Understanding Discount Rates: Public Investment Implications

This lecture discusses the implications of discount rates on public investment decisions. It begins with a pragmatic view of opportunity costs associated with public investments, referencing a survey of economists that suggested a mean discount rate of 4%, with a range from -3% to +27%. The U.S. Office of Management and Budget's recommendations for discount rates are also highlighted, suggesting 7% for intra-generational projects and 3% for social rates of time preference. The instructor emphasizes the importance of considering the opportunity costs of public investment, which can affect both private consumption and investment. The lecture further explores historical interest rates in Switzerland and their relevance to public projects, noting that long-term projects are particularly sensitive to discount rates. A declining discount rate is proposed as a potential solution to mitigate the impact of high rates on future generations. The challenges of agreeing on an appropriate discount rate are also discussed, particularly in the context of fluctuating market interest rates.