Welcome to the lesson Valuing Our Future. In this lesson, we will explore how economists value the future. Dan Sherrel, a 26-year-old writer, wrote a popular memoir in 2020 about climate change. He wrote that when he was a child, he caught a salamander and kept it in a jar with rocks and grass. One day the salamander disappeared under the rocks and was never found again. Where did that animal go? Like the salamander, climate change is wiping out many of our species. Children cuddle with furry cloth elephants and hippopotamuses, but may never encounter an elephant or hippo because of their dwindling wild populations. In 2022, the UN Intergovernmental Panel on Climate Change, argued the heat in the Earth's atmosphere, oceans, ice flows, and on land is irreversible. Though there is still time to limit climate change. We have to move fast. Economists need to help society weigh the high current cost of aggressively reducing carbon dioxide and other greenhouse gas emissions to quickly improve air quality and stabilize global temperatures in 20 to 30 years. Economists need to help society weigh the future costs against the future benefits. How do they do that? Many familiar animals will be extinct in your great- grandchildren's lifetimes. And whole groups of humans will be in unlivable places racked by flooding, drought, and fires because of climate change. But how much are you willing to pay now to avoid that future? All public policy and human decisions are made in one way or another over the value of the future. Take the question of how much an individual invests now to get a benefit later. How much we are willing to give up now for benefits later, depends on the discount rate. The concept of the discount rate is used to value things, actions, and developments in the future in terms of present values. Think of the interest rate as a discount rate. The rate determines how much you get paid for postponing something in the future. When your personal discount rate is low, you value the future as if it were the present. You don't discount the future very much. You will save and you will invest. Lift that concept up to the society level. It means if the social discount rate is low, society values of future by valuing the things we will lose in the future as if that loss is happening now. A low discount rate creates urgency and justification for investing to mitigate the climate crisis. A salamander tomorrow is brought forward as if it is a salamander today. The discount rate connects us to the future. Getting the social discount rate right is important because policymakers use it as a guide to calculate future benefits against the current cost of mitigating the harms of climate crisis. An example is if you and society value a hippo in 10 years and you value it as $10,000. How much would you pay now to make sure that hippo exists? Pure math says, if you are societies discount rate is three percent, you'll pay $7,442 now if the discount rate is three percent. But only $5,585 if it is six percent. If the social discount rate is low, you value the future hippopotamus more now. How much do you value clean air in 10 years? A lot more if the discount rate is low, a society with a low discount rate will spend a lot more now to clean the air and save that hippo. Researchers from the London School of Economics found that society needs low discount rates to pay the cost of reducing greenhouse gases. They found that those who argue against climate change use high discount rates to make their case. To know the social discount rate is to know everything. The climate activists trick is to bring the future forward. In other words, the passionate climate activist wants our society to have a lower discount rate. A lower discount rate values things in the future as larger than if we did not value the future. A society with a low discount rate sees the value of the forest existing in 20 years and will spend a lot now to mitigate the risks of those forests. That society doesn't mind paying high taxes because they will have something more valuable in the future. Society feels that tomorrow's hippo is today's hippo. A person who thinks for the welfare of their grandchildren's children, probably has a lower discount rate than someone who can't imagine future generations. Two main elements determine a society's discount rate. One, a prediction about how abundant people will be in the future and two, society's ethical framework. If you think future generations will be rich and the earth plentiful, current investments will multiply robustly, and future generations don't have to be spared. They can afford to pay the price of environmental erosion when it comes up. The optimistic current generation doesn't spend a lot of climate mitigation. This view has a high discount rate, and was economist John Maynard Keynes' position back in the 1940s. But the pessimistic and sad Dan Sherrel, that 26-year-old activist, and the Intergovernmental Panel on Climate Change realizes that the carbon dioxide we emit now will stay in the atmosphere for very long time, heating up the earth and causing limitations on future generations. If you are like Dan and the IPPC, you think future generations will not be so rich. If you are coming to realize that the emissions we produce now will influence economic growth centuries into the future, your discount rate is falling fast. A low discount rate supports the view that we should act now to protect future generations from the impact of the climate crisis. A low discount rate implies a less rich future, and therefore the idea that future generations will not enjoy relatively large amounts of resources. A low discount rate implies that the well-being of our children, and their children's children is brought forward and given more importance in cost-benefit analysis. Ethical considerations also determine the discount rate, what is just for future generations. Is it great news for advocates of climate mitigation that in one survey, most economists favored a low discount rate because of uncertainty and alternative ethical approaches? We economists are a conservative bunch, and we economists do understand the importance of investing to mitigate climate change. But a survey of hedge fund managers and the extraordinarily rich, would yield a higher discount rate because they generally believed the economy will grow and grow so that future generations will have enough prosperity to pay for the costs that we impose now. The young writer, Dan Sherrel, sees a less abundant future. But that was not the typical view just a few decades ago, John Maynard Keynes, one of the world's most important economists over the last 200 years, also philosophized about the future. I mentioned him before, he was 47 when he wrote his version of Sherrel's memoir in 1930. That essay was called the Economic Possibilities of Our Grandchildren. The Great Depression had not started, the world economy was thriving, and the Second World War was nowhere in sight. Like young Sherrel, Keynes in his essay, issues a call to action, but in a very different way. He calls us to live in the present and for economists and policymakers to care deeply about present conditions. He is exceedingly optimistic about the future. Had Keynes known what we know today, Keynes probably would've changed his mind and call for public investments to stop the climate crisis. His optimistic view suffered from not having the benefit of current ecological and environmental literature. Our politics now is attention between a call to consume now and hope that technology will save humanity in the future to highly discount the future, and between Sherrel's plea and the IPCC to cut consumption now, to save the future. To be fair, Keynes would have certainly backed Sherrel's call to move away from private consumption of swimming pools and toward social investment in solar panels. With 90 years of hindsight, we can't fault Keynes for not considering the drag of production caused by inequality and the climate crisis. Keynes discount rate may have been too high, but he, like Sherrel, had the same goal to bring the future closer. Keynes writes in the Economic Possibilities to our Grandchildren, we economists should aim to improve our measures of the future. Remember that growth depends on equity and bring forward and more highly value our grandchildren's possible experience for the planet. In this lesson, we discussed how economists use a discount rate to value the future and the difference between the evaluation of the future, a century ago and today. In the next lesson, we will wrap up this module and our entire course with our final thoughts about the path forward.
