Econ 309 Discount rates

Casey Mulligan on why 7% is a good discount rate. (New York Times, October 9, 2008)

It's about opportunity costs.

Note: I disagree strongly with him on two points about the state of our economy.

• • "How harmful would it be to wait nine more months for a new car or an addition to your house?" Well...not so bad for any person individually, but there may be these things called "muliplier effects" so it's not good for car dealers, or people who sell things to car dealers, or people who sell things to people who sell things to car dealers, or....

  • "The current unemployment rate of 6.1 percent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 percent." The point isn't changing from 6.1 to 5.9, but rather avoiding having unemployment go above 10%.