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...
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.
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.