I Dissent

As a charter member of the Society for Benefit-Cost Analysis (SBCA), I presented a paper at the Society's very first meeting (subsequently published here), in which I recommended that responsibility for instituting principles and best-practice standards for benefit-cost analysis (BCA) should be removed from the agencies who produce and consume them. It would be better, I thought, if principles and standards were established outside the beltway by a group of independent economists, policy analysts, and even legal scholars.

Over the past few years, the SBCA, led by my friend Richard Zerbe of the University of Washington, has taken up the mantle, with financial support from the MacArthur Foundation. This week, Professor Zerbe has published a final report, "Toward Principles and Standards in the Use of Benefit-Cost Analysis: A Summary of Work." I was a member of the Scientific Committee and reviewed the report in draft, which did not at that point include a specific recommendation on the social discount rate.

While there is much to admire in the final report, I am dismayed at the section on discounting, which recommends the use of a single social discount rate of 6%-9%, validating the OMB's current baseline discount rate of 7%. Until I read the final report, I did not believe any serious economist outside of OMB or industry still believed that 7% is an appropriate rate at which to discount the future streams of benefits and costs of environmental, health and safety regulations. Moreover, I don't believe the analysis presented in the report is nearly sufficient to support that recommendation. Therefore, I strongly dissent.

In my view, the social discount rate for assessing the future costs and benefits of environmental, health and safety regulations should be half or less of Professor Zerbe's recommended 6%-9% rate. My view is consistent with the UK Treasury's schedule of discount rates (here), Marty Weitzman's findings in his article, Gamma Discounting (here), and recent recommendations to the Canadian government by Anthony E. Boardman, Mark A. Moore, and Aidan R. Vining (here).