are central to determining utility discount rates and, within a normative setting, these form a component of consumption discount rates.”
==================
I read it as, undefined variables may define the outcome.
So, we’re right back where we started.
Now I’m talking myself in circles….
Dr. Freeman stated…
The OMB does distinguish between nominal and real rates of return.
The OMB guidance is for a 7% real discount rate, not nominal…
https://www.transportation.gov/sites/dot.gov/files/docs/OMB%20Circular%20No.%20A-4.pdf
The “benefits” of a regulation should be able to withstand the cost to the private sector of those regulations… Otherwise, there are no benefits… Not even speculative benefits.
Yes, the OMB rate is real (my article said “The earlier WUWT article cites the Office of Management and Budget (OMB) real social discount rate of 7%”) but is not the rate recommended by the Interagency Working Group on the Social Cost of Carbon. This is because of the differences between medium-term and intergenerational discounting. You make a persuasive case for positivist social discounting, which many economists agree with, including Nordhaus. But others think that government capital plays a different role than private capital and so cannot apply the same discount rate. You also have to be sure that, if you are using a risk-adjusted social discount rate in a positivist framework, the risk of climate change mitigation is the same as the average risk in the private sector. Do climate damages have a beta of one? There is an interesting recent paper on this (“The climate beta” by Dietz, Gollier and Kessler).
The problem is that “government capital” can only come from “private capital.”
When we value proved oil reserves, it is a risked valuation. Generally at a 90% probability. When deciding whether or not to purchase proved oil reserves from another company, the value is entirely in the future cash flow from those reserves. The standard discount rate for this sort of analysis is 10% (PV10). If we had $100 million in M&A funding, the PV10 analyses of different opportunities guides our final decision.
We’re spending $100 million now for the future cash flow from those proved reserves. The $100 million is a very real cost. The future cash flow has some risk, generally <10% that the field will produce less than its current proved reserves.
With carbon taxes, the costs to the private sector now are every bit as real as the cost of acquiring proved oil reserves. However, all of the benefits from those regulations (the equivalent of future cash flow) are entirely speculative. No sane person would discount those benefits less than they would discount something with tangible value. Either that or the potential benefits from carbon taxes would have to be heavily risked.
From a private sector standpoint, regulatory cost/benefit analyses should meet the same standards as capital allocation cost/benefit analyses in the private sector.
Thank you again for your thoughtful rebuttal to my post and your participation in the comments section. Constructive dialogue is always appreciated here.
*sigh* screwed up the blockquote. Can a moderator fix that? Thanks.
From a 2008 article:
200 economists will be as (in)accurate as 200 climate model runs.
Did they also take into account future technology and its impact on the economy:
From: https://apiumhub.com/tech-blog-barcelona/tech-of-the-future-technology-predictions/
– Nanobots will plug our brains straight into the cloud
– People reincarnation through AI
– AI will become a positive net job motivator
– IoT technology will change product designs
– Space tourism: a week in orbit
– Self-driving cars will make driving safer
– Charge your iphone with the power of a plant
– Ocean Thermal Energy can take us to 100% renewable-energy
– EU will face a shortage of 800,000 IT workers by 2020
– Half of current jobs in the world are unlikely to exist in 2050
The Social discount rate should be equal to your long term inflation assumption… which generally would be around 2%… that way you are only measuring real effects.
Whether calculating this for climate change is a good idea or not is another question… but if you are going to do that you needed to assess the benefit as well as the costs.
There, by definition, has to be benefits, such as more greening of the plant, which need to taken into account. It is simply not possible for there just to be costs. And the discount rate has to be the same for both. Else you are just pulling yourself off…
Don Quijote protecting windmills.
Lots of good commentary spurred by this “rebuttal”.
Why does a normal yield curve provide higher interest rates for long term as opposed to short run investments? Because there are all sorts of risks associated with far horizons that are not apparent over short intervals: bankruptcies, technological obsolescence, political risk, etc. Yet we are to suppose to accept that one can justify very low discount rates to projects with timelines involving centuries. That is we should accept an inverted yield curve in these instances because of various novel justifications.
There is a fixed amount of capital and other resources to employ in projects to maintain our present civilization and also to invest in projects which increase wealth in the future. Projects, public and private, compete with one another for funding. The discount rate and cost/benefit ratio are two well tested tools to help make sensible choices among competing projects. An inverted yield curve demands that we borrow from projects with large rates of return, shorter horizons, and lower risk in order to finance projects with a smaller rate of return, very long time horizons and unknown, but probably larger risks. And all of this is necessary because the proponents of one of these projects (avoiding the social costs of CO2) cannot come up with sufficiently large future benefits to produce a positive cost/benefit ratio without an inverted yield curve.
Firm and individuals who engage in this sort of thinking generally go broke. It is something like the mortgage crisis in gigantic form.
Moderator: My previous comment has vanished, and when I attempt to repost, the system tells me the comment is redundant…
‘”First, it is important to distinguish between nominal and real rates of return. In the latter, inflation is stripped out and the discount rate is applied to cash flows estimated in $2019.”
When considering climate policies designed to decarbonize the world’s economies, the hidden lie in attempting to use a real rate of return when considering climate policies designed to decarbonize the world’s economies is the impact economic growth they will have. The more aggressive the government directed decarbonization, the higher the impact (more negative to growth), as capital will be redirected by government fiat with increasing layers of bureaucracy to “manage” that re-direction.
There is indeed a an economic cost of decarbonization, which in consideration of limited benefits to climate by such policy actions, is why the true Social Cost of Carbon is negative (that is, it is a benefit in total sum). This is the reason the Chinese and the Indians are by their actions, and not cheap words, are aggressively carbonizing their economies.
Considering the linkage between GDP growth and energy use, and then factoring in the density of energy in fossil fuel and nuclear power, it is the only way to go. Going backwards to less dense energy sources like wind and solar makes zero sense if your priority is to grow an economy to improve the welfare of your nation and its people. Which fundamentally is why Trump called “Climate Change a Chinese hoax on the West.”
I think we should not let catastrophic economists off the hook too easily on the matter of human life. A lot of catastrophic calculation is wrapped in the flag of “reducing the population to a sustainable level”, whatever that means in terms of extincting a few billion people.
It’s a package: treating future populations as unwanted and preventable is not in the same ball park as a “0% discount rate defended on the basis of all human life being equal, both now and in the future.” Yet both are advocated.
If those proposing the destruction of “capitalism” and modern life with all its manifold benefits as the “price to pay” for “saving the planet” were given free reign, we would have forced abortions, sterilization and God-knows-what-else made mandatory.
That would be in addition to the deaths in the millions from energy poverty, lack of services and food caused by the extreme “greens” lapping up the money as they plot how to remove people.
It is obvious that the value of present generations and those of the future are not “valued” much at all. Enforced policies that wreak havoc on humans are not respectful and life-respecting.
I took the trouble to ask a WB econometrician what discount rate should be used for long term projections and he replied, “seven per cent”.
One of the great problems in global economic policy is that labour denies that capital has rights, and capital denies that labour has rights. My savings and my labour have true value. When I invest either they both deserve a positive return. They deserve a future value as well.
Zero per cent discount rate? That’s fizzy pop econo-speak.
Many thanks to Mark Freeman for the interesting perspectives on discount rates and to various commenters for their additions!
What remains immutable is application of discount rates to imaginary threats (e.g. CAGW/Climate Change) is a complete waste of time, capital, and effort.
The author makes a case for a low discount rate which would be more relevant if there were any future value to be discounted and netted against known current investment cash flows.
If the purpose of spending trillions today is to avoid quadrillions in costs eight decades from now, your justification gets a bit hairy when the trillions are certain but the damages are imaginary. The “mitigation” not only won’t avoid any cost, it will actually impose huge damages in the form of the lost benefits of fossil fuel use. If the reduction of CO2 emissions does anything at all, it will reduce agricultural productivity. To the extent that ECS is greater than zero, it will reduce beneficial warming that removes marginal lands from production.
It is only the very most speculative extreme values of ECS that could begin to turn that equation around. Discounted cash flow analysis is sound financial methodology, but it can do nothing to answer the question of whether the future costs will materialize.
Imagine that you are required to participate in a lottery with a one in a million chance of being selected for execution. If you were told that you can turn over all of your assets and contract to labor for the rest of your life with subsistence wages and in return you will not be required to take the risk, what choice would you make?
The cure is far worse than the disease. Worse still, the disease is psychosomatic.
Economists. Set the same problem before five different economists and you’ll get five different answers, six if one of them attended Harvard…..
The argument over a couple of percent being too high is purely ideological – the cost simply turns out to be too high to sell the idea as an economic reality. There is also no allowing for a benefit of higher CO2. First, alarmist 30 year forecasts using what they believed to be the effect of a doubling of CO2 on temperature turned out to be ~300% too high compared to actual observations. Moreover, they were blindsided by a galloping greening of the planet with forest cover expanding15% by 2014 after 30 years and overall “leafing out” increase of 18% by 2017. This, along with a doubling(!) of food harvests, oncreased habitat, water conservation … are the “carbon benefits” elephants in the room. Surely a “Garden of Eden Earth^тм” of plenty is more than enough compensation. Heck, with a 50% expansion of forest, we would have enough wood to fire up dispatchable electricity and recycle this renewable source forever, courtesy of the fossil fuel industry. Shouldnt they get paid for this.
One big advantage of the “normative” approach is that one can then engineer the rate to be whatever one wants. It’s much more convenient than being constrained by anything related to reality. Sort of like the climate models that are un-testable.
So…. if CAGW is all a hoax, shouldn’t the discount rate be 100%??
A 100% discount rate doesn’t mean $0 present value. You would need an infinite discount rate for that.
What you’re getting at is that they have an entirely wrong expectation about the risk of receiving a future benefit.
As a “hoax” or more reasonably, as a mistaken hypothesis, the idea that eliminating CO2 emissions will generate benefits (cost avoidance) in the distant future is wrong. There won’t be any payback, just continuing losses.
The net present value of a stream of all-negative cash flows can only be negative, even if the discount rate is zero. You arrive at the same investment decision (don’t invest) whether you discount future cash flows with a discount rate of zero or infinity.
For the exercise to be meaningful you first have to reduce uncertainty about the magnitude of the future cash flows. It’s impossible to reach consensus on that because one side is convinced of inevitable destruction and the other side is confident of minor benefits or at least not more than minor inconveniences.
You can of course calculate the discount rate that results in a breakeven NPV and therefore implies a don’t-invest decision. It’s just the internal rate of return (IRR). You certainly don’t need a discount rate of 100% to see that the investment is not justified.
Mark Freeman: Thanks for taking the time to write here. I have two comments:
1) I notice you didn’t discuss the appropriate discount rate in terms of the Ramsey equation, which supposedly has been proven mathematically to provide the optimum discount rate for a variety of problem of this type. Mathematical theorems beat surveys of opinion in my book.
2) There is an intuitive explanation associated with the Ramsey equation. Many of the experts (from ivory towers?) you surveyed may be worried that environmental degradation, non-sustainable practices, and catastrophic global warming are going to prevent their descendants from enjoying the affluent life-style they do today. They aren’t expecting much economic growth in the coming century and calculate or intuit a low discount rate for this reason. “My descendants are going to have a tough time. I must do my part to minimize the coming disasters.”
However, most of the people on the planet are in undeveloped countries or developing countries. They expect to emulate China and join the developing world. It is completely unacceptable for their governments compromise on these fundamental expectations. They anticipate a high economic growth rate and therefore calculate or intuit a low discount rate. If they emulate China, their vastly richer descendants will be able to adapt to climate change. The INDC’s proposed by these countries for the Paris accords are completely consistent with business-as-usual AND contingent on aid from developed countries (a political impossibility without a crisis). AGW is a global problem and future emissions lie mostly outside the control of the developed world.
Consider China the prototype for the developing world. With complete understand of the potential for global warming and pollution and the ability to design for the future, China built a massive number of low efficiency coal plants and other horribly polluting infrastructure. They then replaced many of those coal plants with higher efficiency coal plant. The people are currently happy and their richer descendants will be forced to clean up the messes.
Most of the people in the middle and lower classes in developed nations probably agree with the developing world – let’s grow our economy now and let our richer descendants deal with whatever comes. Look at the yellow vests in France. Or the depletion of the Social Security Trust Fund in the US within the coming decade, which will cause a 30% cut in benefits under current law (a problem that will be much easier to deal with before tens of millions retire expecting current benefits). Sacrificing the immediate future for our descendants is a losing policy.
Respectfully, you need to get out of your ivory tower and understand how the real world looks at this problem. If they understood the Ramsey equation, they would say that your anticipated economic growth rate was much too low and therefore your discount rate much too high. They want much richer descendants who are capable of adapting, and are certainly not expecting the static or deteriorating situation elites (rightly or wrongly) fear. The US is a democracy and a policy based on a discount rate inconsistent with expectations will never fly.
While not explicitly mentioned in my post, our survey was framed around the Ramsey rule. We “disentangled” the discount rate by asking experts about expected future economic growth rates, their utility discount rate and their elasticity of marginal utility of consumption as well as their chosen discount rate. Media responses were utility discount rate = 0.5% (mode =0%), forecast real global growth per capita per annum = 1.6% and median elasticity of marginal utility of consumption = 1. The median imputed Ramsey rule rate across our respondents was 3%, which is above the median chosen social discount rate of 2%. We discuss potential reasons for this difference in the paper. We also surveyed forecasts of future real long-term interest rates within a positivist setting – our experts thought this would be 2% real per annum as a median response
Frank,
You seem to have this a bit confused.
Nordhaus and Freeman are arguing for discount rates of 2 or 1% respectively. If your argument is that a risk-free return should match the economic growth rate because it is sort of like the return you would get “investing in the overall economy”, then to argue that the economic growth rate is much too low is to argue that the discount rate is also much to LOW, not high.
A high discount rate means that benefits expected in the future are highly discounted so that you are only willing to spend a small fraction of that amount today in order to secure the future benefit. A low discount rate implies that you can’t earn much on your money between now and when you expect a future benefit, so you don’t discount it very much.
Similarly you got it backwards when you said that people in the developing world calculate or intuit a low discount rate. Clearly your intended meaning was that they anticipate high growth and therefore can’t justify squandering their limited capital on future benefits. They highly discount the present value of those future cash flows. They assume a very HIGH discount rate.
Rich,
My thoughts exactly. I thought perhaps I had misunderstood something. Is it perhaps just a slip of the keyboard in Frank’s otherwise thoughtful comments?
Also, I would like to add my voice to those who have already said what a pleasure it is to read such considered and intelligent discussion. Thank you to Freeman and Middleton alike.
I remain a sceptic, who is reasonably confident that the Stern discount rate was an alarmist tool first and foremost. And I agree with those who argue that discounting anything at all beyond the next decade or so is pointless. Look back to the discounted costs of running out of stones in the stone age, or the discounted costs of cleaning up future horse manure as seen from the urban industrialised world in 1880. Running out of coal? Running out of oil? Running out of gas? Running out of lithium? All of our futures will look ridiculous, when looked at from the real future.
In the mid-1980s, Americans were scared to death of the looming Japanese economic “threat.” They did everything better than we did, and were thus clearly going to destroy us economically. One of the most prominent aspects of their superiority to us was in the realm of economic planning. The Japanese had 250 year economic plans! How could we Americans, who have no official economic plan hope to compete?
Well, it turns out that the Japanese 250 year economic plans didn’t include things like laptop computers, the Internet, or smart phones (in fact, cell phones of any kind). Those three things together represent a bigger increase in wealth than that associated with all other economic sectors combined. So the prescient 250 year plans missed the most significant developments occurring just 20 years in the future. (Japan’s economy tanked around the mid 1990s, and has never recovered).
Anyone making “policy” decisions based on a supposed discount rate is a bigger fool than the Japanese soothsayers.
“But for utility discounting, the most common response from our experts was a rate of 0%. This is because many believe that the intrinsic worth of life itself should not be discounted.”
According to CNN, the world average price of a slave is $90.00. Of course an attractive young boy or girl would be worth more, maybe $1,200, for use in the sex slave trade.
In these United States, a child will earn some $4,000 for Planned Parenthood when they kill it. Of course, a certain percentage they butcher for body parts that they will sell.
In real life, the idea that a human life has incalculable value is just silly.
“social cost of carbon” OK so the article author is another of those frauds.
The only social cost is the scam, the scam that CO2 (Not carbon you idiot, learn basic chemistry) controls all.
Article author is another rent seeking hack.
Thanks to Mark Freeman for posting and commenting here. A question for him, if he’s still reading:
What do you think your panel of experts would predict for the average annual per-capita percentage increase in gross world product (say, on an inflation-adjusted PPP basis) from now to 2100?
Oops. I see Mark Freeman already covered this:
“…forecast real global growth per capita per annum = 1.6%”
So my follow-up question is: if an omniscient being told you their estimate was too low by more than a factor of 3…what would that do to the calculated discount rate?
Oops. I see Mark Freeman has already answered this:
“…forecast real global growth per capita per annum = 1.6%…”
So my question is, if an omniscient being told them they were too low by more than a factor of three, what would that do to their calculated appropriate discount rate?
Within the Ramsey Rule, which is the basic setting for our paper, the real risk-free social discount rate is given by the utility discount rate + elasticity of marginal utility * expected growth rate in consumption. Using the median responses for each component, this is 0.5% + 1 * 1.6% = 2.1% (which is lower than the median Ramsey Rule rate calculated across experts of 3%). If you triple growth, this becomes 0.5% + 1 * 3 * 1.6% = 5.3%. In fact, experts deviate a very long way from the Ramsey Rule in their individual choice of social discount rates for a range of reasons – this is one of the main findings of our paper. The real answer would probably be below 5.3%, but somewhere in that ballpark. 1.6% real is pretty consistent with realised growth over the 20th Century; 4.8% real growth would require huge technological innovations.
Hi Mark,
Thanks so much! I really appreciate your detailed answer.
Regarding your concluding statement: “1.6% real is pretty consistent with realised growth over the 20th Century; 4.8% real growth would require huge technological innovations.”
…I have some follow-up questions (and have provided answers in the postscript, since I know you’re a busy man ;-)).
1) If the human brain is capable of 20 quadrillion calculations per second–that’s Ray Kurzweil’s estimate…other estimates are as much as approximately a factor of 100 higher or lower–all the computers in the world were capable of how many “human brain equivalents” (HBEs) in 1998?
2) All the computers in the world were capable of how many HBEs (multiples of 20 quadrillion calculations per second) in 2018?
3) If the growth rate in computer calculations per second of all the world’s computers continues at the same annual percentage rate for the next 20 years, what will be the number of HBEs (multiples of 20 quadrillion calculations per second) in 2038?
Best wishes,
Mark
P.S. Here are the answers (by my calculations…your mileage may vary):
1) In 1998, all the world’s computers combined performed about 100 quadrillion calculations per second…equal to about 5 “human brain equivalents (HBEs)”.
2) In 2018, all the world’s computers were approximately equal to 10 million HBEs…this can be compared to the human population of over 7.5 billion actual human brains.
3) In 2038, if trends of the last 20 years continue at the same rate, all the world’s computers will be equivalent to approximately 5 *trillion* HBEs. (Yes, that’s trillion, with a “t”.) (Oh, and that’s U.S. trillions, not British trillions, i.e., the number of HBEs in 2038 is 5,000,000,000,000.)
This will have almost unimaginable effects on economic growth. That’s why I’ve written several times–and only half-jokingly–that I expect my “Nobel Prize in Economics” when these effects start showing up…because virtually the entire economics profession is blind to them.
P.P.S. Even absent computer (AI) effects, one could still predict a per-capita growth rate in the 21st century more like 3.4 percent than 1.6 percent:
https://markbahner.typepad.com/random_thoughts/2004/10/3rd_thoughts_on.html
Oops! The 3.4 percent value is a completely naive value, based on trends since 1800. If one thought about what *causes* economic growth (human brains with economic freedom), one would predict a much lower growth rate than 3.4 percent.
In fact, the 1.6 percent would not look too bad, if one completely ignored the human brain equivalents from computers (which would completely invalidate one’s prediction):
https://markbahner.typepad.com/random_thoughts/2014/01/population-growth-rate-vs-per-capita-gdp-growth-rate.html
3) In 2038, if trends of the last 20 years continue at the same rate, all the world’s computers will be equivalent to approximately 5 *trillion* HBEs. (Yes, that’s trillion, with a “t”.) (Oh, and that’s U.S. trillions, not British trillions, i.e., the number of HBEs in 2038 is 5,000,000,000,000.)
Unfortunately most of those HBEs are (if trends continue) being used on uploading selfies to social media, cat videos, and porn (not necessarily in that order) instead of actual economically beneficial work.
Unfortunately most of those HBEs are (if trends continue) being used on uploading selfies to social media, cat videos, and porn (not necessarily in that order) instead of actual economically beneficial work.
How much time do you figure is used to comment on this website? 😉
(No offense intended! :-))
Coincidentally, I made a comment about economic growth in the 21st century and am having a discussion about that subject at the Econlog website:
https://www.econlib.org/the-future-of-money/#comment-214407
Assuming my prediction there (which is merely a repeat of something I’ve been predicting for more than a decade) that global per-capita GDP in 100 years exceeds $10 million, needless to say, they won’t be worrying about global warming (having long since reduced the atmospheric CO2 concentration to 350 ppm, or whatever they consider optimal):
https://markbahner.typepad.com/random_thoughts/2013/04/global_warming_is_not_irreversible-1.html