Discount your kids? (!)
From the Economist’s Green.View – How to Value a Grandchild:
When economists do a cost-benefit analysis, they try to place a present-day value on benefits assumed to be enjoyed in the future. To do this they discount the future value by an annual percentage rate, a discount rate, which is typically set at around 3-5%.
But such calculations are typically done for benefits expected to come in 20, 30 or, at most, 50 years’ time. Climate-change economics requires a time horizon of centuries. A typical discount rate would assign almost no current value to benefits accruing in, say, the 23rd century. So why spend money today on something with no apparent value today?
Sir Nicholas argues that, in this case, we are wrong to use a typical discount rate. How can we say that our great-great-great-grandchildren are worth less than we are worth ourselves? He argues for a discount rate of 0.1%. That places a much higher present-day value on benefits accruing centuries into the future, and thus makes a stronger case for spending money now.
Now I’m a huge believer in the value of discount rates. I spent most of my career (as a fixed income trader) eating, sleeping and breathing discount rates. Net present value is the prism through which I look at pretty much every economic outcome… and yet. And yet, the notion that there is no (net present) value (NPV) in future generations – which to be fair is the logical reductionist conclusion one would come to by mechanically applying a conventional discount rate to the economic value a century or two forward – is so obviously wrong. Probably a doctoral thesis in economics in there somewhere to explore and articulate why and when the concept of NPV breaks down. Some sort of generational phase transition? Akin to classical physics giving way to quantum physics past a certain threshold?
But whether or not there is a Nobel prize up for grabs in working the details out, I think most of us will be able to get along with no more than the idea that, in the long run, if we’re all dead, everything else is well…moot.
I’d love somebody to articulate it better (I like to think I could but I’m lazy…) because I remain staunch in my belief that understanding and harnessing the power of NPV is the key to financial success and security in our world. (And if understanding this concept was made a requirement of gaining a high school diploma, that there would be a much smaller pensions crisis and fewer millionaires on Wall Street or in the City…) But refuse to subscribe to the dismal dogma that says I should apply this thinking with just as much zeal to value my future descendents. If that’s being hypocritical, well then so be it. But I’m certain it’s not… proof welcome!
(btw ever hear of Hugg? does the world need a ‘green’ Digg?)
