Ben Groom (LSE): “Discounting the Future: Comparing Expert Views of Economists and Philosophers”

Abstract: Discounting the long-term future has been described as “one of the most critical problems in all of economics” (Weitzman 2001: 260), not least because small changes in the discount rate can substantially alter the recommended stringency of climate policy (Arrow et al. 2013). Views among economists on the appropriate discount rate have differed to such an extent that this source of disagreement was portrayed as equally important as scientific uncertainty about climate impacts when considering the sensitivity of optimal policy choices to underlying modeling assumptions (US-NAS 2016). The disparity between the opinions on what is the appropriate way to strike a balance between current and future costs and benefits results from both uncertainty over the future and differences in ethical beliefs. Forecasts about long-term economic growth, as well as future climate change damages, will become more precise over time as better information becomes available, yet disagreements on matters of ethics are likely to remain largely irreducible (Freeman and Groom 2015, Heal and Millner 2014).

The views of experts on discounting play an important role in public policy. Expert advice on social discounting has been sought from specialists in the field, among others by the United States Environmental Protection Agency (US EPA), and the Norwegian, French, UK and Dutch governments. In particular because economic experts do not command any special expertise in matters of ethics, the role of experts in providing the `raw’ materials for social discounting policies has been called into question. One typical criticism is that guidance on social discounting should be informed via more `democratic’ means (Dasgupta 2008: 158).

This paper makes an important step towards examining to what degree economic experts are representative by eliciting recommendations on social discounting from a disciplinary group that most might agree have more expertise in matters of ethics compared to economists: experts from (political) philosophy. Specifically, we compare results from a recent survey of over 200 experts, defined by virtue of their high-ranking publications in economics journals, with responses from a survey that will be sent out in early December to around 50 philosophers, who have made relevant contribution to intergenerational decision-making, in particular social discounting.

The survey structure is the same for both groups allows disentangling the long-term SDR into its component parts, including pure time preference (δ), the wealth effect (ηg) and return to capital (r) (see Drupp et al. 2015). For the economic experts, the mean recommended SDR is 2.3% and more than three-quarters of experts are comfortable with the median SDR of 2%. Yet the divergence of individual opinions remains wide, with a range from 0% to 10%.  The Ramsey rule, either in its strict form (r = SDR = δ+ηg) or its Social Rate of Time Preference (SRTP) form (δ+ηg), has been the workhorse representation of the SDR, as can be found in government guidelines across the world (Arrow et al. 2013).

Disagreements on discounting have often centered on the components of the Ramsey rule (e.g. Nordhaus 2007; Stern 2007), which is seen as a “useful conceptual framework for examining intergenerational discounting issues” (Arrow et al. 2012). The Drupp et al. (2015) survey provides evidence that many economic experts think differently: 63% of respondents recommend a SDR that is incompatible with either their forecasted risk-free interest rate or their imputed SRTP. Only 20% of experts recommend a SDR that coincides with the SRTP interpretation, and only 10% of experts provide responses for each component that are consistent with the strict Ramsey rule. Important reasons for these divergences may be found in the rich body of qualitative responses, which highlight that policy must engage with issues that transcend the confines of the simple Ramsey rule. Many remarks highlight that social discounting must account for a more comprehensive set of issues, such as uncertainty or relative price effects. The responses also highlight the need for attention to be paid to procedural issues in long-term decision-making. For example, experts recommend that public choices on discount rates and long-term policies should include other criteria, such as notions of sustainability.

This paper will compare expert views from economics and philosophy across the different quantitative measures on individual determinants of the SDR. This will allow drawing conclusions on how representative those economic experts with policy influence are. Besides these quantitative analyses, we will put a specific focus on comparing the qualitative issues raised by both experts groups, which may point in important directions where scientific research on discounting may be undertaken in the future and policy might have to be revised.

[This is a joint work with Moritz A. Drupp, Mark C. Freeman, and Frikk Nesje.]

Ben Groom is Associate Professor in LSE’s Department of Geography and Environment and an Associate of the Grantham Research Institute on Climate Change and the Environment.

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