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More on the Long-Run

Two or three days ago on the radio – I think NPR, but I don’t recall with certainty – I heard a report on climate-change research. This report was prompted by William Nordhaus being named co-winner of the 2018 Nobel Prize in Economic Sciences. The reporter mentioned, correctly, that estimates of the size of the optimal tax on carbon emissions depend on the rate of discount – that is, on the rate at which we today discount well-being in the future relative to well-being today.

In practical terms, the higher the rate of discount, the greater the value we attach to consumption today relative to consumption tomorrow. Someone with an infinitely high “time preference” (as economists sometimes call it) cares nothing about even the nearest future and only about the now. Such a person would use a pricey wooden dining-room chair for firewood rather than spend the extra few minutes that are required to fetch a fire log from the pile of firewood stored outside of his home. (Overlook the fact that such a person is extremely unlikely to have a home in the first place.)

Someone with a zero time preference cares about today and next year and 100 years from now and 1,000 years from now and 100,000 years from now equally. Such a person is just as happy to have a meal served to her today as to have a certain prospect that that same meal will be served to her 10,000 years from now. (Overlook the fact that this person will not be around to enjoy the meal 10,000 years from now.)

Clearly, every human being has a time preference somewhere between zero and infinity. Most of us care about the future, but we care less about the future than we care about the now, and our concern for the future diminishes the further out is the future from the now.

An upshot of the above, rather obvious observations is that ‘optimal’ government policies are not designed to maximize our ability to consume today. But also such policies “discount” the future: a policy that promises $1,000,000 of net gains in 2029 is not as good as a policy that promises $1,000,000 of net gains in 2019. And a policy that promises $1,000,000 of net gains in 2030 is even less valuable to us in 2018 than is the policy that promises net gains of $1,000,000 in 2029.

Because the (vast majority) of any ill-effects that might be caused by today’s carbon emissions will occur only in the future, the more eager someone is for government to restrict carbon emissions today, the more likely is that person to argue for a low, or even zero, rate of time discounting. “We should care about the earth and humanity 1,000 years from now no less than we care about the earth and humanity today!” – such a person might proclaim.

This post is not about the reality of climate change; it’s not about its causes; it’s not about its consequences; it’s not about the ‘best’ ways to deal with it. Instead, this post is about an inconsistency that many people, especially on the political left, exhibit in their policy proposals.

Over the years I’ve encountered many people – on the political right and left (and middle) – who object to free trade at least in part on the grounds that the short-run adjustment costs are high enough to warrant trade restrictions. That is, these people might grant that in the long-run the benefits of free trade will be positive, but the long run is, well, in the future. We should care about the workers who today loses their jobs and the business owners who today suffer bankruptcy.

A similar attitude is at work in many discussions of immigration policy. The short-run adjustment costs of more open immigration are often alleged to be high enough to overwhelm whatever net long-run benefits a policy of more-open immigration might produce.

How many are the people who, on one hand, support restrictions on trade and immigration on the grounds that the future gains from less-restrictive policies should be discounted heavily, and who, on the other hand, insist that, when it comes to the environment, the future should, if discounted at all, be discounted only at a very low rate?

I don’t know the precise answer to my question, but I do know that a decent answer is “Quite a few.” Such people are deeply inconsistent. If higher carbon taxes and stricter environmental regulations are justified today with the argument that even the far-distant future – beyond our lifetimes – is nearly as important to us as is today, then the long-run consequences of freer trade and more open immigration policies should be all that matter; their short-run consequences should be completely ignored.

Obviously, government policies should discount the future but not completely so. Unfortunately, given the unusually short time horizons of elected officials, government policies almost always give undue weight to the here and now and too little weight to the future.


The above post is little more than a rehash of my very first post ever at Cafe Hayek.