The Deficit and Future Generations, part two

As I asked in the previous post, if our descendants are going to be richer than we are, then why should we leave more for them than we’re already leaving? Here’s one possible answer.

In economic terms, even if consumption is increasing, the marginal utility of consumption may be increasing too, because innovation may produce new types of goods that are expensive to produce and severely nonsatiating (or it may produce many, many nonsubstitutable new types of goods that are expensive and only moderately satiating, which I think would be equivalent). To put it another way, except for the necessities that we obviously won’t give up, the goods we have available today are all basically a bunch of crap compared to what our grandchildren will have available. Wouldn’t it make sense for us to give up some of our crap so that they can have more of the really good stuff once it gets invented?

That’s the kind of argument that seems interesting at first but starts to seem silly once you put numbers or pictures to it. Would it have been reasonable for our grandparents – who mostly had to make do with bulky AM radios – to make additional sacrifices so that we could have more iPods? I don’t think so.

But there is one area where the argument might make some sense: medical technology. You might think of “lifespan” as an expensive (on the margin) and severely nonsatiating good. Another month of life is considered very valuable even if you’ve already had hundreds and hundreds of them. The technology to prolong life can get quite expensive, and new types of expensive lifesaving technology are constantly being invented. Moreover, “health,” though in one sense highly satiating (once you’re cured of a specific disease, you don’t need any more of the cure), is in another sense quite nonsatiating: even if a health plan already covers hundreds of diseases and procedures, you’ll be willing to pay more for it if it covers one more disease that you might get (even if it’s not life-threatening) or one more procedure that you might need (even if it’s not life-saving). It was reasonable for our grandparents to make sacrifices so that we could have laser surgery and MRI scanners.

Of course, in addition to laser surgery and MRI scanners, we do also have iPods. So apparently our grandparents made more sacrifices than they really had to. But if you look at what’s happening today, the idea of sacrificing for the sake of future medical technology may not seem so unreasonable. For several years now, people in some income ranges have typically experienced declining real wages but rising real compensation. The major difference is health insurance. In other words, they’re getting richer, but they’re spending all of the new income – and then some – on health care. To the extent that these people consume a constant fraction of their income, their overall consumption is going up, but their consumption of most goods is going down, even though the new goods they consume (more health care) are not substitutes for the old ones (iPods? restaurant meals? gasoline?). If this trend continues, then we have a clear example of growth that raises the marginal utility of consumption.