Infinite Horizon Economics

[truthspeaker]

Can anyone give me a good pointer to the basics of infinite horizon economics? In particular, in order to get your infinite series to converge on a finite number, you have to discount future terms in the series. What do they use to discount numbers in the future -- how do they calculate their discount rate

Comments

[topologist]

Wait, is this renormalization for economists? Now I'm interested too.

[truthspeaker]

Well, I'm trying to figure that out. There is the Social Security Trustee Report, which claims a large (but finite) infinite horizon gap equal to 3.6% of payroll income (which is also finite).

There's an economist trying to run as a 3rd party who says that the US has a $211 trillion financial gap in the infinite horizon.

There are papers that do infinite horizon calculations, but they never define it precisely enough for me to understand how they're getting finite numbers. I *think* they're simply discounting future numbers to make them shrink exponentially with time, but I'm not certain.

[ext_72787]

Almost certainly future returns are discounted. It has been traditional to use a rate around 7% based on some arguments about long-run treasury returns, but perhaps lower numbers are now being used.

If you look up "net present value" you should find lots of information on discount rates which should also apply to this class of problem.

[truthspeaker]

That's why I was assuming they were using a discount rate, but I couldn't find anything that stated that explicitly. I was especially interested in knowing what the discount rate actually was -- 7% sounds high, and I need to think if the government can save money by investing in treasury bonds. (On one hand, paying interest to yourself doesn't make money, but not issuing bonds does mean you don't have to pay interest on the non-existing bonds. So, it depends on what question you are answering -- Social Security investing in bonds means that the checks are paid with money raised from taxes going to the treasury to SS, so I'm not convinced that's better than a pure pay-go system. I need to think about these issues for a bit.)

I also need to research why 7% -- a figure that is high with current interest rates, even in the longer term.