In the Monday Message Board, Michael Greinecker points to a truly strange response to arguments for a zero rate of social time preference.

Crucial quote

I found myself becoming very curious whether economists who support Sir Nicholas’s social discount rate of zero, such as econ bloggers John Quiggin and Brad DeLong, identify themselves as pro-choice or pro-life, and whether they had considered the Stern Report from this angle.

My response has been anticipated by a commenter who observes

Strange as it may seem to Economist writers, there are phenomena in the world that aren’t particularly illuminated by applying economic concepts. Attitudes towards abortion have nothing at all to do with discounting rates.

Others in the comments thread spell this out.

One odd feature of the Economist blog is that contributions are anonymous. I know that Megan McArdle (aka Jane Galt) has something to with the site. While I’m used to pseudonymous commenters, most economics bloggers are (as Matt Yglesias puts it) proudly eponymous, or at least easily identified, and I find this a more satisfactory mode for arguing about issues like the Stern Review, though can’t exactly say why.

During the discussion of discounting and the Stern Review, I got an email raising a point that I had already been worrying about. In discussing costs and benefits in 2100, I and others routinely refer to future generations, and in a sense that’s right, since the people involved in the discussion won’t be around then. But, children alive now have a reasonable chance of living to 2100 – quite a good chance if life expectancy keeps rising. Economists often deal with this kind of thing by modelling a series of overlapping generations, but I haven’t seen much discussion of this in relation to benefit-cost analysis, though no doubt it’s in the literature somewhere.

I finally got around to thinking about this, and in particular the following question. Suppose we accept an ethical framework in which everyone now alive matters equally. Suppose also that as individuals we have a consistently positive rate of time preference, preferring to have higher utility now at the expense of less in the future, that is, more when we are young and less when we are old (this isn’t obvious by the way, but I’m assuming it for the sake of argument) . What is the appropriate pure rate of time preference for society as a whole?

My preliminary answer, somewhat surprisingly to me, is “Zero”. I’ll set out the outline of the formal argument over the fold, but the simple summary has two parts. First, since generations overlap, if, at all times, we treat all people now alive as equal then we must treat all people now and in the future as equal. Given this equality, positive individual rates of time preference translate not into a social preference for the present over the future but into a social policy that consistently puts more weight on the welfare of people when they are young than when they are old.
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If you want to see the new flexible workforce, go to Walmart (hat-tip Tim Dunlop). As Tim’s title suggests, there’s nothing new about workers being told, from day to day, whether they’ll be wanted and for how long – look at any old movie about the waterfront for illustrations. All that’s new is that it’s being done by computer now. And flexibility, in cases like this, is a zero-sum concept: the more flexibility our bosses have to direct us, the less we have to run our own lives.

Obviously, I’m not the only one who gets annoyed by pieces pointing to purchases of consumer goods as evidence that rising inequality isn’t really a problem. But, as an economist, it particularly annoys me when this claim is put forward by people who claim to understand markets. I’ve been going on about this for yearsand years.

The most important thing that happens in markets is that relative prices change. If prices change, but income and preferences don’t, what we expect is that people will consume more of the goods and services for which prices have fallen and less of those for which prices have risen. So, when Jeff Taylor tells us that

With price points dropping below the $1000 mark, high-end TVs are moving down-market fast with Wal-Mart leading the way.

we can all cheer this renewed verification of the Law of Demand. But, of course, this tells us precisely nothing about what’s happening to inequality.
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