post by Paul Kelleher
Bill and I are currently reading and studying John Broome's new book Climate Matters: Ethics in a Warming World. It is an excellent if deceptively challenging book (Broome's prose is so effortless that one can be led to think mastering the ideas will be, too). I am certain the book will shape the way I think about virtually all matters in public and population health. Indeed, I am currently writing a paper on its main themes that I hope to post here in a week or two.
Broome's chapter on discounting future goods is among the best in the book. He notes that discounting is a common practice in cost-benefit analyses of climate change, and the debate over the proper discount rate has been viewed by many as the ethical question raised by global warming (although Broome would not agree with that, I don't think). I have discussed the issue of discounting a couple of times on the blog, but if you have to choose, read what Broome has to say (naturally).
Broome explains that cost-benefit analysis is a kind of shortcut: economists want to understand the impact that various policies will have on society, and the gold standard would be a way to assess the impacts they will have on individuals' well-being. But economists are notoriously pessimistic about being able to measure well-being directly, so they use a proxy: they measure what individuals are willing to pay for commodities, since these commodities can serve as a proxy for the human well-being they produce in those who enjoy them. The more someone is willing to pay for a given commodity, the more well-being it would produce for that person (if she were to acquire it).
Broome points out what all economists already understand: other things equal, the same commodity will produce more well-being if enjoyed by a poor person than if enjoyed by a rich person. This phenomenon is known as diminishing marginal utility, and it can be present even when the rich person is willing to pay more than the poor person for commodity. So unless the economists' short-cut for measuring well-being takes this phenomenon into account, the shortcut will likely be biased in favor of policies that benefit the rich, since their higher willingness to pay will be interpreted as a higher capacity to benefit. Broome remarks, "Cost-benefit analysts have ways of correcting for [this bias in favor of the relatively rich], but in practice they rarely take the trouble to do so." I have discussed this fact about cost-benefit analysis at length elsewhere.
There is an irony here, however. For Broome also notes that economists standardly discount the importance of future benefits at some positive rate. This practice gives more weight to the enjoyment of a commodity here and now relative to the enjoyment of the same commodity in the future. And one key economic rationale for doing this is that people in the future are expected to be richer. Broome goes on:
If people are richer in the future, that means additional commodities bring less benefit on average to future people than the same commodities bring to present people. A kilo of rice in one hundred years will contribute less on average to the well-being of the people who eat it than a kilo contributes today. This is a good reason for discounting future commodities. Ironically, although cost-benefit analysts generally ignore the diminishing marginal benefit of money when they are aggregating value across people at a single date, their main case for discounting future commodities is founded on this diminishing marginal benefit.
Broome does not pull punches when he goes on to note that the effect of this irony is that it protects the current rich on two fronts: it downplays the case for transfers from the current rich to the current poor (since it ignores the greater capacity of the poor to benefit from the same expenditure), and it downplays the case for transfers from the current rich to future generations (since their well-being is discounted relative to well-being here and now). Broome's view is that if people in the future really will be better off than we are, then we really do have reason to discount the value of future commodities. But this same reason suggests that cost-benefit analysis should no longer ignore the fact that the same commodity brings more benefit to the current poor than it would if enjoyed by the current rich.