Thursday, November 6, 2008

 

The Optimal Savings Rate

Some people think that although people make efficient decisions about how much to save personally, the social discount rate we use is too low. The market gets it right, but government does not. I think the opposite is true.

Individuals are too eager to consume in the present instead of the future. Think of a person as a sequence of selves over time. Most people are selfish and favor the present self over the future self. They save too little.

On the other hand, when it comes to decisions across generations, we have to remember that future generations will be richer than we are. Thus, we should not incur too much cost now in exchange for benefits for them later.

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