Social Discount Rate
Scott Matthews
Courses: 12-706 and 73-359
Lecture 14 - 10/20/2004
1
Admin Issues
Midterms Due
Midterm Grades next week
50% HW average, 50% midterm
90+% A, 80-90 B, etc (conservative)
Scheduling of Project Presentations
12-706 and 73-359
2
Social Discount Rate
Discounting rooted in consumer
preference
We tend to prefer current, rather than
future, consumption
Marginal rate of time preference (MRTP)
Face opportunity cost (of foregone
interest) when we spend not save
Marginal rate of investment return
12-706 and 73-359
3
Intergenerational effects
We have tended to discuss only short
term investment analyses (e.g. 5 yrs)
What about effects in distant future?
Called intergenerational effects
Economists agree that discounting should
be done for public projects
Do not agree on positive discount rate
12-706 and 73-359
4
An example
Someone offers you choice of $1000 now
and $1200 in one year
If you have no preference (indifferent) then
your MRTP is 20%
12-706 and 73-359
5
Discounting handout
How much do/should we care about
people born after we die?
Higher the discount rate, the less future
values will count compared to today
Ethically, no one’s interests should count
more than another’s
Implies there is no justification for
discounting across long time periods
Called ‘equal standing’
12-706 and 73-359
6
Climate Change
Discussions ongoing about how best to
manage global CO2 emissions to limit
effects of global change
Should we sacrifice short-run economic
growth to do something to improve
environment and leave resources for the
future?
Really asking 2 separate questions!
12-706 and 73-359
7
Two Questions
What duty do we have to make sacrifices
for future generations?
If we sacrifice, what is the optimal policy
to maximize benefit?
So we should compare global change
proposals with alternatives
Perhaps higher R&D spending on science or
medicing would have higher benefits!
12-706 and 73-359
8
Hume’s Law
Thus discounting issues are normative vs.
positive battles
Hume noted that facts alone cannot tell us
what we should do
Any recommendation embodies ethics and
judgment
E.g. focusing on ‘highest NPV’ implies net
benefits is only goal for society
12-706 and 73-359
9
Some evidence
Cropper et al surveyed 3000 homes
Asked about saving lives in the future
Found a 4% discount rate for lives 100 years
per now
Equal standing does not imply different
generations have equal claims to present
resources!
Harsanyi says only do so if their marginal
gain is higher than our loss
12-706 and 73-359
10
More evidence
If future generations will be better off than
us anyway
Then we might have no reason to make
additional sacrifices
There might be ‘special standing’ in addition
to ‘equal standing’
Immediate relatives vs. distant relatives
Different discount rates over time
Why do we care so much about future and
ignore some present
needs
(poverty)
12-706 and
73-359
11
Government Discount Rates
US Government Office of Management and
Budget (OMB) Circular A-94
http://www.whitehouse.gov/omb/circulars/a094/a094.html
Discusses how to do BCA and related performance
studies
Match real values with real discount rates, etc
How to do sensitivity analysis / which inputs to vary
What discount, inflation, etc. rates to use
12-706 and 73-359
12
OMB Circular A-94, Appendix C
Provides the current suggested values to use for
federal government analyses
 http://www.whitehouse.gov/omb/circulars/a094/a94_appx-c.html
Revised yearly, usually “good until January of the
next year”
How would the government decide its discount
rates?
What is the government’s MARR?
12-706 and 73-359
13
Historic Nominal Interest Rates
(from OMB A-94)
12-706 and 73-359
14
Real Discount Rates (from A-94)
12-706 and 73-359
15
Effect of these Discount Rates
These are ‘effectively zero’
What does this mean for projects and
project selection decisions?
What does it say about intergenerational
effects?
12-706 and 73-359
16
Valuation of Seniors handouts
What did the EPA proposal implictly
suggest about the value of their lives?
What did it suggest about how they should
be discounted or valued?
Does this match with the social discount
rates set by OMB?
12-706 and 73-359
17