Obama 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 Hands The Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-Handed Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.
Economics 210a Weblog Archives DeLong Hot on Google DeLong Hot on Google Blogsearch May 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 on how expensive the damage will be — on what economists call the social cost of carbon. Sunstein and others in the government have spent several months trying to define this cost, and he talked me through the process. One of the most important issues is the discount rate — the depreciation of money over time. All else being equal, if given a choice between paying $1 million now and $1 million five years from now, economists will choose to pay later. After all, if money depreciates at say, 3 percent a year, then spending $1 million today is the equivalent of spending only about $860,000 of today’s dollars five years from now. Over very long periods, like those involved in climate change, the discount rates that are applied to short-term problems like budgets build toward absurdity: using one common method, spending $1 million today to forestall climate change would be the equivalent of spending $2,300 in 2100. Calculations like this seem to argue against doing anything now. The problem, Sunstein says, is that we might do irreversible damage to the planet while blithely waiting for the price of action to drop just enough.... As an academic, Sunstein seemed to side with economists like William Nordhaus at Yale, who set the discount rate at about 5 percent, which would counsel patience. “It’s not clear what direction 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 be bad also.” A low a discount rate might protect the environment by spurring us to sacrifice now — while damaging the economy, increasing poverty and putting more people out of work. The difficulty is that the experts are lined up “out the door 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 moral philosophy without a license--and of how Cass Sunstein has never bothered to do the work necessary to acquire a license to practice law and economics. First, "irreversible damage": we are doing irreversible damage to the environment every day in that every day human activity brings more species closer to extinction, and natural or artificial selection would never be able to resurrect them no matter how much 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, and does nothing other than perform the function of getting him onto Obama administration message without admitting that he does not understand why the cost-benefit analysis tools he loves so much are leading him to what is for an Obama administration 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 because Sunstein does not understand how to use them. Nick Stern's Climate Change Report uses the same tools and leads to a very different conclusion than "argu[ing] against doing anything now." The shortcut way to understand why is that there are actually three 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 their quality. (Plus there are risk adjustments that I won't go into here.) We tend to read the money-discount and the real-discount rates off of the market yields on long-term Treasury bonds and on long-term TIPS. But neither is appropriate if what is at stake is human lives and their quality--then something more like the TIPS yield minus the expected rate of growth of labor productivity 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% per year. 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.
http://delong.typepad.com/sdj/2010/05/obama-fail-why-cass-sunstein-sho…ot-repeat-not-repeat-not-be-director-of-oira-never-no-way-no-how.html
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Obama Fail: Why Cass Sunstein Should Not Repeat NOT Repeat NOT!! Be Director of OIRA. Never. No Way. No How - Grasping Reality with Both Hands
5/25/10 11:32 AM
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 given tragedy were the same in inflation-adjusted dollars in 2100 as it is today--if the amount of real value we would wish to spend to avoid a chance of 10,000,000 Bengalis drowning in 2110 would be the same as the real value we would spend to avoid a chance of 10,000,000 Bengalis drowning in the next hurricane season. But it won't be: we expect technology to progress over the next ninety years, and thus for us to be capable of and want to and be willing to spend much more money to guard against human catastrophes a century hence. 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 billion people on the world with income per capita of $56,000 per year. Thus we expect that inasmuch as they will be richer than we are that they will value human lives and high quality lives more highly in real values and be willing to spend 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 in real 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, Moral Responsibility, Obama Administration, Philosophy: Moral, Science, Science: Climate | Permalink Favorite
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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 of 10,000,000 drowned Bengalis in 2110 is zero. Maybe the Bengalis are capable of taking care of themselves. Maybe we ought spend as much on the Bengalis as they spend on us. Reply May 17, 2010 at 11:07 AM Bill said... Brad, Doesn't the growth of per capita income cut the other way and tend to increase the appropriate real discount rate? The future people are richer, so given diminishing marginal utility we should give a dollar more weight now than in the future. This consideration 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't quite get your argument here. Reply May 17, 2010 at 11:13 AM Brad 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 the market 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 labor productivity growth are already baked into their 3% per year... Reply May 17, 2010 at 11:19 AM kid bitzer said... "law professors should simply not be allowed to practice law and economics or moral philosophy without a license--and of how Cass 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 AM Ebenezer 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 PM nilso said... I enjoyed reading this because back in 1981-82 when I was taking Political Economy of Natural Resources courses, there was no discussion that I recall of 3 distinct discount rates, much less a particular human discount rate. There has been progress. It gives me a little hope. Reply May 17, 2010 at 12:55 PM http://delong.typepad.com/sdj/2010/05/obama-fail-why-cass-sunstein-sho…ot-repeat-not-repeat-not-be-director-of-oira-never-no-way-no-how.html
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Obama Fail: Why Cass Sunstein Should Not Repeat NOT Repeat NOT!! Be Director of OIRA. Never. No Way. No How - Grasping Reality with Both Hands
5/25/10 11:32 AM
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 as a result of resource depletion? If I understood your argument right that would imply that since these future humans are going to be poor ones, we get to apply an even higher discount rate (i.e. their lives don't matter much because they are poor). Given that beyond a certain point it seems to be relative status, not the absolute value of one's income that correlates with human happiness, doesn't this sound grossly wrong to you. Reply May 17, 2010 at 01:11 PM Johnny 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 per capita than at present!), in a world that is destroyed? Reply May 17, 2010 at 02:08 PM Bill 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 rather than a way to get some sort of even pseudo-objective answer. Especially as economists rarely seem to discuss their assumptions much Reply May 17, 2010 at 02:19 PM Rob said... Bill-Because costs are usually easy to measure while benefits are difficult. It leads to "sensible moderates" taking conservative options when facing many issues. Reply May 17, 2010 at 02:22 PM Measure 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 more goods 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, and not just the central tendency. If Florida or the northeast becomes unlivable -an unlikely but not impossible scenario- then the long 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 and on long-term TIPS. But neither is appropriate if what is at stake is human lives and their quality--then something more like the TIPS 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 PM scathew 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 enough inputs 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 of climate 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 which science cannot really be applied. Like when you hear in the 40's they dosed terminal patients with high radiation to see the effects without ever telling them for "the good of society". Reply May 17, 2010 at 02:49 PM Anon 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 billion people 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 doing wrong? Reply May 17, 2010 at 03:12 PM frankcross said... Isn't it more complicated? There's obviously great uncertainty about future deaths. Technology has repeatedly advanced to solve problems. We may find a very simple, inexpensive bioengineering fix for climate issues, for example. I realize that this really should go into the calculation of future harm, but there's no way to do that. I always figured it was a factor in the human discount rate applied to projected harms. Reply May 17, 2010 at 06:45 PM bakho 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's decisions.
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Obama 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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Reply May 17, 2010 at 07:39 PM DM said... I thought Nick Stern used a discount rate of zero in his report. Reply May 18, 2010 at 07:27 AM zeno2vonnegut said... Humans and three-toed sloths are beneficiaries of an earth that has provided a stable environment for life and this stability has been 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 a large portion of the C02 sequestered by hydrocarbons over 400,000,000 years. Looking around the solar system, we can see another stable equilibrium. From Wikipedia: "A runaway greenhouse effect occurs if positive feedbacks lead to the evaporation of all greenhouse gases into the atmosphere. A runaway greenhouse effect involving carbon dioxide and water vapor is thought to have occurred on Venus." Reply May 18, 2010 at 03:14 PM Nathanael 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 high probability, say, 10%, of causing the total collapse of human civilization -- and the 'business-as-usual' scenario does -- is worth spending at least that proportion of the entire value of human civilization on preventing. So there really is hardly any price for stopping carbon emissions which is too high. Reply May 18, 2010 at 09:51 PM Comment below or sign in with
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