Discount rates and infrastructure safety: Implications of the new economic learning

Abstract

Discounting is a tool used by economists to make tradeoffs over time. Discounting is relevant to disaster risks because they are generally low-probability and hence are not likely to occur immediately. The combination of low probability and the on-going nature of the risks make discounting especially salient for large-scale disasters. Because infrastructure can last for many decades in the future, the choice of discount rates can significantly affect assessments of the value of increased safety measures. An emerging consensus among economists calls for applying discount rates that are lower for risks farther in the future as compared with harms in the immediate future. The rationale is that long-term investments provide a hedge against uncertainty regarding future economic growth. Declining rates are also justified when portions of the population have low prospects for income growth compared with other societal groups. Inequality, particularly the future economic prospects of poorer individuals, matters in terms of discounting. Fixed discounting rates such as those now used by the U.S. government may undervalue disaster risks by using too high a discount rate. The implication is that society has been underinvesting in infrastructure resiliency.