Public Finance, 2nd Edition

as OMB's estimate of the pretax rate of return in the private sector in recent

years preceding 1994.

33

The OMB's directive probably does not have much force, however.

One reason why not is that it can be overridden by Congressional legislation.

A prominent example, noted in Chapter 8, is the enabling legislation for

water and air antipollution regulations, which speciWcally forbid an analysis

of abatement costs in applying command-and-control strategies. In addition,

the federal agencies receive conXicting instructions from other overview

bodies. For example, General Accounting OYce (GAO) guidelines recom-

mend the use of very low discount rates when projects have eVects on human

life in distant generations. The Congressional Budget OYce generally uses a

social rate of time preference in its social welfare analysis. Bazelon and

Smetters point out still other instances when diVerent discount rates are

used, such as in the sale of government assets. They also note that budgetary

planning is cash-Xow based with a 5- to 10-year window. The spending and

revenue implications of government policies that occur beyond 10 years into

the future are essentially discounted at an inWnite rate. In conclusion, dis-

counting practices within the federal government really are quite varied and

somewhat haphazard in application.

Concluding Observations

In our view, one would be hard-pressed to mount a decisive case for or

against any public rate of discount over a range of 3 to 20 or even 25%.

Nor is the argument Weitzman makes for declining discount rates over time

entirely compelling. Why should the distribution of economists' opinions

necessarily reXect the probabilities of correctness? A better approach might

be to try to achieve a consensus about the appropriate underlying economic

and policy environment and then select a single rate of discount based on the

consensus. Perhaps Weitzman's approach is a good proxy of the alternative

approach; perhaps not. All one can say for certain is that whatever rate the

government selects, it should be applied equally to all potential investment

projects (standardizing for risk; see Chapter 25). We have seen, however, that

consistent project evaluation does not occur at the federal level, and one can

guess that it does not occur at the state or local level, either.

REFERENCES

Bazelon, C., and Smetters, K., ``Discounting Inside the Washington, D.C. Beltway,'' Journal of

Economic Perspectives, Fall 1999.

33

C. Bazelon and K. Smetters, ``Discounting Inside the Washington, D.C. Beltway,''

Journal of Economic Perspectives, Fall 1999, p. 221. The discussion of federal discounting

practices on which the remainder of this paragraph is based appears on pp. 219±226.

756 REFERENCES

Bradford, D., ``Constraints on Government Investment Opportunities and the Choice of the

Discount Rate,'' American Economic Review, December 1975.

Diamond, P., ``The Opportunity Costs of Public Investment: Comment,'' Quarterly Journal of

Economics, November 1968.

Diamond, P., and Mirrlees, J., ``Private Constant Returns and Public Shadow Prices,'' Review of

Economic Studies, February 1976.

Feldstein, M., ``The Inadequacy of Weighted Discount Rates,'' in R. Layard, Ed., Cost±BeneWt

Analysis, Penguin Education, Penguin Books, Ltd., Harmondsworth, Middlesex, England,

1972.

Feldstein, M., ``Does the United States Save Too Little?,'' American Economic Association

Papers and Proceedings, February 1977.

Harberger, A., ``The Opportunity Costs of Public Investment Financed by Borrowing,'' in

R. Layard, Ed., Cost±BeneWt Analysis, Penguin Education, Penguin Books, Ltd., Har-

mondsworth, Middlesex, England, 1972.

Harberger, A., Project Evaluation: Collected Papers, Markham Publishing, Chicago, 1974.

Haveman, R., ``Policy Analysis and the Congress: An Economist's View,'' in R. Haveman and

J. Margolis, Eds., Public Expenditure and Policy Analysis, second ed., Rand-McNally

College Publishing, Chicago, 1977.

Layard, R., Ed., Cost±BeneWt Analysis, Penguin Education, Penguin Books, Ltd., Harmonds-

worth, Middlesex, England, 1972.

Marglin, S., ``The Social Rate of Discount and the Optimal Rate of Investment,'' Quarterly

Journal of Economics, February 1963.

Marglin, S., ``The Opportunity Costs of Public Investment,'' Quarterly Journal of Economics,

May 1963.

McKean, R., ``Tax Wedges and Cost±BeneWt Analysis,'' Journal of Public Economics, February

1974.

Sen, A., ``Isolation, Assurance, and the Social Rate of Discount,'' Quarterly Journal of Econom-

ics, February 1967.

Sen, A., ``The Social Time Preference Rate in Relation to the Market Rate of Interest,'' in

R. Layard, Ed., Cost±BeneWt Analysis, Penguin Education, Penguin Books, Ltd., Har-

mondsworth, Middlesex, England, 1972.

Sjaastad, L., and Wisecarver, D., ``The Social Cost of Public Finance,'' Journal of Political

Economy, June 1977.

Weitzman, M., ``Gamma Discounting,'' American Economic Review, March 2001.

24. THE RATE OF DISCOUNT FOR PUBLIC INVESTMENTS 757

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