Discounting and Welfare Evaluation of Policies

If policy discounting is to have any welfare relevance, it must be a derivative of a social welfare function. If that derivative is to have a net present value (npv) form, the baseline allocation must be stationary. Given a stationary baseline in an overlapping generations growth economy the inter-generationally fair discount rate under the relative utilitarian welfare function equals the growth rate of per-capita consumption, roughly, 2% for the U.S. This differs from the interest rate, even in the golden rule equilibrium unless population growth is null. J.E.L. classification numbers: D50, H43, H50.