At a Brussels nuclear law conference in 2007, I gave a technical paper on intergenerational issues in nuclear waste economics. I argued for the prudence of applying a conservative discount rate when setting aside funds for future nuclear waste management so as to guard against contingencies. Recently I had the chance to look at my argument again with fresh eyes when I obtained a copy of the conference proceedings (published by Bruylant), and I was struck by one passage that may be of broader interest, especially given what happened between 2007 and now in global financial markets:
“The fifth and final argument for [a conservative discount rate] is the possibility of some unforeseen event that could dramatically change the economic circumstances of one country or another. In Nassim Nicholas Taleb’s excellent recent book, The Black Swan: The Impact of the Highly Improbable, the mathematician and former trader argues that history is dominated by highly improbable, high impact events. He cautions that markets are poor predictors of war, for example, that government predictions are generally unreliable, and that the accuracy of a forecast ‘degrades rapidly as you extend it through time.’ Or as he cautions in a nutshell: ‘No one in particular is a good predictor of anything. Sorry.’
The Asian financial crisis of 1997 led to rapid – and quite unforeseeen – devaluation of the Thai baht, the Korean won, and the Indonesian rupiah. Argentina’s economy, meanwhile, experienced hyperinflation in the late 1980s and then collapsed between 1999 and 2002. Japan actually experienced deflation and a zero interest rate policy between 2001 and 2005, quite at odds with economic predictions for the country two decades earlier (and also at odds with what one would expect of the world’s second largest economy). These examples give us pause, because Argentina, Japan and Korea have nuclear plants, and Thailand announced plans in June 2007 to build the country’s first nuclear plant. All will need [nuclear waste] repositories in time. But more within the spirit of Taleb’s argument, the better lesson is to recognize that we have no idea where the next financial crisis will occur.”
The last sentence was meant as a general warning, not a premonition. We may have recognized the lesson of that sentence for now - humility - but we’re likely to forget it again in the next bull market.
As for the title of this post, it comes from the fact that seemingly small human preferences at one moment in time - apparently marginal increments of utility or enjoyment – can have huge impacts on future generations. As Cowen and Parfit write (I quote them in my paper), “Imagine finding out that you, having just reached your twenty-first birthday, must soon die of cancer because one evening Cleopatra [the ruler of ancient Egypt] wanted an extra helping of dessert.” The example sounds far-fetched, right? But the issue is whether incremental forms of consumption and enjoyment at the expense of the environment today - widespread enjoyment of shark fin soup, for example - are set to have similarly dramatic and harmful impacts on future generations.
As the British economist F.P. Ramsey wrote in an important paper in 1928 (“A Mathematical Theory of Saving,”), to “discount later enjoyments in comparison with earlier ones … is “a practice which is ethically indefensible and arises merely from the weakness of the imagination.” Sadly, and ironically, Ramsey died only two years after writing those words, only 26 years old, and with the wisdom of someone who had lived much longer.