History has a destination with layovers

There’s lots of talk about discounting. Not the kind of discounting we’ll see the day after Christmas. No, the kind we do to future happiness. We’d rather eat a candy bar today, and be happy today, than eat a candy bar tomorrow, and feel happy tomorrow.

The Stern report is an uppity (I kid!) British report released last month about the costs and benifits of methods to mitigate global warming. Supposedly, the science is locked on the facts of global warming (it exists and its caused by us miserable humans). This report then is about the economic consequences of dealing (or not) with the problem. The basic conclusions are the the costs are big but the benefits (in terms of stemming the tide of global warming) are biggererer.

The authors of this report had a tough job. Props for even trying. This isn’t your standard cost/benefit analysis. If I decide to buy a candy bar, the benefits to me must be greater than the 75 cent cost. On some days I’m willing to pay 2 bucks for a Snickers, in which case I’d think the 75 cents is a good deal. On other days, I’d only pay 1/2 a buck and 75 cents is too expensive. On both days, my decision is a no brainer.

The problem with analyzing the costs and benefits of mitigating (aka abating) green house gases is that the costs occur today and the benefits happen way in the future (maybe when most of us are dead). Given these distant benefits, the question of how much we care about happiness accrued way in the future becomes pertinent. How much do we value the benefits accrued to our future selves? How much to future generations?

The answer might be zero (in which case we’re a bunch of pricks) or it may be as much (or more!) than we value our benefits accrued to ourselves, today. If our value on the happiness of future generations is zero, then we wouldn’t do anything to reduce green house gases. Why would we? We don’t care what happens to “them” anyway. On the other hand, if we value future generations as much as ourselves then we’d treat the problem like the candy example above. We’d treat the future benefits as if they occurred today.

There’s just one rub. Most folks have a time preference in their own happiness. They’d rather be happy today in exchange for happiness tomorrow. Ask yourself, would you rather me give you a dollar today or a dollar tomorrow? How about a dollar today or $1.10 tomorrow? $1 today or $2 tomorrow?

Most likely, you’d choose a dollar today versus tomorrow, but there’s a price in which your future self can buy off your present self. Was it the dime that made you wait for tomorrow or did you need a buck? In any case, discounting is just a fancy way of saying our present selves need to be paid off to give benefits to our future selves.

Why shouldn’t this figuring be any different across generations? In other words, if I discount my own future selves, why wouldn’t I discount future generations? Should benefits that accrue to future generations be discounted? Should they count less than benefits accrued to us today?

In this response the Stern report, the authors give these reasons for discounting:

There are two reasons for discounting future costs and benefits in economics: pure time preference motivated either by impatience or the risk that future generations will not exist (here referred to as pure utility discounting), and the declining marginal utility of consumption (combined with an assumed positive growth rate).

Ignore that second reason; we’ve only been talking about time preferences anyway. I’d add one more motivation, in addition to impatience and risk, for believing we should have preference for good things to happen sooner rather than later even across generations. As some brilliant commentator at Prof. Delong’s site put it:

There has to be some time preference that leans towards preferring good things to happen sooner rather than later. Surely its a good thing that the Internet was invented 30 years ago instead of last year; that the Bill of Rights is over 200 years old instead of 20; that we emerged from the African savanna 100 milinea ago instead of 1000 years ago. Surely its better that direct mind to computer interfaces will be developed in 10 years rather than 100.

It seems to me that history has a direction. For some good things to happen other good things needed to happen first. The transistor had to be invented before the computer could be (well pretty much). I want good things to happen sooner so the other good things that depend on those first good things might happens sooner so that those things can lay the ground work for subsequent good things and, well, you get the picture…

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