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Discounting... on stilts

Douglas A. Kysar

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Jeremy Bentham famously described the concept of natural rights as “nonsense upon stilts.” This Response argues that cost-benefit analysis (CBA)—a contemporary applied version of Bentham’s utilitarianism for public policy analysis—is also nonsensical in that CBA purports to resolve questions, the answers to which have already been subsumed within the framework’s architecture. In particular, CBA subsumes vital questions of intergenerational equity through its use of an exponential discount factor to adjust future costs and benefits to a present value. This discounting procedure has the practical effect of dramatically diminishing the apparent significance of policy effects on future generations in the context of problems such as climate change, species extinction, deforestation, and aquifer depletion. Indeed, the impact of discounting future costs and benefits to a present value tends to swamp all other variables within such long-term policy analyses. Accordingly, arguments in favor of the use and selection of a discount rate for CBA calculation deserve close inspection.
As it turns out, conventional justifications offered for the use of discounting in the intergenerational context do not withstand scrutiny. Moreover, although some analysts are careful to acknowledge the need to address questions of intergenerational equity directly through other policy mechanisms, these analysts understate the difficulty of limiting discounted CBA to its proper sphere of competence. The formal language of CBA offers the promise—but not the reality—of compounding all relevant reasons for deciding into its calculations, including the needs and interests of future generations. Because ex post monetary transfers are thought to compensate for any residual interests that CBA has failed to incorporate into its calculations, policymakers are invited to believe that CBA can resolve most any social dilemma without the need for openly moral judgments concerning fairness or justice. Naturally, when those actors are faced with a dauntingly complex and morally inflected policy conundrum such as climate change, the temptation to delegate responsibility to the calculative process in this manner is overwhelming. Yet, as this Response argues, the compensatory transfers that are thought to sanitize the CBA procedure in the intergenerational context are deeply problematic, both in their conception and in their amenability to concrete realization. [...]
At bottom, the disagreement between defenders and critics of discounting arises from a difference of view over what constitutes an interesting question. With respect to climate change, for instance, a policy approach that focuses on equitable considerations would ask first whether future generations are entitled to a minimal level of climate stability and freedom from catastrophic harm. Only after that question had forthrightly and courageously been answered would questions of welfare maximization and discounted CBA become even relevant, let alone interesting. To holders of this perspective, the tendency to narrowly focus on technical aspects of the cost-benefit methodology— while ignoring or burying in footnotes the need to address the equitable distribution of rights and resources across human generations— seems rather like fiddling with deck chairs . . . on stilts. [...]

The University of Chicago Law Review, Vol. 74, No. 1. (2007), pp. 119-138 
Key: INRMM:14534863



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