5/25/10 11:32 AMObama Fail: Why Cass Sunstein Should Not Repeat NOT Repeat NOT!! Be Director of OIRA. Never. No Way. No How - Grasping Reality with Both Hands

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Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchMay 17, 2010

Obama Fail: Why Cass Sunstein Should Not Repeat NOT Repeat NOT!! Be Director of

OIRA. Never. No Way. No How

Umm... This ain't rocket science. This really ain't rocket science at all...

Benjamin Wallace-Wells:

Cass Sunstein Wants to Nudge Us: In OIRA’s cost-benefit calculations, the government’s willingness to spend depends onhow expensive the damage will be — on what economists call the social cost of carbon. Sunstein and others in thegovernment have spent several months trying to define this cost, and he talked me through the process. One of the mostimportant issues is the discount rate — the depreciation of money over time. All else being equal, if given a choice betweenpaying $1 million now and $1 million five years from now, economists will choose to pay later. After all, if moneydepreciates at say, 3 percent a year, then spending $1 million today is the equivalent of spending only about $860,000 oftoday’s dollars five years from now. Over very long periods, like those involved in climate change, the discount rates thatare applied to short-term problems like budgets build toward absurdity: using one common method, spending $1 milliontoday to forestall climate change would be the equivalent of spending $2,300 in 2100. Calculations like this seem to argueagainst doing anything now. The problem, Sunstein says, is that we might do irreversible damage to the planet whileblithely waiting for the price of action to drop just enough.... As an academic, Sunstein seemed to side with economists likeWilliam Nordhaus at Yale, who set the discount rate at about 5 percent, which would counsel patience. “It’s not clear whatdirection the risk of error cuts in,” he told me. “If we err, 7 percent could be bad,” he said, but “if we err, 1 percent could bebad also.” A low a discount rate might protect the environment by spurring us to sacrifice now — while damaging theeconomy, increasing poverty and putting more people out of work. The difficulty is that the experts are lined up “out thedoor and down the block on both sides of this issue,” one economist told me...

Here we have yet another example of why law professors should simply not be allowed to practice law and economics or moralphilosophy without a license--and of how Cass Sunstein has never bothered to do the work necessary to acquire a license topractice law and economics.

First, "irreversible damage": we are doing irreversible damage to the environment every day in that every day human activitybrings more species closer to extinction, and natural or artificial selection would never be able to resurrect them no matter howmuch money we would spend trying to do so. The question that must be asked: is how much we care--how damaging is the"irreversible damage," and what other goods are we willing to forego in order to avoid it? What Sunstein implies--that"irreversible damage" is something that must be avoided and that trumps cost-benefit calculations--is simply incoherent, anddoes nothing other than perform the function of getting him onto Obama administration message without admitting that hedoes not understand why the cost-benefit analysis tools he loves so much are leading him to what is for an Obamaadministration official an off-message conclusion.

Second, the cost-benefit analysis tools Cass Sunstein loves so much are leading him to an off-message conclusion only becauseSunstein does not understand how to use them. Nick Stern's Climate Change Report uses the same tools and leads to a verydifferent conclusion than "argu[ing] against doing anything now." The shortcut way to understand why is that there are actuallythree discount rates to be used in cost-benefit analysis here--(i) a nominal interest discount rate to be used for money values, (ii)a real interest discount rate to be used for real values, and (iii) a human discount rate to be used for human lives and theirquality. (Plus there are risk adjustments that I won't go into here.) We tend to read the money-discount and the real-discountrates off of the market yields on long-term Treasury bonds and on long-term TIPS. But neither is appropriate if what is at stakeis human lives and their quality--then something more like the TIPS yield minus the expected rate of growth of laborproductivity is appropriate.

At the moment the real TIPS yield is 1.79% per year. The expected labor productivity growth rate is something north of 1.6% peryear. That calls for a human-lives-and-their-quality discount rate, to be applied to global warming expenditures now, of 0.19%per year AT MOST.

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5/25/10 11:32 AMObama Fail: Why Cass Sunstein Should Not Repeat NOT Repeat NOT!! Be Director of OIRA. Never. No Way. No How - Grasping Reality with Both Hands

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Wallace-Wells's and Sunstein's 3% per year discount rate would be the right one if the human, life, and welfare cost of a giventragedy were the same in inflation-adjusted dollars in 2100 as it is today--if the amount of real value we would wish to spend toavoid a chance of 10,000,000 Bengalis drowning in 2110 would be the same as the real value we would spend to avoid a chanceof 10,000,000 Bengalis drowning in the next hurricane season. But it won't be: we expect technology to progress over the nextninety years, and thus for us to be capable of and want to and be willing to spend much more money to guard against humancatastrophes a century hence. Today we have 6 billion people on the world with income per capita of $7,000 a year. In 2110 weexpect to have 9 billion people on the world with income per capita of $56,000 per year. Thus we expect that inasmuch as theywill be richer than we are that they will value human lives and high quality lives more highly in real values and be willing tospend more to preserve and enhance them than we are.

To argue that they will not be--that avoiding a 1% chance of 10,000,000 drowned Bangalis will be worth spending no more inreal value on in 2110 than it is today--is to be a moral monster.

Or a cost-benefit analyst who does not understand how to use his tools.

Brad DeLong on May 17, 2010 at 10:35 AM in Economics, Economics: Energy and Oil, Economics: Environment, MoralResponsibility, Obama Administration, Philosophy: Moral, Science, Science: Climate | Permalink

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Comments

Alan Vanneman said..."In the long run we are all dead." Who said that? Maybe the amount of money we ought to spend to avoid 1% chance of10,000,000 drowned Bengalis in 2110 is zero. Maybe the Bengalis are capable of taking care of themselves. Maybe we oughtspend as much on the Bengalis as they spend on us.

Reply May 17, 2010 at 11:07 AMBill said...Brad,

Doesn't the growth of per capita income cut the other way and tend to increase the appropriate real discount rate? The futurepeople are richer, so given diminishing marginal utility we should give a dollar more weight now than in the future. Thisconsideration gets reflected in the second term of the usual Ramsey-type formula r = delta + eta*g.

I don't agree with using 3 percent for these decisions, especially given Weitzman's analysis of the risk of catastrophe, but I don'tquite get your argument here.

Reply May 17, 2010 at 11:13 AMBrad DeLong said in reply to Bill...Yes, increasing productivity growth increases the social discount rate, but it doesnt affect the gap (whatever that is) between themarket and the social discount rate: it increases the market and social rates by the same amount to first order.

Since Sunstein and company are reading the discount rate off of the U.S. Treasury market, the effects of expected laborproductivity growth are already baked into their 3% per year...

Reply May 17, 2010 at 11:19 AMkid bitzer said..."law professors should simply not be allowed to practice law and economics or moral philosophy without a license--and of howCass Sunstein has never bothered to do the work necessary to acquire a license to practice law and economics."

or moral philosophy, for that matter.

Reply May 17, 2010 at 11:51 AMEbenezer Scrooge said...And as a practicing lawyer let me add--Most law professor should not be allowed to practice law.

Reply May 17, 2010 at 12:33 PMnilso said...I enjoyed reading this because back in 1981-82 when I was taking Political Economy of Natural Resources courses, there was nodiscussion that I recall of 3 distinct discount rates, much less a particular human discount rate. There has been progress. Itgives me a little hope.

Reply May 17, 2010 at 12:55 PM

5/25/10 11:32 AMObama Fail: Why Cass Sunstein Should Not Repeat NOT Repeat NOT!! Be Director of OIRA. Never. No Way. No How - Grasping Reality with Both Hands

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Omega Centauri said...So what do you get if instead of getting richer, due to better knowledge and exploitation of knowledge, we actually get poorer asa result of resource depletion? If I understood your argument right that would imply that since these future humans are goingto be poor ones, we get to apply an even higher discount rate (i.e. their lives don't matter much because they are poor). Giventhat beyond a certain point it seems to be relative status, not the absolute value of one's income that correlates with humanhappiness, doesn't this sound grossly wrong to you.

Reply May 17, 2010 at 01:11 PMJohnny Appleseed said...When you assume the future will be richer, you've ceded the argument. What exactly will we all be consuming (8 times more percapita than at present!), in a world that is destroyed?

Reply May 17, 2010 at 02:08 PMBill Murray said...To me the proper question would be why use cost-benefit analysis? It seems more like a tool to get the answer one wants ratherthan a way to get some sort of even pseudo-objective answer. Especially as economists rarely seem to discuss their assumptionsmuch

Reply May 17, 2010 at 02:19 PMRob said...Bill-Because costs are usually easy to measure while benefits are difficult. It leads to "sensible moderates" taking conservativeoptions when facing many issues.

Reply May 17, 2010 at 02:22 PMMeasure for Measure said...It's my impression that the proper social rate of discount is far from a settled issue among economists.

I'd peg it at a long-run rate of economic growth in the economy - something like 2 or 2.5%. Those in the future will have moregoods and less environment. A dollar's worth of environmental benefits in the future should be discounted by our descendants'greater access to technology and stuff. The tricky part is understanding that you have weigh the tails of expected outcomes, andnot just the central tendency. If Florida or the northeast becomes unlivable -an unlikely but not impossible scenario- then thelong run rate of economic growth could be negative.

--- "We tend to read the money-discount and the real-discount rates off of the market yields on long-term Treasury bonds andon long-term TIPS. But neither is appropriate if what is at stake is human lives and their quality--then something more like theTIPS yield minus the expected rate of growth of labor productivity is appropriate."

Someday I hope to understand that argument. Alas, my intellect is for the moment lacking.

Reply May 17, 2010 at 02:22 PMscathew said...Yeah, Ford did risk analysis on the Pinto and decided it was more cost effective to pay the claims.

In any case, there's no way given the complexity and interconnectedness of life on earth that any tool could contain enoughinputs to determine diddly. If the planet raises 5 degrees and kills of species X, Y, and Z we have no idea what the death of X, Y,and Z will mean to all the other creatures in the proverbial alphabet, particularly ourselves. And that's just one small aspect ofclimate change.

Anyway, it all sounds to me like a bunch pf well meaning but crazy scientists playing god with our futures on a subject to whichscience cannot really be applied. Like when you hear in the 40's they dosed terminal patients with high radiation to see theeffects without ever telling them for "the good of society".

Reply May 17, 2010 at 02:49 PMAnon said..."Today we have 6 billion people on the world with income per capita of $7,000 a year. In 2110 we expect to have 9 billionpeople on the world with income per capita of $56,000 per year."

I used a web based compound interest calculator, and used Brad's .19% growth and got nothing like $56,000. What am I doingwrong?

Reply May 17, 2010 at 03:12 PMfrankcross said...Isn't it more complicated? There's obviously great uncertainty about future deaths. Technology has repeatedly advanced to solveproblems. We may find a very simple, inexpensive bioengineering fix for climate issues, for example. I realize that this reallyshould go into the calculation of future harm, but there's no way to do that. I always figured it was a factor in the humandiscount rate applied to projected harms.

Reply May 17, 2010 at 06:45 PMbakho said...Decisions about our energy future must be made every day.

A power plant built today will still be in existence 50 years from now.

Decisions need to be based on forecasts of the future.

Dithering by Bush (and now Obama) make the future 50 years from now more uncertain.

Set a future goal for carbon emissions 20 years from now, decrease the uncertainty and improve the economics of today'sdecisions.

5/25/10 11:32 AMObama Fail: Why Cass Sunstein Should Not Repeat NOT Repeat NOT!! Be Director of OIRA. Never. No Way. No How - Grasping Reality with Both Hands

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Me: Economists: Juicebox Mafia: Moral

Philosophers:

Reply May 17, 2010 at 07:39 PMDM said...I thought Nick Stern used a discount rate of zero in his report.

Reply May 18, 2010 at 07:27 AMzeno2vonnegut said...Humans and three-toed sloths are beneficiaries of an earth that has provided a stable environment for life and this stability hasbeen driven by life itself. Faced with moderate perturbations to this benign equilibrium the earth has adjusted. We currently"plan" an experiment to test the limits of this adjustment capability as we "intend" to return to the atmosphere in 400 years alarge portion of the C02 sequestered by hydrocarbons over 400,000,000 years. Looking around the solar system, we can seeanother stable equilibrium. From Wikipedia: "A runaway greenhouse effect occurs if positive feedbacks lead to the evaporationof all greenhouse gases into the atmosphere. A runaway greenhouse effect involving carbon dioxide and water vapor is thoughtto have occurred on Venus."

Reply May 18, 2010 at 03:14 PMNathanael said...The Stern report is the only remotely legimiate application of these economic tools to global warming. And it's good work.

But it's also true that we don't need this level of analysis. The *fact* is that any course of action which has a fairly highprobability, say, 10%, of causing the total collapse of human civilization -- and the 'business-as-usual' scenario does -- is worthspending at least that proportion of the entire value of human civilization on preventing. So there really is hardly any price forstopping carbon emissions which is too high.

Reply May 18, 2010 at 09:51 PMComment below or sign in with TypePad Facebook Twitter and more...

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