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It Turns out the Long Term Does Matter After All

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02/20/2019

It is fairly easy to imagine the regressive left having childishly high time preference; they see some current social ill (homelessness, potholes , student debt, inequality) and want them abolished right away. If your position is: "solve the problem now, damn the future consequences," you show a very high discount rate; future costs pale in the face of the current disaster. Let me use former Fed chairman Bernanke’s famous “Firefighter” analogy to illustrate that this is a common conviction among even the moderate left. Fighting back against fears over moral hazard as objections to the Fed’s lender-of-last-resort policies during the financial crisis, Bernanke answered:

"You have a neighbor, who smokes in bed... Suppose he sets fire to his house… “You might say to yourself . . . ‘I’m not gonna call the fire department. Let his house burn down. It’s fine with me.’ But then, of course, what if your house is made of wood? And it’s right next door to his house? What if the whole town is made of wood?” The editorial writers of the Financial Times and the Wall Street Journal in September 2008 would, presumably, have argued for letting the fire burn. Saving the sleepy smoker would only encourage others to smoke in bed. But a much better course is to put out the fire, then punish the smoker, and, if necessary, make and enforce new rules to promote fire safety.

The same point can be made in Krugman’s love for government spending: the cost and problems of future budget deficit are of no concern in the midst of a recession — we’re facing disaster now and must solve that now. In other words: very high discount rates apply.

And if the left stayed with their child-like levels of discounting the future, it would be a quirk of their convictions (perhaps biology) that we may object to on other grounds. But, when it suits them, they conveniently opt for extraordinarily low discount rates instead:

Are We Concerned About the Long Term or Aren't We?

Here’s an example. Imagine you face a costly, damaging disaster 100 year hence. You could either absorb the cost way off in the future, or build up preparations for that cost now. Building preparations would reduce the damage down the line, but at the expense of your current standard of living – you need to sacrifice some present resources to avoid damage down the line. Add some numbers and even college sophomores can solve this conundrum: you discount the future costs by the compounded yearly interest rate, the rate at which you discount the future. For purposes of illustration, you may perceive of this as the rate of return you may have earn on the sacrificed resources. Should this amount be bigger than the cost of the disaster, you’d rather just stash the money and await the bill.

But now let’s pretend that this was an example of the future costs of climate change and how to deal with them. In that scenario, the Left’s argument would have been one of insanely low discount rates; the livelihoods of those not-yet-born are of utmost importance, +2 degrees Celsius in the year 2100 would be a catastrophic event – indeed the “collapse of civilization” itself. In stark contrast to the urgent high-discount rate stories above, economists of less preachy persuasion argue over which discount rates to use in assessing the future damage of climate change. Surprisingly, the most aggressive leftists, those adamant on preventing societies current ills above, have now flipped one-eighty, and argue for astonishingly low discount rates – even flirting with zero, so as to increase the weight put on future costs, and increase their present discounted value.

When the topic involves poverty, bank failures , unemployment or inequality, the advocates of whatever fashionable policy is urgently needed implore us to take immediate action, almost regardless of the costs down the line. Enter climate change and this seemingly changes everything. For some unfathomable reason climate change means that the living conditions of non-existing peoples of the future are now supremely valuable (over and above the currently living ones). Whereas, say, homelessness or poverty require us to consider the currently living. Concerning climate change, the picture shifts to the valuation of those yet unborn. The future state of society a century hence is all that matters – in a way entirely foreign to the damn-the-consequences position of other topics.

To add insult to injury, the Left pretends that their position is entirely consistent, indeed inseparable, without realizing that their implied discount rates are at cross-purposes. Either the future is immensely important, at which point current “solutions” with long-term costs like budget deficits and bank bailouts are ruled out, or the future is not very important, at which point measures to combat climate change are largely unneeded. Pick one.

Joakim Book is an economics graduate of the University of Glasgow, and is currently a graduate student at the University of Oxford. He writes regularly at Life of an Econ Student

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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