Thursday, February 18, 2010

Underestimating the human cost of environmental harm...

... by 1/20.
From Ezra Klein:
Bush stopped weighing the costs and benefits of deregulation ... providing industry lobbyists with a back door to block regulations. OIRA also instructed agencies to discount the value of future lives in constructing cost-benefit analyses by 7 percent a year, so that 100 lives in 50 years would only be worth 3.39 current lives. (Such logic can be used by conservatives to argue that the present cost of regulating greenhouse gases outweighs the future benefits of stopping climate change.)

7 percent! Can you imagine earning 7 percent real return on a risk-free bond (after inflation, so nominally, about 9-10 percent nominal return!)? Ridiculous!
From James Kwak:
Over the last five years, the ten-year Treasury yield has generally been between 4 and 5 percent. Call that 4.5 percent. Inflation has been in the low 2 percent range, so at best this is a risk-free return of 2.5 percent. ... Since the legal value of a life is primarily based on future income, this means that the real value of a life increases roughly with productivity. Productivity growth runs at about 2% per year. So if you are getting 2.5 percent on your risk-free investment, 2 percentage points of that just goes to make up for the fact that the people your policy is killing are getting more expensive, which means your discount rate should be 0.5 percent. ... Shouldn’t we also be discounting for risk? The textbook says you should adjust your discount rate based on that probability distribution — the wider the distribution (the riskier the investment), the higher the discount rate. This makes sense because of basic risk aversion. ... That leaves us with a discount rate of about 1 percent, not 7 percent. And instead of 3.39 lives today, you get 60.80 lives today.

Is that a pro-life policy?

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