A New Premium on Discount Rates.

• Date: 01 June 2023
• Author: Marlowe, Justin

Moments after his inauguration, President Biden signed a document titled, "Memorandum on Modernizing Regulatory Review." It's as technocratic, inconspicuous, and inside-the-beltway as the title suggests. But it could reshape the way we think about the costs and benefits of state and local government.

This memorandum set in motion a review of how the federal government evaluates the impact of proposed regulations. That review has several components, including a careful look at how to better incorporate perspectives from those who are affected by regulation but haven't traditionally had a voice in policymaking. But the component that could affect state and local finance the most is a rethinking of discount rates.

As a quick refresher, recall that a discount rate is a number used to adjust future benefits to today's terms. For instance, imagine that a friend owes you $1,000. They of f er to pay you back the full $1,000 in three years orpay you $500 today. They're also quite unreliable, so there's a good chance the future payment will be less than $1,000. You need to build that uncertainty into your decision.

We quantify that intuition through a discount rate. Discount rates are higher when a future outcome is less certain, when an outcome is simply more valuable to us today than in the future, and when we expect higher inflation, among other reasons. Discount rates and interest rates go hand in hand.

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