New Orleans        It never ceases to amaze me, both as a delight and a caution, how many really fundamental things that are critical to our understanding of politics and the economy, but that, for one reason or another, are so far off our normal radar that we are left clueless.  Add “discounting” to that list.  I’m not going to claim to have never heard the word, but I confess flatly that I’ve never paid attention.

Nonetheless, skimming through the New York Review of Books, I stumbled on a review entitled “The Price of Tomorrow” by Geoff Mann about a newish book, Liliana Doganova’s Discounting the Future: The Ascendancy of a Political Technology.  What was this about, I wondered?

Mann starts out defining this as a problem for investors, which seemed uninteresting, saying,

The problem for investors is figuring out how to measure the value of that future and compare the profitability of investments that differ in all sorts of ways: initial costs, rate and timing of returns and final payout, perceived riskiness, and so on. The biggest return is not necessarily the fastest, and the fastest return is not necessarily the biggest. The solution is a process called “discounting,”….

Whoops, that sounds important, and it is, even if pretty far from my skill set.

Doganova describes discounting as a mechanism through which “the present defeats the future.” The basic intuition behind this “political technology” is that people prefer something now, or sooner, to the same thing later. So the monetary value they assign to the later thing will be lesser, “discounted” at a rate determined by the intensity of their impatience: the higher your discount rate, the more you value present benefits relative to future benefits. The discount rate is not an objective fact, and there is no financial regulation that tells private investors what it should be. Most private investors choose a rate at least equal to a broad market rate of return—the idea being that it doesn’t make sense to invest if higher returns are readily available elsewhere—or a rate they consider the minimum acceptable level of profitability given the riskiness of the investment: the bigger the gamble, the higher the profits the investment must promise. This makes the discount rate a crucial determinant of where investment goes in the economy. The higher the chosen rate, the more investors demand returns now and not later, and the narrower the range of investments considered “worth it.”

I hope you’re still with me.  Investors be damned, the real hook that grabbed me and should be a warning for all of us is how government is playing with these numbers, particularly the difference between the Biden gang and the Trump wrecking crew, and especially when it comes to the crazy way MAGA is handling climate change.  Mann, an econ professor at Canada’s Simon Fraser University, does a great job at breaking it down.  Normally, he says, climate is discounted at 3.5% in most models meaning that “an investment that provides a $100 benefit a century from now is worth $3.21 today.”  Running to 2300, that C-note “dwindles” to less than one penny in present day accounting.

In practice, discounting is applied by the government to all cost-benefit calculations on expenditures, which are public investments.  In looking at the social cost of carbon for example, the impact can be wildly different in determining value depending on the rate.  I’m trying to stay out of the weeds here, but “despite OMB recommendations,” the Trump administration is using a very high discounting rate of 7%, often used to privilege private investors, which “means our welfare today should be valued at six times that of people in 2050,” which is not far way really.  On something like the fuel efficiency automobile standard that Trump rolled back, he rationalized it by changing the Obama administration’s 3% discount to his 7%, so he could throw the thing out the window to our future peril.

Bottom line, I’ll read the book and try to get my head wrapped around this more tightly and comeback to this later, but even before a deeper dive, my toes are in the water enough to know this is serious and scary.  It’s not the kind of thing about which we would normally be demanding change when we have an argument with our elected representatives, but it looks like maybe we should for the sake of our children, if not for ourselves.