A Bird in the Hand . . .

The notion of saving for the future, or investing, is a key to economic development. On the other hand, it also conflicts our natural tendency to value the immediate over the future.

Would you rather get ten dollars today or a million a year from now? That's probably not a hard question for most people. What about a thousand dollars today versus a million thirty years from now? A billion fifty years from now?

I won't be alive fifty years from now, so why would I want a billion then? Well, it the money were inheritable, my children have a good chance of being alive then, and, should I be so lucky, my grandchildren and other progeny. If it's tradeable, I should be able to sell it tommorow for several tens of millions to someone who will in turn eventually sell it for even more and so on until some owner perhabs not yet born collects fifty years from now.

How did I get the "tens of millions." It's a crude estimate based on current long term interest rates. Current interest on 30-year treasuries is 4.59%, so if you figure, say, 5% on a 50-year, then 87 million today buys a billion fifty years from now.

The point I want to emphasize is that the worth of that billion fifty years from now depends on, among other things, its transferability, since it's not intrinsically worth anything to me. Even if fully tradable, though, the present value of the billion-in-fifty needs to be deeply discounted. That discount pretty obviously also depends on the degree of certainty there is about somebody being able to collect in 2057, and upon the value of the dollar at that point.

So why is this relevant to climate - did I mention that this is a post about anthropogenic global warming? It's relevant because economists like to argue that the cost of any expense we incur today to ameliorate climate change should be judged against a discounted future benefit. Extreme free market fundametalists, like Czech President Vaclav Klaus, think that the appropriate discount rate is the free market interest rate. By that argument we wouldn't be justified in spending more than about 7 million dollars today to prevent one billion dollars worth of damage in 2107. This argument, if valid, would impose an incredibly heavy burden on any climate remediation. It would also mean that there is no point in spending anything to prevent any catastrophe whatsoever at some more distant point in the future.

This argument is not only profoundly counterintuitive to people like myself, it's also deeply suspect on several other grounds. A good discussion of some aspects can be found in this post by Eli Rabbett, and especially, via the comments to previous link, in Discounting and Uncertainty: A Non-Economist’s View, An Editorial Comment by Steven Sherwood.