Calculating Net Discount Rates: It's Time To Recognize Structural Changes

Despite fundamental changes in both the overall economic climate, and the financial markets in specific, both the academic literature and the majority of actual earnings loss calculations encountered by the authors continue to reference a "net" discount rate figure of between 0 and 2% (Brookshire and Slesnick, 1993). The rationale customarily cited for utilizing these "minimal" discount figures is the historical relationship between the relevant nominal interest rates and earnings growth. As is indicated in the following critical examination, however, continued production of these results is becoming increasingly dependent on selectively restricting the studied data sets, limiting the depth of the statistical analysis, and disregarding the structural alterations that have taken place in the macroeconomic environment in the post-WW II period. Once these constraints are removed, substantially higher "net" discount figures are produced---ones which significantly alter the results of future loss estimates. I. Data Selection Mathematically, the actual computation of a "net" interest rate is a relatively straight forward process. It consists of a simple subtraction of some relevant pecuniary measure of the change in the economic variable representing the loss factor, such as profits, gross receipts or wages, from a composite market interest rate over some comparable period of time. Ideally, a measure of the damaged or lost pecuniary value which most closely approximates that forgone by the injured party is chosen. As an example, in a forgone earnings action, the actual wage history of the individual or his/her relevant cohort would be the preferable choice. In the absence of specific cohort data or in instances where an insufficient individual earnings history exists, the analysis is often based on average earnings movements for the general population. Because of its broader applicability, the general data set approach is also the one most often chosen for discount rate research. The specific earnings series most often seen in the literature (Bonham and Sumner, 1992; Lawless and Male, 1994) and, convention, chosen by the authors for this study is average hourly wages in