So we understand that a high discount rate means we don’t care about the future, while a low discount rate means we do. We learn that before subjecting a range of outcomes to discount rate analysis, we have to be capable of accepting all the possible outcomes. We realise that discount rate or cost-benefit analysis can only show that the benefits of a policy exceed the costs. There will be winners and losers. If the winners don’t wish to compensate the losers for their losses, the policy may not be politically achievable. Finally, if we want to apply fair intergenerational transfer, we may need a very low, near zero, discount rate. Perhaps those Victorians weren’t so foolish after all. Given all this uncertainty, it probably helps to know that there are two types of economists: (1) those who cannot calculate the correct discount rate, and (2) those who do not know that they cannot calculate the correct discount rate. Before we can argue about discount rates, we have to argue about priorities. After we agree priorities and the relative ranking of goals, we can use discount rate analysis to help us choose options within each goal. Until we agree our priorities, you can count me in on the political discussions, and count me out of the economic discussions. © Professor Alderman Michael Mainelli, 2016
So we understand that a high discount rate means we don’t care about the future, while a low discount rate means we do. We learn that before subjecting a range of outcomes to discount rate analysis, we have to be capable of accepting all the possible outcomes. We realise that discount rate or cost-benefit analysis can only show that the benefits of a policy exceed the costs. There will be winners and losers. If the winners don’t wish to compensate the losers for their losses, the policy may not be politically achievable. Finally, if we want to apply fair intergenerational transfer, we may need a very low, near zero, discount rate. Perhaps those Victorians weren’t so foolish after all. Given all this uncertainty, it probably helps to know that there are two types of economists: (1) those who cannot calculate the correct discount rate, and (2) those who do not know that they cannot calculate the correct discount rate. Before we can argue about discount rates, we have to argue about priorities. After we agree priorities and the relative ranking of goals, we can use discount rate analysis to help us choose options within each goal. Until we agree our priorities, you can count me in on the political discussions, and count me out of the economic discussions. © Professor Alderman Michael Mainelli, 2016
01mar16longfinance_michaelmainelli.docx