Discounting Inside the Washington D.C. Beltway

Abstract

Discounting translates future values to the present. A larger discount rate places more weight on costs and benefits in the near term over costs and benefits in the future. The choice of the discount rate is, therefore, critical in evaluating the merits of many public policy proposals.This article focuses on how the choice of discount rate can dramatically affect policy choices. These policies include whether to build a bridge, whether to privatize a Power Marketing Administration which sells electricity generated by government-owned facilities such as dams, how much money should be spent on early-childhood education, or options for reforming Social Security. The ongoing challenge is to discount future costs or benefits in a way that matches the project's level of riskiness. We begin by discussing the underlying issues in choosing an appropriate discount rate. We then discuss the variety of different discount rates that are actually used by various Washington policymakers and the biases they often generate.

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