Investing in Future Generation: Relating Debt Reduction and Environmental Protection

Abstract

Governments often engage in activities that affect the welfare of future generations in opposite directions. Long-term projects aimed at protecting the environment benefit future generations, whereas increasing government debts, including the accrued benefits in Social Security and Medicare, cost them. From an efficiency point of view, these government activities should be coordinated. This study examines the discount rate for environmental programs, the gross (tax-inclusive) interest rate, its value, and realistic options for debt reduction. The study also reviews the recent growth in government debts of various forms. As of 2015, the total federal liabilities when Social Security and Medicare commitments to current retirees are included were almost $40 trillion or 222% of GDP. Therefore, the room for debt-reducing reforms is substantial. The study concludes that more efficiently coordinated generational policies would evaluate environmental projects with a stricter criterion (a higher discount rate for benefits to future generations) than the existing one, and debt-reducing options (including reducing or containing elderly entitlement debts) would be given comparable consideration.