“Putting a Premium on the Future” by John Edward

John Edward, who teaches economics at Bentley and UMass Lowell, frequently contributes columns on economic issues.

Assume you had $50,000 to invest. Option 1 is to put the money toward your child’s college education. Option 2 is to renovate your house. Which would you choose?

When evaluating choices, decision makers often use cost-benefit analysis. The premise is that you can quantify costs and benefits. At times that premise is suspect. Some object to putting a number on everything, especially when lives are at stake.

There is another problem with cost-benefit analysis. One step in the process is “discounting the future.” A dollar in the future is worth less than a dollar today due to inflation. Discounting the future takes that into account.

For example, assume the benefit of some decision will be worth $100,000 20 years from now. When using the “present value formula” with a “typical” interest rate of 5%, the $100,000 20 years in the future is valued to be worth only $40,000 today.

For some public policy issues we should instead put a premium on the future. Presidential candidates should focus less on telling voters that they will cut government spending, and instead tell us how they will solve problems that those too young to vote will have to pay for.

Before dropping out, presidential candidate Scott Walker signed a pledge. He promised to “oppose any tax or fee increase aimed at fighting climate change.” Many candidates have identified themselves as skeptics or non-believers regarding climate change, or that humans are causing it.

Ignoring global warming is very risky. If our elected leaders do not deal with climate change now, our grandkids may face dire consequences.

The Precautionary Principle says: “When an activity raises threats of harm to human health or the environment, precautionary measures should be taken even if some cause and effect relationships are not fully established scientifically.” Policy makers need to put a premium on the benefits of acting now, even if they do not understand the science.

Presidential candidate Marco Rubio has a policy to address environmental issues. He said, “We must be willing to embrace the free-market approach.”

The problem is that free markets do not factor in the costs of pollution. In a true market-based approach companies would have to pay for the damage they create. In most cases they do not pay, so free-markets do not address environmental issues.

A maxim, often attributed to Native Americans, says “We do not inherit the earth from our ancestors; we borrow it from our children.” Our children will bear a high cost for the pollution we are leaving behind. Policy makers should not discount the benefit of stewardship of the planet we have out on loan.

Presidential candidate Lindsey Graham “voted in favor of allowing school prayer, requiring testing, money for teaching abstinence, but against money for local education grants, community learning centers and many other education programs. Senator Rick Santorum voted no on the same bills.” (According to OnTheIssues.org.)

In a recent The Boston Globe Op-ed, UMass President Marty Meehan reflected on how education opens opportunities:

What I learned at UMass Lowell changed my life. It set me on a road that took me to Congress and to the UMass presidency. So it matters to me personally that students have the opportunity to set out on their own journeys – without building up a stifling debt.

The next President of the United States must invest in our children’s future. He or she needs to put a premium on giving our children the same opportunities that I had, that Marty Meehan had, and that the elected leaders of today had.

Presidential candidate Mike Huckabee seems to understand how bad our transportation infrastructure is: “We’ve got a crumbling infrastructure. We have bridges falling down on people in the US. Infrastructure in this country has been neglected, whether it’s our airports, our bridges, and our roads.” He also recognizes the stimulus effect of spending money on transportation: “Every billion dollars we spend on highway construction results in 47,500 jobs.” However, he opposes increasing the gas tax to help pay for it.

According to the United Nations World Commission on Environment and Development: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Putting off fixing our crumbling infrastructure is not sustainable. By paying a little more for our gas guzzling now, we would put a premium on making it safer for future generations to move about the country.

Presidential candidate Rand Paul said, “I oppose the Federal Reserve primarily because it wreaks havoc on the economy.” He and his fellow Republican candidates have been very critical of President Obama’s stimulus program.

Low interest rates and stimulus spending were the correct responses to the Great Recession. However, they were temporary repairs. Neither did anything to respond to the looming problem of excessive inequality.

For most of U.S. economic history, labor productivity and wages grew at about the same rate. In the last forty years productivity has grown over 10 times as fast as wages. The wage increases have been unevenly distributed to an extreme. Since 1978 CEO pay increased by about 1000%. The pay for a typical worker went up by 11%.

Today’s leaders need to shift their focus from managing the day-to-day economy to reversing these long-term trends. Otherwise, inequality will wreak havoc on the economy. We should never discount the value of equal opportunity in a civil society.

Former presidential candidate Paul Tsongas, in his book “Journey of Purpose” wrote:

I now think generationally; I now talk generationally. It comes naturally to me and it colors my perspective on everything. Including politics. And politicians. I see generational responsibility as our most compelling obligation. It is ultimately all that gives purpose to our lives. And the rejection of that responsibility renders null and void whatever glories we have brought to ourselves.

We need to elect a President that understands the concept of generational responsibility. In some cases, discounting the future is being irresponsible to future generations.

In an article titled “Is the American Dream Dead” The Washington Post reported the results of a CNN Money poll in which “63 percent said their kids will be worse off (than their parents).” To restore the dream we need to elect a president less like the current herd of candidates and more like Paul Tsongas. We all need to think less like accountants, and more like parents willing to put off renovating the house.

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