Abuse of intergenerational equity

Posted on September 4, 2011

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Intergenerational equity is a cornerstone of sustainable development (Our Common Future, Brundtland):

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs

This definition of sustainability has both current and future generations at its core.   These are described as intragenerational equity and intergenerational equity.   The combination of the intra – the “needs of the present” –  with intergenerational “without compromising the ability of future generations” is very deep-seated.  It is the basis of much legal, religious and cultural tradition. It underpins the United Nations Charter and the Universal Declaration of Human Rights.  (Note some have argued that the definition would benefit from an addition of the implied “all”, as in “needs of all of the present”, “all of future generations”).

Intergenerational equity is usually applied to our relationship with natural resources – you can’t despoil land – even if you own it – without reference to some consenting process that considers the wider picture.

The concept was first systematically explored by John Rawls’ concept of “just savings”  (more) and developed by economist Robert Solow in 1973 “an obligation to conduct ourselves so that we leave to the future the option or the capacity to be as well off as we are”.   We can use exhaustible resources but only to invest in productive capacity (strong sustainability later rejected this substitutability argument – but the core concern remains).    In 1974  economist James Tobin applied the concept to endowed funds:

The trustees of endowed institutions are the guardians of the future against the claims of the present. Their task in managing the endowment is to preserve equity among generations

Crucial here is the phrase “guardians of the future against the claims of the present“.  Intergenerational equity is about protecting the future from the claims of the present.  It means not running down resources – be it it fishing stocks, river quality, or, indeed money.  In financial terms the proceeds of an endowed fund should not be spent a rate that exceeds the after inflation return on its investments. This ensures that the proceeds are spent equally on current and future constituents of the endowed assets.

The opposite of Intergenerational Equity is running down resources, this means reducing options, quality and access. This reduces the choices available to future generations. To do so is borrowing against the future.

Unfortunately,  there is a perverse but increasingly common interpretation of intergenerational equity that promotes intentionally  borrowing against the future.    A report in the Otago Daily Times this week  (ODT 3/9/11)

Council financial planner Carolyn Howard… said the use of loan financing “supports the principle of intergenerational equity” and was appropriate for long-lived assets.

Howard is referring to the debt repayment for a stadium built by Dunedin and funded by the city.    The application of intergenerational equity was  described by former Councillor Richard Walls (ODT 17/12/2008, also ODT 29/7/2010)

“Once confirmed, loans were used to spread the cost over each generation of users, known as “inter-generational equity”, he said.”

Somewhat bizarrely Council (acting) Chief Executive acknowledges that the loan repayment will result in a restriction of choices: (ODT 3/9/11)

Acting chief executive Athol Stephens yesterday said the extension of the loan period would mean the city could find itself “constrained” in future if it wanted to develop “love to do” projects like cycleways.

A council that is rightly concerned about intergenerational equity needs to avoid running down resources – of any form of capital, and indeed look for areas to improve the resource stocks. We can’t wait for climate change induced sea-level rise to wash away suburbs or have future generations wishing we had taken cycleways seriously.

 

While we’re not paying our own way in not fully funding investment, deferred maintainance, and we’re running down resources, I think is morally repugnant to selectivity argue that future generations must pay their way.

We the city wanted this stadium (the collective ‘we’ whereby two previous city councils voted for it).  In the interests of intergenerational equity we must pay for it as quickly as possible.  How to do this, without creating perverse inequities within our current generation is indeed a sorry challenge that the current council must face.

(Update: DCC still getting it wrong. Cr Syd Brown “”That’s what intergenerational equity is all about … now it’s her generation’s turn,” Cr Brown said.  ODT 25/1/12 ).

Background:

Howard and Walls are not entirely wrong.   Intergenerational equity is sometimes used to refer to future generations paying off our loans, particularly for long term infrastructure projects.   They should recognise though, that this view is counter to the overwhelming number of publications that use intergenerational equity to mean not degrading resources:

Why debt? It is the principle of intergenerational equity. Fairness over times. Water and sweer mains last from 50 to 100 years. This means that two to four generations of citizens will benefit from their presence. Why should they not pay for their share of the benefit? …paying for a project over its service life is good public policy.

Boland et al.  (NATO, 1995) Environmental infrastructure management p163

Recent policies to enable policies to raise market based finance have been justified on several grounds, including…intergenerational equity, where the ‘lumpy’ costs of infrastructure investments should be spread over the useful life of the asset, and serviced through a regular stream of municipal income and project revenues resulting from the investment…however has numerous challenges. (note the book doesn’t argue the validity of this point – just that it is sometimes raised).

Alam (2010) Municipal Infrastructure Financing: Innovative Practices from Developing Countries p90

There are very few books that take this  “they’ll benefit, they should pay” approach.  Most take a not reducing choices approach:

Excessive use of local government bonds hinders intergenerational equity in the long run.

Yun-Hwan Kim (2003) Local government finance and bond markets p209

Short term operational assets (eg keeping money as cash)…loss of intergenerational equity.

Russell (2006) Trustee investment strategy for endowments and foundations p87

Intergenerational equity is a seriously nonmeasureable (and therefore shouldn’t be used as a basis for depleting resources).

(good luck reading this one). Corbae et al. (2009) An introduction to mathematical analysis for economic theory and econometrics p428

Inequality in birth cohorts in paying for social security with an ageing population. Transfer schemes (ie savings) fairer than ‘pay as you go’ but increases temptation to spend windfall.

Johnson et al (1989) Workers versus pensioners: intergenerational justice in an ageing world p73 (see also Cheal 2002 Ageing and demographic change in Canadian context).

Apparent conflict between sustainability and efficiency resolved by thinking of sustainability as a matter of intergenerational equity p16 (note assumes substitution, but questions GNP as primary goal).

Economists can participate more effectively in the diverse social decision making areas in which intergenerational equity decisions are being made if they use economic analysis to complement other types of analysis rather than assume economic reasoning is a sieve through which all other forms of reasoning must pass

Norgaard R.B. (World Bank) (1992) Sustainability and The Economics of Assuring Assets for Future Generations

Two typologies of intergenerational independence: in Japan the older generation takes its turn to claim dependence, and the United States the younger generation takes its turn to claim independence.

Akiko Hashimoto (1996) The gift of generations: Japanese and American perspectives on aging and the social contract ,p153

Intergenerational equity as basis for managing freshwater resources in the middle east.

National Academy of Sciences (1999) Water for the future: the West Bank and Gaza Strip, Israel, and Jordan p16

“The failure to incorporate intergenerational equity is a major limitation of aggregated standard national accounts”.

Clarke and Islam (2004) Economic growth and social welfare: operationalising normative social choice theory p64

“Will governments that systematically neglect the welfare of the vast majority of the current population…consider the interests of those not yet born”

Roman Lopez (2005) Intergenerational versus intergenerational equity: views from the South. In Simpson et al. (2005) Scarcity and growth revisited: natural resources and the environment in the new millennium, p262

Focus on intergenerational equity differs from now everyday use for sustainability to mean environmentally desirable, this makes no distinction between momentary environmental problems such as foul smells that cause no long lasting health effects and permanent or cumulative problems (such as species loss or climate change).

Pezzey and Toman (2005) Sustainability and its economic interpretations In Simpson et al. (2005) Scarcity and growth revisited: natural resources and the environment in the new millennium, p124

Intergenerational Equity defined on a family (fortune) basis – how will these decisions affect my families ability to replicate my lifestyle? With a personal survey and an example “Bob”.
“we have assumed that he will never spend any more money than his current spend rate”

Morris et al. (2010) Kids, Wealth, and Consequences: Ensuring a Responsible Financial Future for the Next Generation

The furture is a common that we exploit at net cost to its other potential users. Market economics, if left unconstrained, would sadly lead us to maximise pofit for today: hang the consequences for tomorrow!

Intergenerational equity is a value-based concept addressing the rights of future generations.
It therefore extends the scope of social justice into the future, and also of the wise stewardship of biodiversity and other natural resources. According to the moral of intergenerational equity, each generation has the right to inherit the same diversity in natural and cultural resources enjoyed by previous generations. p27
Any other conception of delivering intergenerational equity – for example by maximising profit today to hand them a strong economy tomorrow – risks missing the most fundamental point of sustainability and ignores the resource base that sustains it p28

Everard (2009) The Business of Biodiversity, p28

Thomas Jefferson on debt to satisfy short term interests in terms of loss of soil (www.conlaw.org)

If a debt justification focus is taken, then intergenerational equity is a “misleading focus” as it worsens intragenerational equity (redistribution from taxpayers to bond-holders). Public debt is a “deadweight loss” since everyone’s labour supply decisions are distorted by taxation necessary to pay the debt.

Lars Osberg (2004) What is the real issue in debt? in Ragan and Watson (2004) Is the debt war over?: dispatches from Canada’s fiscal frontline p339

However much wealth our generation has created, in public policy we have not fully paid our own way. Furthermore we have grossly understated our governmental debt and overstated our assets.

Lamm and Blank (2007) Condition critical: a new moral vision for health care, p36

We have enjoyed, and continue to enjoy the consumption of goods, public and private, at the expense of future generations.

Sheffrin (1993) Markets and majorities: the political economy of public policy p232

One of the great issues of the future will be “intergenerational equity” when the younger generations start to recognise what we have done to them.
Robert Loius Stevenson said, “Sooner or later, we all sit down to a banquet of consequences”. True except my generation of politicians will not be sitting there when the bills become due. We have been good neighbours but bad ancestors”

Lamm (2003) The brave new world of health care p13

I really did try to get a balanced view here.  The fact is, the view reported by Howard and Walls is counter to the vast majority of books.  Try it yourself on Google Books or Google Scholar, I’d be interested to know if you come up with a different summary.

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