Monday, March 17, 2008

Real-world economics

The current real-world economics review is now available free online. There are a couple of provocative short papers I liked by Nobel Laureates Ken Arrow and Joe Stiglitz. The Arrow piece argues that controversy over choice of the discount rate does not bring into question the conclusions of the Stern Review - for discount rates less than 8.5% the Stern's Review's conclusion that the benefits of mitigation exceed the costs are valid*. Stiglitz's piece builds on earlier attempts to build the Iraq war into a picture of the likely development of the global economy. He argues that a repeat of the stagflationary experiences of the 1970s and 1980s is a likely consequence of the war.

This is becoming a classy, readable, generalist journal and, as it is free, I recommend subscription to anyone vaguely interested in the economic view of our world.

*In the same issue an Aussi Ted Trainer takes issue with the Stern Review's estimates of the required extent of mitigation (Arow accepts this as accurate) claimimg it is a gross underestimate. To the contrary Trainer argues for a global abandonment of affluent enery-intensive lifestyles.

11 comments:

derrida derider said...

The review certainly has a better name now - as a father of a quite gifted kid with a form of autism, I always thought it a bit politically incorrect for comfort.

It was also offensive to economists too, though of course some of them deserve to be offended. To quote JK Galbraith "We are taught that it is our duty to comfort the afflicted. But it is surely also our duty to afflict the comfortable".

hc said...

I agree - not just politically incorrect but offensive and inaccurate.

Anonymous said...

What was it called before? Non-autistic economics?

Spiros

Anonymous said...

Harry:

If you think Arrow is right about the use of the almost non-existent discount rate in Stern's report, when do you a discount rate is applicable... Ever?

He used a cost of capital which Mark Hill says was 1/70th of that which should have been used.

Hill also calculated that using even Sterns distortions it would be economically better to do nothing than mitigate.

What do you say about that, harry?

JC

Anonymous said...

JC, it wasn't the discount rate that was nearly zero in Stern, it was pure rate of time preference. These are different concepts. (The discount rate = the pure rate of time preference plus other things).

Stern's discount rate was 1.4%, which is about 1/4 the size of conventional discount rates, not 1/70.

Uncle Milton

Anonymous said...

Milton:

thanks for the lesson.

I said that the cost of capital used was 1/70th. You understand what it is?

JC

Anonymous said...

JC, cost of capital and discount rate are exactly the same thing.

Uncle Milton

Anonymous said...

Milton:

So you time preference is zero?

Anonymous said...

JC, an individual's preference is irrelevant to this discussion. Stern's argument is that for society as a whole, the welfare of future generations should not count less than the current generation, simply because they will live in the future (apart for allowing for the very small probability that future generations will not exist because of some huge calamity like a nuclear holocaust. So the pure rate of time preference is almost, but not quite, zero. (There are other reasons to discount future benefits and costs of climate change mitigation, so the overall discount rate is not zero).

For individuals, it is a different matter altogether, because they know they have finite lives. Individuals' pure rate of time preference is usually thought to be about 2% per year.


Uncle Milton

Anonymous said...

Milton

That's nonsense, otherwise we shouldn't use discount models for long range pricing and valuations.

Not applying a discount rate for generations that aren't born is absolutely laughable.

I couldn't think of one reasonable person who would think that was a good idea unless they were peddling junk economics... then again yes I can.

And Stern useed cost of capital that was 1/70th below accepted standards..


And even if we used Stern's report and took his assumptions the numbers tell us not to mitigate but allow GDP to growth faster than it would under mitigation.

Do the numbers and if you need help just call out.

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