Discounting for future generations: the consensus?

I have discussed a few times the difficulty of figuring out what the proper discount rate should be when evaluating the impact of environmental policy, and in particular how small changes in that rate can have a huge impact on outcomes. See posts I, II, III, IV. And if there is so much disagreement and this matters so much, why not convene all the arguers and get them to agree on a common document?

This is what the US Environmental Protection Agency did , and the resulting document is co-signed by Kenneth Arrow, Maureen Cropper, Christian Gollier, Ben Groom, Geoffrey Heal, Richard Newell, William Nordhaus, Robert Pindyck, William Pizer, Paul Portney, Thomas Sterner, Richard Tol and Martin Weitzman (no Nicholas Stern, I note). They agree that the proper tool to determine the discount rate is the Ramsey formula. No big surprise here. They agree that a crucial component of this formula is the expected future growth rate of the economy, and that this is very difficult to obtain. And this is as far as they got. No magic number, after all they are economists. I wonder whether biologists could now be convinced that we actually need a discount rate.

HPEC

If you are a high school student, or teach economics to high school students, you most definitely will want to click here.

Time preference may vary across goods

When we model intertemporal choices, we usually go with a single consumption good, which means (up to some aggregation assumptions) that all goods have the same intertemporal elasticity of substitution and economic agents have the same risk aversion for each. Or that somehow any dispersion would not matter through aggregation. Is there any evidence of such dispersion?

According to Diego Ubfal, there is, and it is considerable. Using a quite large experimental survey of 2400 people in rural Uganda, he finds that the monthly discount rate goes from 110% (meat) to 66% (salt). And unlike this literature, this paper does not assume linear utility and goes through the trouble of estimating the curvature of the utility function as well (without reporting results, though). I wonder, however, how seasonality may play in this. For households that are that poor and who have to live from day to day, it is perfectly understandable that the rate may vary widely whether the good is in season or not, whether one is in a period of the year with relative slack on the budget or resource constraint, and add to this whether the size of the remuneration from the experiment may distort things. Still, this is an interesting and detailed study.

The slow recovery is even more man-made than the start of the recession

I have argued before that this past recession is to a large extend policy-maker made. While there did not seem to be any fundamental reason (in the real economy sense) for a contraction, the problems in the financial sector have been talked up and aggravated both in Washington (I, II) and Brussels/Frankfurt. And these self-fulfilling actions of the politicians have made things so bad that we may have ended up with large, permanent shock to the economy.

What does all imply for the ensuing recovery? For the US, Kathryn Dominguez and Matthew Shapiro use policy announcements and news reports to see how they have influenced forecasts of the inevitable recovery. And, surprise, it looks like all this politicking on both sides of the pond has slowed down the US recovery significantly in the US, and by extension in Europe as well I would say. In each of 2010, 2011, ans 2012, initial positive forecasts for the year had to be downgraded. That may be a bias towards optimism by the forecasters, as Reinhard and Rogoff have warned that the recovery will be slow. Or it is the politicians' fault. And we may have had a bad permanent shock.

A Profile of Stanley Fischer

In the Washington Post.  Stan was my PhD dissertation adviser.

England's Comeuppance to EU Exit: Scots Exit UK

British politics are weird. No sooner did British Prime Minister David Cameron appease Eurosceptics within his party by promising a referendum on the UK remaining in the EU by 2017 that he warned the independence-minded Scottish National Party (SNP) about breaking away from the United Kingdom through a yes vote in their referendum scheduled for next year meaning its automatic exit from the EU. In other words, he is offering his compatriots a decisive break from the European project while threatening his Scottish peers that breaking away from the UK would mean they would no longer be in the EU. In one case, EU membership is cast by the same person in a negative light and in the other in a positive light depending on the audience in question. It hinges on the understanding that Scotland is far more positive about remaining in the EU than England is.

The question surrounds the meaning of nationhood for international treaties to which Scotland was privy to as part of the UK. If Scotland attains independence, will it have to go through the entire process all over again as a new nation? The weight of opinion says "yes":

The British government on Monday intensified its campaign to stop Scotland leaving the United Kingdom, publishing a legal opinion saying it would forfeit its membership of international bodies such as the European Union if it chose independence. The pro-independence Scottish National Party (SNP) that runs Scotland's devolved government plans to hold a referendum on emotionally charged subject next year, and has played down the impact of a "Yes" vote on Scotland's international status.

But the 57-page legal opinion - drafted for the British government by two independent experts on international law - said the implications could be far-reaching, likening the situation to the 1991 collapse of the Soviet Union when Russia was declared the USSR's legal successor but the 14 other Soviet states had to forge their international relations anew. The overwhelming weight of international precedent suggested Scotland would be legally deemed a "new state", it said - a scenario that would force it to re-apply to join international bodies such as the EU, the United Nations and NATO.

Scotland is also holding on to the ideas that the English will readily allow the former to keep the pound and that (declining) revenues from the North Sea oil fields will keep the new state afloat:

The government's intervention came as a panel of experts, including two Nobel prize-winning economists, issued a report saying the SNP's plan to keep the British pound in the event of independence was a sound strategy, suggesting it would also be wise to keep the Bank of England as the central bank.

The SNP argues that North Sea oil revenues combined with Scotland's fishing, farming and whisky industries would be enough to keep an independent Scotland solvent. But critics say the oil is running out, that Scotland would lose disproportionately generous British government subsidies, and that it would struggle to raise enough tax to pay its bills.

It's a neat case of "what goes around comes around" to isolationist English alike those in the ruling Conservative Party: So you want to leave the EU but don't want to allow the Scots to leave the UK, eh? You likely can't have it both ways. And here's the clinching irony of it all: If the UK voted in a (Tory-sponsored) referendum to leave the EU, English parliamentarians cannot suggest that Scotland will lose the benefits of EU membership by declaring independence since they will all have left the European Union.

As I said, British politics are weird--more so if they involve Europe.There is impeccable retro-imperial logic to it all in that Rule Britannia would of course not have tolerated supranational authority alike the EU while thinking it impossible that Scotland could ever break away.

Of Quota Reform and American IMF Hegemony

Two things strike me as notable with the recent news that the US plans to finalize changes in the shares of quotas at the IMF and thus the voting rights there:

1. Given that the US has effective veto power at the IMF by virtue of having more than 15% of quota shares when a quorum of 85% is necessary to make a decision, it alone has the ability to unblock the quota reform process which remained deadlocked during the 2012 presidential elections at a time when it has become by far the world's largest debtor:

The Obama administration is hoping to move ahead shortly with legislation to finalize IMF voting reforms agreed in 2010, which will make China the third-largest voting member in the global financial institution, a senior U.S. official said on Saturday. The official, speaking at the end of a Group of 20 meeting of finance ministers in Moscow, said the administration was actively discussing legislation with relevant members of Congress.

The 2010 package cannot be finalized until it gets the go-ahead from the United States, which has effective veto power over the historic deal that was meant to have been approved by all IMF member countries in October last year, but was stalled by the U.S. presidential election.

2. For all the hullabaloo about China becoming the IMF's third-largest shareholder and giving LDCs more of a voice in the institution, its head remains a European by tradition. What's more, the ultimate percentage of quotas shifted from developed countries to developing countries is actually not all that large at--wait for it--a 6% realignment:

This completes the 14th General Review of Quotas with an unprecedented doubling of quotas and a major realignment of quota shares—a shift of more than 6 percent from over-represented to under-represented members and a more than 6 percent quota shift to dynamic emerging market and developing countries. 

Why does it take so much time to accomplish relatively little?