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The Cost of Risk to the Government and Its Implications for Federal Budgeting

The Cost of Risk to the Government and Its Implications for Federal Budgeting

Chapter:
(p.29) 3 The Cost of Risk to the Government and Its Implications for Federal Budgeting
Source:
Measuring and Managing Federal Financial Risk
Author(s):
Deborah LucasMarvin Phaup
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226496597.003.0004

This chapter lays out the economic case for incorporating the cost of market risk in government decision making, describes how risky securities are currently accounted for in the federal budget and how this likely biases real resource allocations, and surveys the results of recent research on the cost of market risk for federal obligations. The analysis begins by addressing both the philosophical and practical impediments to incorporating the cost of risk into federal budget estimates. While the idea that market risk is a legitimate cost is now widely accepted in the private sector and by most academic economists, the concept has not gained such wide acceptance among policymakers nor in the federal budgeting community. The chapter revisits the lively debate that took place in the late 1960s and early 1970s between the leading economists of the time over whether the risk of activities undertaken by the government should be treated as a cost.

Keywords:   federal budgeting, market risk, decision making, resource allocation, cost, securities

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