RFF Comments on the Proposed Revisions to Circular A-4 Richard Morgenstern, Richard Newell, William Pizer, and Brian Prest Public Comment June 2023 June 1, 2023 US Office of Management and Budget 725 Seventeenth Street NW Washington, DC 20503 Dear Director Young, On behalf of Resources for the Future (RFF), I am pleased to share the accompanying comments with the Office of Management and Budget (OMB) on the proposed revisions to Circular A–4: Regulatory Analysis. RFF is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy. While RFF researchers are encouraged to offer their expertise to inform policy decisions, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals. The authors of these comments are: • • • • Richard Morgenstern, Senior Fellow, Richard Newell, President and CEO, William Pizer, Vice President, Research and Policy Engagement, and Brian Prest, Fellow. If you have any questions or would like additional information, please contact Brian Prest at prest@rff.org. Sincerely, Richard G. Newell President and CEO 1616 P ST. NW, SUITE 600, WASHINGTON, DC 20036 • 202.328.5000 • WWW.RFF.ORG RFF Comments on the Proposed Revisions to Circular A-4 1. Overview OMB’s proposed revisions to Circular A-4 represent an essential and important step to update 20-year-old guidance. Much has changed in financial markets and in economic and scientific understanding in the past two decades, which merits updates to regulatory analysis—in particular regarding approaches to discounting. 1 Our comments below focus on three key issues that have been updated in the proposed revision to Circular A-4: (1) approaches to discounting; (2) the scope of analysis; and (3) the newly proposed approach to distributional weighting. We conclude by noting the important role of OMB guidance for ensuring analytical consistency across agencies. 2. Discounting 2.1. Default Discount Rate The proposed A-4 revision appropriately focuses its discussion of discounting methods on the social rate of time preference, which indicates the rate at which society is willing to trade current consumption for future consumption. The estimated value for that rate has been reasonably based on the real rate of return to longterm US government debt, and OMB proposes to update that estimate from 3 percent (set in 2003) to 1.7 percent using more recent historical data. We agree that the 3 percent estimate is outdated, and a lower rate is justified based on the evolution of market conditions over the past 20 years. Nonetheless, the figure on the top of page 30 of the Preamble demonstrates that the 30-year trailing average is now less stable with respect to the estimation period than it was when the existing Circular A-4 was written and also throughout the 2000s. For example, the 1991-2020 average is about 2 percent, whereas the 19932022 average yields a substantially lower value of 1.7 percent. We find it difficult to argue that the social rate of time preference, which is what the discount rate used in regulatory analysis is meant to represent, changes that quickly. Relatedly, we are concerned that a methodology leading to significant changes in a benefit-cost analysis, perhaps driven by a noisy signal of underlying social preferences, could undermine its value. Given the variability demonstrated by the Preamble’s figure on page 30, OMB could carefully consider both the level of precision given the stability of the underlying data, as well as how frequently to update the discount rate estimate. On the latter point, OMB could consider a regularized and recurring update of discount rates on a stable basis, such as ten or perhaps five years—but not more frequently. In addition, it is worth noting that the real return on 10-year Treasury bonds is not the only reasonable measure of the long-term consumption rate of interest. Another benchmark is the real return on longer Discounting is the process of converting a value received in a future time period to an equivalent value received immediately. For more, see Prest (2020)