Discounting

When I was working as an economist at a research center at the University of Missouri, I was contacted by someone who wanted to bring a hockey team to the Mid-Missouri area. He called me to ask if I would publicly support his request for public funding. He told me he had conducted an economic impact study that he would share with me.

I was skeptical, but I told him that I’d look at his study. He did some good things – at least considering how economic impact studies generally go. He was careful enough to only include spending by out-of-towners in his analysis - although we can quibble about why those out-of-towners would be in Columbia to begin with. His estimates for amount spent per out-of-towner looked reasonable. He even calculated a net revenue flow that showed that after about 10 years or so, Columbia would begin realizing a positive net benefit if it invested in the hockey team today. At least this guy admitted that the city would be in the red in the short term.

The problem was that he never discounted the future expenditures to the present. The public provides funds for a stadium today and receives a (supposed) stream of benefits into the future. But he assumed that a dollar received today was equivalent to a dollar received 25 years from now. When I discounted the future income flows, the city never showed a positive net flow.

I pointed that out to him, and he never called me back.