WSP01328 - Laserfiche WebLink

Home Browse Search

to the Viet Nam war. He then weights these average rates by the proportion of investment in the diff'erent parts of the priva.te sector during the .later part; of this period. Finally, he reduces this ag- gregate average rate by the avemge rate of inflation In the longer period. The resulting estimate of the real average rate of return in the private sector is 10.4 percent: for this concept, this ~timation procedure is probably accurate within a. :tl percent range. Recognizing the two conceptual problems discussed above, in- clusion of the rate of return on State and local government investments would somewhat lower this. rate and a reduc- tion in non-Federal investment dis- placed by additional Federal investment would lead to a marginal rate somewhat above the average. On net. it appears that the average of the marginal returns on physical investment in the non- FederaLsector is around 10 percent. and additional evidence also suggests that the marginal retwn on investment in educatton is approximately equal to the rate of return on physi.cal investment. Moreover, there is strong reason to be- l1eve that the real rate of return in the non-Federal sector has been roughly constant over the entire period since the Korean war. The structural cond1tions that determine this rate are the long- . run investment prospects in the U.S. economy and the levels -ef taxes on cap- . ital or the earnings on capitaL The long- run investment prospects appear to be roughly constant. Although the corpo- rate income tax has been reduced slightly since the Korean war, property taxes have been increased by a roughly equal magnitude. A sign1:ficant redis- tribution of investment activities within the non-Federal sector would also change the average of the rates of re- tum, but this has not. been observed. This suggests that a frequent recalcula- tion of the Stockflsch estimate need not be made unless there is evidence of a significant change in these structural conditions. It Is Important. to recognlze that the stabtlity of the real rate ot return in the non-Federal sector is not inconsistent with the observed var1ance of the rates on marketed debt I.nBtruments. Changes "':'1n the yields on Government bonds and other debt Instruments primarlly reflect conditions--such as changes in ilie an- ticipated inflation, monetary policy. and the distribution between equity and debt financing-that are unrelated to the real rate of return on investment. In summary, ilie conceptual and em- piricalissues are not fully resolved. The above discussion, however, suggests that the appropriate rate for evaluating Gov- ernment investment decisions is approx- imatelY 10 percent and is SUbstantially invariant to short-term changes in economic and money market conditiollB. 3. Selection of a speci/lc rate for water resource projects. The revealed prefer- ences of the Federal politica.l process clearly indicate a desire.to transfer in- come to the people in specific regions by subsidizing water resource projects. In NOTICES the past; these subsidies have been im- plemented in several ways but most lm- pol'tantly by the \IBe of o.n Interest rate to evalus.te these projects that Is lawer than that for alternative Federal and non-Federal investments. Accepting the legitimacy of the political process in determining income transfers and sub- sidies. the use of. a low interest rate, un- fortrmately,1s often an ineM.cient instru- ment for these purposes because it also biases the design of these projects to- ward those with higher near-term costs and lower near-term benefits. ReCOgnizing both the objectives of subsidizing water resource projects and the objective of an efficient combina.tion among and between Federal and non- Federal investment activittes, a 7-per- cent rate will be used. for evaluating water resource projects durtng the nex.t 5 years. Use of a 7-percent rate will fa- cilitate Implementation of one of the basic purpose of multiple objectives planning by allowing more comparable consideration of environmental qUe.lity objectives. Less capitalinteD.5ive projects, scaled mainly to meet near-term needs, will'result in relativelY more efficient use of Federal e.nd non-FederaJ Investment toward meeting increasing critical water needs. given current budgeta.ry con- stmlnts, It 18 sometimes argued that the dJs- count rate 00 be used in evaluating Fed- eral investment opportunJ.ties should be based on the cost of Federal borrowing (the cost of money to the Treasury). It should be noted that. properly calculated. the cost of Federal borrowing tricludes not only the yield rate on Treasury obl1- gatJons but also tax revenuea foregone on returns to private borrowing displaced by Federal borrowing, comm:iss1oI18 paid on sales of bonds. and' administrative costs of borrowing. After the yield rate. the most significant of these is foregone tax revenues. The fulll cost of Federal long-term bor- rowing, .for generally preva1!ing economic ,collBideratlollB. is at least 7 percent and can be as high as 10 percent. The exact figure depends on how much tax revenue is foregone. This, in turn. depends on the distribution of income from foregone in- vestment among corporations. tncUvid- uals, and State/local governments. Thus. the 7-percent rate established above, approaches both the opportun.1ty cost o.nd the tola.! cost of Federa.! borrowing. E. CONSIDERATION AND COMPARISON OF ALTERNATIVES A range of JX)SBible alternatives to meet needs o.nd problems. including types of measures and alternatives CBipable of ap- plication by various levels of govern- ment and by nongovernmental inter- ....., should be studied, These alterna- tives should be evaluated or judged 6S to their ooutrtbutlon to the multiobjectlves. Plans, or increments thereto, wUl not be recommended. tor Federal develop- ment th&t. although they have positive oontrlbutions to the multlobJect.ives, 24167 would physically or economically pre- clude alternative non-Federal plans which would Ilkel.Y be undertaken In the absence of the Federal plan and which would more effectively contribute to the multiobjectives when comparably evalu- ated according to the principles. The alternative non-Federal plan that would likely he physically displaced or lCOOIlomicallY "prec.luded with develOp- ment of the Federal plan, or increments thereto, will be evalua.ted for purposes of this determinatton on a oomparable ba.sls with the proposed Federal plan with respect to their beneficial and ad- verse effects on the multiobjectives, in- cluding the 'treatment of national eco- nomic development effects and the dis- conn.t rate used in the evaluation. Taxes foregone on the proposed F'edereJ. plan and taxes paid on the non-Federal al- ternative. will be excluded in such com- parisons for the evaluation of the na- tional econo~c development objective. 1'. PERIOD OF ANALYSIS The period of analys1s will be the lesser of: (1) The period of time over which the plan.w1l1 serve a useful P\.1I1X>5C con- B1dering prdbBble technological trends affecting various alternatives: or (2) the period of time when turther "dIscounting of beneficial and adverse effects will have no appreciable result on design. Where pertinent, however, appropriate consid- eratton will be given to long-term en- vironmental factors which may extend beyond periods Blgni1lco.nt for analysis of effect6 for national or regional economic development. SaJ.vage value remaining a.t the end at the period of ansJys\s should be taken ' into account for Income-producing fea- tures of the plan. For the environmental objectives, the goal may be to achieve a level of env1ron- menta.! quaJlty during or at the end of the period of anaJysls o.nd to maIntain this level Into the Indellnlte future, One hundred years will nornmll.Y be considered the upper limit of the period of analysis, o.nd shorter periods will be used whenever appropriate for any of the constde:ra.tions described above. G. SCHEDULING Plo.ns shoul1:l be scheduled for imple- mentation in relation to needs so toot desired multl:Objective beneficial effects are achieved effectively. Beneficial and ad.verse e1fects occurring according to d1:IIerent patterns in time are affected differently by the discount' process when plans are scheduled for implementation at alternative future tlmes~ Therefore, plan fonnulation,should analyze the al- ternative schedules of implementation to identify the schedule that would result in the most' desirable mix of contribu- tions to the multiobjectives when the beneficial and adverse effects of a plan are appropriately disCOWlted. While beneficial and adverse effects to\V'8.rd the multiobjectives will accrue over different time frames for the alter- native implementation scheduloo the discontinued equlvalent of such bene- ficial and adverse effects to be considered No. 246--Pt. D--4 FEDERAL REGISTER, YOLo 36, NO. 245-TUESDAY, DECEMBER 21, 1971