Peter Thiel, the Silicon Valley tech tycoon, has a fond aphorism he employs that he apparently borrowed from the late conservative journalist M. Stanton Evans. It goes something like this: “Democrats are the evil party and Republicans are the stupid party.” It’s a blunt and uncharitable way to classify the two parties, but in the realm of federal regulation, the saying has a grain of truth.
Government regulations cost money and that makes businesses less competitive and increases prices for consumers. However, regulations also have benefits. That’s why for decades, federal regulators have been required to prepare an economic analysis for their largest and most significant regulations. That includes a cost-benefit analysis tallying up positive and negative outcomes expected from the action. Because these benefits and costs occur across different time intervals, they are “discounted,” i.e., an interest rate is used to ascertain the “present value” of benefits and costs accruing in the future.
For the last 20 years, federal regulators have employed two distinct discount rates for this purpose. A 3 percent rate was primarily used to mollify Democrats, while a more substantial 7 percent rate existed primarily for Republicans. The Biden Administration is now in the process of “modernizing” the government’s 20-year old regulatory analysis guidance, including by discarding the 7 percent rate. The decision highlights how disagreements about discounting really stem from divergences in the ideologies of the two parties.
Republicans prefer discounting because of the “opportunity cost of capital,” essentially because money left uninvested will still be deposited in a financial institution where it accumulates interest over time. However, while this perspective makes sense in the context of cash flows, it is flawed with respect to regulatory analysis. Cost-benefit analysis isn’t analogous to cash flow analysis because the former incorporates a much wider assemblage of benefits and costs than just money. Health improvements, wellbeing, and even life extension are all accounted for in cost-benefit analysis, and none of these things can be invested or earn interest. Ergo, Republicans, in Thiel’s terminology, are “stupid.” They are discounting for the wrong reason.
Read the full article on Forbes.