An Appropriate Discount

Here is the question:  How much should we discount future problems to create solutions for today?  For example, if we have an economic policy that can make us 10B dollars richer today but we have to pay back 11B dollars in 10 years, is that a good idea?  Economists generally assume that there is a discount rate we apply to future wealth and benefits that is multiplicative year after year.  For example, if we discount 6% per year then 1 dollar's worth of benefits in 5 years is only worth 73 cents of benefits right now.  This is especially critical when evaluating the costs of environmental policy years down the road as in order to talk about the net benefits or penalties of various schemes we need to understand how we weight various outcomes.  If we cost ourselves 1 dollar now but our descendants will save 2 dollars by not having to respond to issues later on, is that a good tradeoff?

It turns out this issue is really contentious.  In both The Rational Optimist and The Skeptical Environmentalist this issue was really brought to the fore because both authors felt that it was critical to assume that our descendants would be much, much richer than we are today.  For them paying 2 dollars to prevent a flood due to climate change is much less of a problem than it is for us to pay 1 dollar to use renewable energy sources today, so in that particular case we should just keep burning oil.  Obviously everyone agrees that it is sensible to make the easiest cuts first and that some cuts should be made, but people strenuously disagree on exactly how deep to cut into our economy today to benefit those will come later.  In the books Eaarth and Earth in the Balance the opposite view was held:  Those authors felt that we should weight our descendants' problems very highly and that discounting benefits and penalties in the future was unconscionable.  In fact this issue is often framed as a moral one with some people even claiming that a discount of zero is the only moral choice, valuing the lives of those many generations from now as equal to those alive today.

I think the idea of a zero discount is bonkers, in particular because the authors themselves don't live that way.  People care about those close to them and care much less about others they do not know; even those who are very generous do not spend the same time and money helping random strangers as they do their family and friends.  If people really behaved this way the rich wouldn't buy expensive cars or clothes - they would set up trust funds to distribute their money equally among their 1000 potential descendants 10 generations hence and live a middle class lifestyle.  People naturally apply their own future discounts and if that behaviour is immoral then I don't know if there exists a moral person.

The other major issue with zero future discounts is uncertainty.  We can be pretty confident that 1 dollar of benefit today is worth about 1 dollar.  We have a sketchy idea of how much it will be worth in 25 years and absolutely no clue about its worth in 50 years.  Think about someone from 1960 trying to work out the economic value of something in the world of the internet, cell phones, facebook and the collapse of communism. They would have no idea, and using valuations of concepts and even raw goods from that long ago is a joke.  Because of this we have to value the future less simply because we don't know whether what we are doing will matter at all.  Even barring the seemingly unstoppable increases in economic power that each new generation brings the lack of predictive power means we must strongly weight benefits today over seemingly equal benefits far down the road.

None of this means we should pour arsenic into the water just for fun but it does mean that we need to approach these issues cautiously and not idealistically.  Future discounts aren't just an economist's construction - they actually model human behaviour if the number is set correctly.  We need to accept that, set reasonable numbers and move on.