Monday, November 27, 2006

Dasgupta on the Stern Review

Partha Dasgupta reads the Stern Review of climate change and, like Bill Nordhaus, does not like what he finds:

the strong, immediate action on climate change advocated by the authors is an implication of their views on intergenerational equity; it isn't driven so much by the new climatic facts the authors have stressed....To give you an example of what I mean, suppose, following the Review, we set delta [the rate of subjective time preference] equal to 0.1% per year and eta [the elasticity of marginal utility with respect to consumption] equal to 1 [so utility is logarithmic] in a deterministic economy where the social rate of return on investment is, say, 4% a year. It is an easy calculation to show that the current generation in that model economy ought to save a full 97.5% of its GDP for the future! You should know that the aggregate savings ratio in the UK is currently about 15% of GDP. A 97.5% saving rate is so patently absurd that we must reject it out of hand. To accept it would be to claim that the current generation in the model economy ought literally to starve itself so that future generations are able to enjoy ever increasing consumption levels.
Dasgupta has the right title to opine on these issues: He is the Frank Ramsey Professor of Economics at Cambridge University.