The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Foreword Foreword This volume contains the papers presented presented at a conference conference on "Financing “Financing Economic Growth: The Problem of Capital Formation,” Formation," held at the Center for the Study of American Business, Washington University on November 30, 1976. 1976. Cosponsored by the Center and the Federal Reserve Bank of St. Louis, the conference considered considered the problems of generating sufficient flows of saving and investment to finance economic growth and development in the future. Included here are the luncheon address by Lawrence Roos of the Federal Reserve Bank of St. Louis and the major papers presented by Robert Eisner of Northwestern University, Allen Data Resources, Inc. and Massachusetts Institute of Sinai of Data Technology, and Jai-Hoon Yang of the Federal Reserve Bank of St. Louis. iv CAPITAL FORMATION AND THE FEDERAL RESERVE Lawrence K. Roos It is a real pleasure to be here as aa co-sponsor, along with Murray Weidenbaum and the Center for the Study of American Business, Business, of this important meeting on capital formation. II must admit to a certain feeling of apprehension in attempting to deal with a subject of this complexity in the company of so many distinguished distinguished members of the acaacademic community. As president of aa Federal Reserve Bank, II think it appropriate that I direct my remarks to the role of the Federal Reserve System in the process of capital accumulation. Although the Fed is usually viewed as playing aa relatively minimal part in that process, some of our actions in monetary policymaking do have significant long-term effects on capital accumulation. First, some background. As we know, additions to the stock of human stanand physical capital have in the past produced aa steadily rising stan- dard of living for our people. In fact, our ability to accumulate and expand capital has brought us a standard of living rarely matched by others. As we look ahead to the future, however, there are serious surgrounds for concern as to whether our economy can match, much less sur- pass, the record of past accomplishment. What has been the accomplishment accomplishment of the recent past? From the late— late- 194O's 1940’s to the early-197O's, early-197O’s, our economy's economy’s stock of human capital grew Mr. Roos is president of the Federal Reserve Bank of St. Louis. sented these remarks as the luncheon address at the conference. -1—1— He prepre- rapidly as a result of advances in education and training, improvements in health care, enhancement of knowledge, and development of new techtechnological know-how. During the same period, resources were allocated to the production of business business plant and equipment (i.e., physical capital) to such an extent that growth of business physical capital far outstripoutstrip- production of goods ped growth of the number of man-hours worked in the production and services. As a result of these two developments, overall productivity grew at an historically high rate. As a consequence, the average rate of inin- crease in our standard of living more than doubled during the past. past three decades. Growth in output per capita rose from a 1.5 percent average annual rate of increase in the late-l940’s late-1940's to about a 3.5 percent rate in the early—l97O’s. early-1970's. So much for the past. But what does the future hold in terms of the ability ability, of our economy to sustain, or to exceed, the average rate of increase in output per capita of the early-1970's? early-l970’s? AA related question while at the is whether past rates of growth in output can be sustained while same time achieving often asserted social objectives. At this moment the answer to these two questions must be “NO” "NO" unless the influence of prospective demographic trends on output per capita are offset by other developments. Let me elaborate. According to Census Bureau projections, growth in the labor force aged population, that is, the potential number of persons available for filling jobs, jobs, is expected to slow markedly over the balance of this century. At the same time, growth of the total population is projected -2—2— to increase somewhat. An implication of these two projections is that growth in output per capita will wi 11 recede from its recent rate of increase the unless there are compensating offsets, such as aa marked rise in ·the growth of productivity. In turn, the extent of productivity growth will depend crucially on the potential rate of capital formation. As economists, you are familiar with the economic considerations which influence the rate of capital formation. are varied. There are many and they As president of a Federal Reserve Bank, I shall direct my remarks to the contribution that the Federal Reserve System can make totoward facilitating growth in the capital stock. It might be appropriate to start by pointing out what the Federal Reserve cannot do to affect capital growth. It can neither directly increase the amount of resources available for production nor directly directly influence the allocation of these resources to capital formation. The money and, thereby exert exert an Federal Reserve can only control the stock of money indirect influence on capital formation. indirect Fed do this? How can the Fed growth rate One way is to avoid pronounced short-run changes in the growth’ of money. Many studies indicate that stop-and-go monetary actions in the post—World short—term accelpost-Horld War Har II era produced alternating periods of short-term acceleration and deceleration of monetary growth, thereby, contributing in considerable measure to fluctuations in income, output, and employment. Such instability has the effect of generating uncertainty regarding returns to be expected from additions to capital and, thus, tends to discourage capital formation. The other way the Federal Reserve can facilitate capital formation is by controlling the average growth rate of money over longer periods —3— -3- inflation or deflation. deflation, of time so as to avoid inflation AA generally accepted proposition today is that the trend growth rate of money relative to the trend growth rate of output is the fundamental determinant of inflation. level~ given our institutional instituti As rising price levels, rigidities, are an imporimportant deterrent to capital fonmation formation and to the efficiency ency of the allocaallocation of capital, it is appropriate to consider consi just how they impact capcapital markets. First, inflation tends to shorten the maturity structure of debt. Lenders, to protect against the erosion of their investments caused by possible changes in the rate of inflation, inflation, opt for loans with shorter maturities. In such situations, firms engaging engagi in longer-run capital formation, such as public utilities, face the necessity of constantly rolling over short-term debt. short—term debt, The resulting uncertainty with respect to borrowing costs again tends to reduce the incentive to invest. Under the progressive income tax rate structure, structure, conditions of inin- flation cause personal income tax li ilities to rise faster than income. liabilities As a result, the expected real return to individuals from adding to their human capital is reduced. structure, inflation also al so has Given our present corporate income tax structure, an adverse impact on business capital formation, formation. Plant ant replacement costs rise, but depreciation deductions from from corporate income for tax purposes are based on historical costs. costs, As aa result, reported profits are overover- instated, firms pay higher taxes than otherwise, and the incentive to invest in plant and equipment declines. Firms in regulated industries find that during periods of inflation their regulated prices tend to rise more slowly than their market— market- determined costs. As a result, they often are unable to compete for inin- vestment funds with firms in unregulated industries. Under such circumcircum- stances, the allocation of resources to capital formation is less effieffi- cient than if all firms were able to compete on an equal basis in the marketplace. In addition, inflation inflation often leads to calls calls for the imposition of formal or informal controls over all prices and wages. The possibility of wage and price controls leads to uncertainty regarding regarding future expected returns from capital investment, and consequently, reduces the incentive to accumulate capital. capital AA similar situation prevails when ceilings are imposed on interest rates that thrift institutions may pay on time and savings deposits. It is well documented that rising market interest rates are the handmaidens of inflation. It is also well documented that when market rates rise above legally mandated ceiling rates, investable funds bypass thrift institutions for unregulated markets. The frequent result is a less allocation of current resources available for capital formation efficient allocation formation. All of those factors, I believe, underscore the role of Federal Reserve monetary policy in facilitating capital formation. Our mission is to promote a more stable economy and to prevent a persistent rise in the average level of prices. This role calls for relatively stable short-run growth of money, and long-run growth roughly in line with the trend growth of output. It is clear that monetary authorities should be primarily concerned with providing a stable monetary environment in the long—run, long-run, rather than engaging in attempts to solve sectoral problems. This is true particularly where capital formation is concerned. —5— -5- Essential to the capacity of the Federal Reserve to fulfill its its proper monetary policy role is its ability to function independently of short—run influences which call for the use of monetary policy to solve short-run problems. The framers of the Federal Reserve Act wisely provided an independent status for the Fed whereby it would be able to function in the national interest independent of political or social pressures. Any Any lessening of this independence might might indeed produce disastrous long-term results. In this respect, independence must be construed in both a legal and de facto sense. While it cannot be denied that even a legally inin- dependent system can make errors, problems are more certain to occur occur when a monetary authority tries to respond to public pressures pressures to counteract short-term economic problems. We must resist both legal and de facto independence. threats to Federal Reserve independence. society’s goals is to foster In summary, if we believe that one of society's continued growth in our standard of living at a rate commensurate with past experience, II suggest that continued capital formation is aa necesneces- goal. sary condition for the achievement of this goal . For this objective to be achieved, it is necessary that the Federal Reserve System remain legally and practically independent. While such independence does not assure that adequate capital formation will take place, it will at least increase the probability that some of the obstacles facing us will be minimized. —6— -6- GOVERNMENT POLICY AND INVESTMENT Robert Eisner There is nothing that cripples business investment investment like aa recession. From the beginning of 1974 to the third quarter of 1975, 1975, while unemployunemploy- ment rose from 5.2 percent to between 8.5 and 99 percent, real nonnonresidential business fixed investments fell 17.5 percent. While gross national product in constant dollars declined 6.6 percent from the fourth 1975, the total of fixed investinvestquarter of 1973 to the first quarter of 1975, ment, including residential as well as nonresidential structures, dropped 23.6 percent from the first quarter of 1973 to the second quarter of 1975. These facts should be an unforgettable reminder to all concerned with obtaining both aa substantial and an optimal rate of business business investment. The one major government responsibility in this area area should be to provide aa general climate of prosperity. Beyond that, II comshall argue, government should leave investment decisions to the competitive processes of the free enterprise system, unless cogent reasons otherwise, exist for doing otherwise. There should be no general presumption that business investment. government should encourage -- or discourage -- business -- -- Dr. Eisner is William R. Kenan Professor of Economics, Northwestern University, and Senior Research Associate, National Bureau of Economic Research. Many of the views expressed here, here, and some of the wording, Research. are to be found in other recent and current works of the author; see L4, /4~, 5, 6, 7 and §..7. 87. -7—7- “Investment Needs" Needs’ and Presumed Constraints "Investment We are frequently to told l4e 1d that productivity, prosperity, employment, and growth depend upon major business investment. investment, There have then been many efforts to project "investment “investment needs." needs.” A New York Stock Exchange study A bi 11 ion by 1985. of some $650 billion L2~17pointed L2'ff to a capital "shortage" “shortage” /J,s Treasury Secretary, William Wi 11 i am E. Simon P.s L1lf! of over $2.5 billion L7!.7 suggested suggested aa capital capital gap gap of billion by comparing his estimates of capital requirements in current dollars over the next decade with actual expenditures in current dollars over the last decade, without noting the noncomparability of prices. There have been many other comparisons of projected needs and requirements and anticipations of actual investment. Bosworth, Duesenberry and Carron L3J ooffered L’~~_7 ffered a projection for 1980 of 15.8 percent as the ratio of gross private domestic investment to gross national product. figure was in fact just about the mean for that ratio This particular figure in the 1950’s 1950's and in the pre—recession pre-recession year of 1973. A major study of A capital requirements was undertaken undertaken for the Council of Economic Economic Advisors under the direction of Beatrice N, N. Vaccara of the Bureau of Economic Economic Analysis. It projected aa figure of $986.6 billion, in 1972 prices, for non-residential non—residential business fixed investment from 1975 to 1980, or 12.0 percent of cumulative gross national product, “in "in order to insure a sufficient to meet the needs of a full employment 1980 capital stock sufficient pollution abatement and for decreasing economy, and the requirements for pollution petroleum." L22, dependence on foreign sources of petroleum.” L22, p. JJ 7/ Frequently, financing has been seen as aa major concern for the supply of business investment. ''To Benjamin Friedman wrote in 1975, “To an unusually great extent, financial considerations may act during this -8W-8- period LT977-817 [1977-Bfl as effective constraints on the amount of fixed Investinvestment which the economy in aggregate is able to do.” do." Lit [Tl, p. sy 5,g7’ ln In May 1976, however, Allen A11 en Sinai reported, “There "There are no financial financi a1 shortages of any consequence.” consequence. " L!O, {[o, p. y if Concern has also been expressed with regard to the rate of return on capital. AA study by William Nordhaus LT2T LI'ff suggests a drop in the "genuine" “genuine” rate of return on non-financial corporate capital. It appeared to fall fairly steadily from from a high of 10.0 percent in 1965 1970's, before the current to a plateau of around 5.5 percent in the 1970’s, recession. adjust(This genuine rate of return involves a depreciation adjust- ment, akin to that now incorporated in the national income accounts, and the inclusion of net interest in the numerator and the total value of denominnon-financial corporate capital, rather than net worth, in the denomin- ator.) Presenting a variety of measures, Holland and Meyers found that mid-1960's and lower real rates of return were generally higher in the mid-1960’s "are better off now since, but they note that non-financial corporations “are mi d-1950' s." They observed further, “operating "operating profitability profitabi 1i ty than in the mid-1950’s.” (ROC) (R0C) is about the same now as then but the cost of capital is lower. 'shortage,' it has as yet had no observable effect If there is a capital ‘shortage,’ on the cost of capital.” capital." LT3, [13, p. 3!7 3§] I have elsewhere offered critical reviews of some lome of these studies and reported findings. ~!hat Ishould I should like to do here, however, is to What consider what the role of government has been in achieving the rate of investment that we have had and offer some thought as to what government -9- policy should be. be, I shall consider, in particular, the argument that government, with business and individual income taxation and with our social insurance system, discourages saving and investment. Hence, it is claimed, government should take special measures to encourage investment to compensate for this discouragement. Policy The Government Record on Tax j~gjj~y~ With regard to the tax system a widespread argument by business spokesmen, politicians and some economists is that after—tax after-tax returns on capital and business investment are generally depressed by government policy. In its more sophisticated form the claim is that there is aa "wedge," “wedge,” consisting of the rate of income taxation, between the marginal social return on saving and investment and the after-tax return perceived by investors. One presumes, by this reasoning, that there is no social cost to capital or to its accumulation which should be met by taxation. To the extent that national defense and police forces are used to protect capital or the cost of the future income, this is not true. Further, business income taxation should not be viewed as taxes on capital, except in the Marxian sense of all capital, “constant” "constant" and "variable." “variable.” For if business or corporate income taxation discourages business production, it does not general generally distort the choice of input to achieve achi eve any given output. Taxation on one sector, of course, wil will1 discourage production production in that sector. discourage With less production in that sector there would be less employment of labor labor as well as less utilization of capital. unaffected, however, however, If aggregate demand and output are unaffected, there would then be more production in other sectors, with the relative -1 ~ utilization utilization of labor and capital again unaffected. We may view business taxation as so pervasive pervasive aa tax on productive activity that it offers no alternative in the way of reallocation of resources to production outside of the business (taxed) sector to some other productive activity. would have to assume that In that case, we wculd business taxation discourages productive activity generally, generally, increasing the demand for leisure and reducing not only investment but the employemployment of labor and the production of market output. AA more sophisticated sophisticated view of a possible role of business income taxation in discouraging investment begins with the acknowledgement that such taxation is aa tax on profits and not on capital or any one factor of production production except to the extent that the costs of non-capital services, factor services are more fully tax deductible than are capital services. Thus, in the so-called "nee-classical" formulation of the investment so~caiied“neo~classical”formulation investuient function, what becomes criti critical ca 1 is whether tax depreciation equals equa 1s economic depreciation, whether capital costs such as interest interest and dividends are deductible, and whether capital gains and losses are fully included in taxable income (See {If/, example). LT4J, for example), !fall If all this were true, business income or profits taxation would be neutral with respect would not to the proportions of factors used in production and hence would directly affect affec·:: irwestment, investment. It is hardly clear, when these elements are considered, that business income taxation has on balance discrimindiscriminated against capital and investment. First, despite the long hue and cry about the inadequacy of tax depreciation charges, there is considerable evidence that, except for some of the last few years of extraordinarily rapid inflation, tax depreciation has in fact exceeded exceeded economic depreciation. This is largely "capital consumption confirmed by the new Bureau of Economic Analysis “capital adjustment" adjustment” for corporate enterprise. This adjustment is essent~ally essentially the difference between depreciation charges calculated on aa consistent straight-line basis but adjusted for inflation and the estimates of straight—line basis actual depreciation charges based largely on tax depreciation. It turns out that for each of the years from 1962 through 1973 the BEA capital consumption adjustment to corporate profits was positive, indicating that consistent straight-line depreciation (at 85 percent of Bulletin “F” "F" lives) with adjustment for rising replacement costs was less than actually reported corporate depreciation charges. The similar adjustment for non-farm proprietors’ proprietors' income was positive for L2'§J and L'Zff, Table every single year from 1946 through 1975 (See L~..7 L2i~7~ T able 1.13). 1,13). find, The reasons are not hard to find. The Congress, the Treasury and the Internal Revenue Services have been beer. increasingly “liberal” "liberal" on tax depreciation and amortization allowances over the years. Beginning "Certificates of Necessity” Necessity" for five with World War II, we had various “Certificates amorti2e.tion, renewed again during the Korean War. year amortization, In 1954, sum-of-the-digits and double-rate sum—of—the—digits double—rate declining balance depreciation were initiated for tax purposes. These entailed aa major acceleration of consequent increase in annual depreciation charges. depreciation and consequent accelerContrary to some confused or confusing interpretations, such acceleration does represent, in an economy growing as is ours in the annual money value of capital expenditures, a permanent permanent increase in annual -12—12— depreciation charges. In 1962, “guideline” ''guideline'' depreciation was instituted, offering more acceleration of depreciation and increases in annual charges. In 1971 we acquired the "Asset Range" system which permitted still sti 11 “Asset Depreciation Range” further acceleration of depreciation by allowing shortening of tax lives by 20 percent beyond the already shortened guideline lives. Finally, over several decades, it turns out, the Internal Revenue Service has been acquiescing in a very considerable shortening of lives for tax deprecidepreciation purposes (so that by 1971 for much property there was indeed little to gain from the Asset Depreciation Range system). With regard to the costs costs of raising capital for investment, interest expenses are fully deductible for tax purposes. What is more, as pointed out by George von Furstenberg, with continuing inflation, busiinflation,busi- ness borrowers may charge against taxes "not “not only 'real' ‘real’ interest but also the inflation premium in their interest payment." payment,” L21, -/21, p. 225.7 Vet, with inflation, the real value of bonded indebtedness declines Yet, and businesses pay no tax on the implicit capital gain gain in their net worth. Perhaps most important in recognizing overall tax effects on investinvestgains, ment is our lack of effective taxation of capital gains. These are of course only taxed upon ''realization,'' “realization,” and then essentially at half of normal income tax rates. Taking into account the extent and timing of "realization," “realization,” which still need not occur even at death, the effective rate of taxation of capital gains, frequently zero, is almost certainly -13— -13- under 10 percent. percent. 11 Inflation can lead to nominal capital gains which are not real. Even inclusion of only half of such nominal capital gains in taxable income could result in taxation of of capital rather than true income, defined as the value of what can be consumed while maintaining real capital intact. The combination of tax deductibility of interest paypayments and limited 1imited taxability taxabil ity or non—taxability non-taxabil ity of capital gains, nominal or real, may lead, however, to quite different results. One can finance a great deal of investment in tangible assets by borrowing, finance with the interest costs contributing to a reduction of taxes on other income. Then, as the return on the investment accrues in the form form of increased value of th! the assets, no taxes are paid. The net after— aftertax return on investment is thus raised. Additional government encouragement of some forms of business investment stems, of course, from the so-called investment tax credit, which is in fact a reduction of taxes related re 1ated to purchase of eligible e 1i gi bl e equipment. That credit, introduced initially in 1962 and variously revised, suspended, reinstituted, abolished, reenacted, and extended and increased, now stands at 10 percent for business generally, with an extra 1.5 percent related to corporate contributions to employee stock ownership plans. Taking into account all of these factors -- accelerated depreciation —— for tax purposes, full full deductibility of nominal interest costs, depreciation of the real value of business debt as a consequence of 1sailey - - offered an estimate of 8 or 99 percent in 1969. Bailey /3J LU -14- inflation, the non—taxation non-taxation of capital gains, and the equipment tax credit -- I would charge that federal government tax policy has in —— fact slanted the economy to an overallocation of resources to business investment in physical capital. While I suspect that it is too early to be sure of a secular downturn, particularly with figures heavily influenced by the stagflation and recession of the last few years, one may wonder whether the declining rate of return on business capital suggested by Nordhaus and others perhaps relates to these government policies. How Tax Incentives Influence Investment Government tax incentives for business investment may be expected to increase investment and the capital intensity of production until the marginal after-tax after—tax return has again fallen to whatever is the in principle, leave required rate of return on investment. This would, In the long run after-tax rate of return largely unaffected, while causing is capital gains for owners of capital until the new equilibrium Is reached. In practice, however, there may well be some over—shooting. over-shooting. ual firms perceive higher after-tax profits for themselves. IndividIndivid- They may not anticipate anticipate all of the ultimate effects for the economy as aa whole as increases in other taxes counteract their own ininediate immediate tax gains. They then react largely to an expansion effect of apparently lower tax substitucosts without recognizing that in the aggregate it is only a substitu- tion effect which can apply. Hence they over-Invest, over-invest, at least given the width of markets, as perhaps they did in the late fifties and into —15- the sixties only to find excess capacity and excessive capital intensity in the seventies. before-tax and Thus, not only have the marginal before—tax social returns to business capital been reduced by the introduction and extension of tax incentives. The after-tax returns to business and to the owners of business business capital may also have been reduced. The issue of effects upon rates of return is in a fundamental analytical sense related to the considerable dispute as to the effectiveeffectiveness of various government tax measures in increasing the rate of aggregate investment. Aside from influences on aggregate demand, which we may wish to rule out on the assumption that alternate taxes or business reductions in government expenditures would replace any given business tax reductions, special tax measures for investment such as the equipment tax credit and accelerated depreciation must operate by lowering the relative price of capital. Consequences for investment then depend upon the elasticity of substitution between capital and other factors, or more generally among all factors of different durabilities, and upon costs of adjustment which dictate the time paths of capital and associated investment, investment. "neo-classical" framework simply assumed perfect Early work within a “neo-classical” competition and aa Cobb-Douglas production function, where where the elasticity elasticity of substitution between capital and labor is, of course, unity. (See LTk7 [Jtff and LI':if, Li5/, for example.) All that was actually estimated was a set of distributed lag coefficients, and these were actually taken as constant and independent of the factors inducing investment. With discussion of the critical nature to the investment function of these underlying underlying -16—16— assumptions (See /5 L9 and 127), l_Q/), attention to parameters of production functions increased, both in themselves and In in terms of their roles functions in investment. Forms of production functions proliferated, along with presumed empirical findings. Estimates of investment functions tended "capital" and on balance to find elasticities of substitution between “capital” "labor" “labor” less than unity but in many instances one could not pinpoint estimates sufficiently to reject the possibility of unitary elasticity and of the Cobb-Douglas form form (Note LVJ. L1J”). Differences tended to appear with as between estimates from time series and from cross sections, wIth the former generally showing lesser elasticities of substitution (as observed in LIV), LTZJ), and we have seen various arguments that the one or the other set of estimates was biased. The connection of all this to investment Is is that, if finns firms minimize costs or maximize profits, the prime effect of government lowering of the after-tax after—tax cost of capital is, by lowering the relative price of capital in general or in some Instances instances more durable capital in particular, to In increase the capital intensity of production. The extent of this increase depends in equilibrium upon that critical elasticity of substitution. Given non-zero non—zero elasticity of substitution, lowering the relative price of capital brings about an increased rate of gross investment. In an otherwise stationary economy, the capital intensity of production capital-labor ratio rises to a new equilibrium, at which point or the capital—labor greater depreciation and retirements of capital are offsetting the permanently higher rate of gross investment. Net investment returns to zero. Maintaining aa constant ratio of capital to output or capital -17—17— to labor, where output or labor are increasing, of course requires increasing capital, that is positive net investment. AA higher capital intensity or a higher capital-labor ratio, in a growing economy, implies a permanently higher rate of net investment. Government investment incentives may be perceived by individual firms as increases in cash flow and decreases in costs, with product demand unaffected. Positive investment investment responses in the short run may be related to these perceptions. We may presume, however, that government policy aimed at increasing increasing investment is independent of policies directed toward the maintenance of aggregate demand. considerations of fiscal policy, If general considerations including real or imagined needs to combat inflation or meet balance of payment or exchange problems, are such such as to maintain aggregate demand or its path invariant, the short run considerations considerations that lead underto increased business investment are in time overwhelmed by the underlying constraints of the production function. Thus, if the elasticity of substitution is low, any substantial short run increases in business investment may be followed by sharp reductions in experienced rates of return and evidence of an apparent over-supply over—supply of capital. capital, As firms experience the inelasticity of the demand for additional capital with respect to its rate of return, our usual government incentives incentives bring little bang for the buck. subsidies in the Many billion dollars of tax subsidies form of equipment credits and accelerated depreciation produce only modest increases in investment. We may also wish to consider the differential impact of investment -18- tax incentives on large and small firms. AA good argument can be made that the equipment tax credit and other business investment tax preferpreferences are a disproportionate advantage to large business, with small business figuratively picking up the crumbs from the table. AA major reason for this is simply that it is big business that tends to be most capital intensive and uses not only only the largest amounts but the largest proportions of equipment In in the productive process. Hence tax benefits for the purchase of business equipment are a much more substantial boon to large business than to small business, both absolute and relatively. The consequence is not only that small business gets less relative benefit. There may also be a backwash in this instance which leaves altersmall business altogether worse off. Aside from the fact that an alter- native to reducing business taxes in a manner that gives peculiarly large benefits to big business might be a reduction in taxes of another form which would be of more benefit to small business, there are certain form real and monetary effects of a tax credit and other other investment tax subsidies which indirectly injure small business. First, to the extent that that large business does take advantage of the tax credit to order more equipment, it puts added pressure on supply, including small small thus raising equipment prices which all business, Including business, must pay. Secondly, added business investment by large concerns may further tighten credit markets, raising interest rates and making credit more difficult to obtain by small business. The net gain to small business from these incentives would thus clearly be less than -19- the apparent gross gain which seems so attractive, and may even possibly be negative. possibly There is in fact aa third manner in which the equipment tax credit and accelerated depreciation allowances allowances are likely to be of less relative benefit to small than to large business, business. This relates to depreciathe rather obvious fact that the tax credits and increased tax depreciation deductions are essentially benefits to firms that are already making profits. With limited provision for loss offset, small firms and new firms which are showing little or nothing in the way of taxable profits hardly benefit from tax advantages which would reduce their profits tax liabilities. Effects on Saving of Individual Income Taxes and Transfers Some see the individual income tax as a deterrent to investment. It is claimed that saving for future consumption is taxed twice, once as current income is received and a second time as a return has been saving.22 Thus, the relative price of future consumption earned on the saving. and current consumption, or of saving and current consumption, is altered to the advantage of current consumption. As aa consequence, individuals or households attempt to save less and, given a full employment economy, less saving occurs and hence there is less investment. With diminishing before-tax, social marginal returns to capital, we have aa higher before—tax, 2As suggested suggested above, the availability availability of interest deductibility above, the of interest deductibility and largely untaxed capital gains, as well as explicit tax shelters, may in fact leave many forms of saving less heavily taxed than current consumption. -20- return on capital than there would be without income taxation. PrePre- sumably we have sacrificed investment with a social return which, except for tax considerations, would be warranted. Given the assumption of full employment, taxes on income may not, however, reduce the rate of saving. substitution effects. We must distinguish income and If savers are concerned primarily with establishestablish- ing a future consumption stream, say for their retirement, a tax on the return to cumulative wealth reduces permanent permanent income and reduces current consumption, and thus increases current saving. A A lower rate of return may induce individuals to save more in order to attain consumption goals in later years: the old Cassel effect. In aa growing economy with a growing population, we then have increased saving of the relatively more numerous working young. If there are not compensating If income transfers, this is supplemented by decreased dissaving of elderly retirees who, because of the lower rate of return on their past saving, must consume less. It is frequently argued that government redistributional efforts, efforts, in the form of the the whole tax and transfer payment package, encourage consumption and hence discourage saving. This argument may be questioned appropriately in terms of both the Friedman permanent income LI'[/ LT~Jand Modigliani life-cycle consumption functions Li~.7. [If[/. Both the Friedman and Modigliani models suggest that the marginal propensity to consume the Modigliani of poor transferees may be no higher than that of rich tax—paying tax-paying transferers. Redistribution from rich to poor will not then necessarily raise consumption. -2 It has also been argued recently, particularly by Martin Feldstein, that our social insurance system and its method of financing reduce private saving below what it would otherwise be, and substitute no real public saving. One might suggest one contrary effect in the dominant component of taxes on the working young young to finance transfer payments to the elderly retired. The propensity to leave estates may be such e·lderly to consume all of their pensions, that, despite the need of many elderly our social security system adds more to private saving than it subtracts. subtracts. Except for this, it might governmight be conceded that the guarantee by govern- ment of retirement benefits reduces a major r11ajor motivation for saving. Consideration of historical alternatives to governmental guarantees of old age support, though, still leaves questions. What we had before "social" “social” security at a government level, and what still exists in much of the world, is private support within the family, essentially essentially by one's children. one’s Before the advent of social security in the United States, it would appear that the bulk of the population found themselves unable or unwilling to save significantly during their working lives, and relied in large measure on the support of their children for sustenance in old age. The final word on empi ri ca 1 data is certainly empirical yet to be said, but there may have been little loss in private saving as a consequence of the shift of support of the aged by their children from aa private mechanism to one socialized socialized by the state. To the extent that the social commitment appears more reliable it may enable individuals to insure themselves themselves more readily against risks and uncertainties of all kinds regarding retirement needs, includino includinci —22-22- the uncertain length of life itself, and future health and medical expenses. Social insurance may thus bring about aa reduction reduction in saving intended to meet risk and uncertainty. Such aa governmentally induced • reduction reduction in saving is not necessarily a welfare loss. We may well prefer to save less and have a lower expected lifetime income when risk and uncertainty are reduced. We may prefer the lower-income- lower-risk combination which which social insurance makes possible, to the lower—risk higher income-higher income-higher risk combination, which we would be forced to seek through more saving if social insurance were not available. Monetary Policy Business investment investment is seen by many to depend considerably upon monetary policy. In general, easier monetary policy is viewed as bringing lower interest rates, although this is disputed by “monetarists.” "monetarists." They argue that increases in the quantity of money will only temporarily temporarily lower interest rates but then raise prices, the expected rate of inflainflation and the nominal rate of interest as well, Clearly, higher expected rates of inflation bring on higher nominal rates of interest. It is hardly clear, however, that these prevent the lower real rates of interest which are what should be relevant to investment decisions. Further, one may well properly question whether expansionary monetary policy alone, that is the Federal Reserve system bringing about the J exchange of non-interest bearing debt (money) for interest bearing debt, will generally cause much inflation. The main body of economic thinking does perceive a negative relation between the rate of interest and investment and hence a positive relation -23- between easier money and investment. What that monetary policy will be is likely to depend considerably upon the political process. Despite the short run independence of the Board of Governors of the Federal Reserve system and of the Open Market Coninittee, Committee, one may anticipate that a Democratic administration will have some influence in implementaimplementation of its traditional policy of easier money. This would appear particularly likely as long as the rate of unemployment remains high from the sharp and and the economy has not completed its recovery from deep recession that began in 1974. Measures intended to affect investment are frequently poorly judged if one concerns oneself exclusively with business investment which, as we shall notefurther, note further, is a small proportion of total capital accumulation. In fact, there is little evidence that tight money and higher interest rates have a direct impact on business investment. They do have profound effects, in large part because of governmental restricrestrictions and institutional arrangements in mortgage markets, on investment in residential housing. Tight money may choke off investment by relatively smaller and less credit-worthy unincorporated business. credit—worthy It may have very drastic effects on investment by state and local government and school districts. may also make puchases of some consumer durable~more durable.s more difficult. It In its impact on security prices it may importantly affect people’s people's percep— percep- tion of their wealth and hence their own consumption and investment in human capital. Important indirect impacts on business investment may stem from the general movement of the economy in response to monetary policy. -24— -24- Paradoxically, it is possible that tight money intended to discourage investment may actually increase business investment. For example, to the extent that construction resources are freed from residential housing and government building, they may become more readily available for the erection of new business plants. Corporate fund raisers may lament the higher interest rates that they pay and yet not note that lower construction costs (or less rapidly rising construction costs) or shorter delivery times are a consequence of the tax impact of tight money elsewhere in the economy. AA Broader View of Investment These considerations should lead us to aa much broader consideration of basic determinants and costs of business investment. One may be seriously misled by too narrow a view, particularly that of an individindivid- firm, ual firm. Here it may appear that the availability of funds is aa simple, overwhelming determinant of the rate of capital expenditures. Even in this instance, one may readily document the fact that most large firms make capital expenditures to the extent that they appear sufsufficiently profitable. For the giants of American industry that do the bulk of capital spending, funds are available. The question is whether the profitability of their use is sufficient. And the expected profitprofit- ability of use of funds varies considerably considerably more than their cost. cost. • Where profitable opportunities dwindle it may appear that the high cost of funds is t discouraging investment. But were profitability high, that same high cost would not discourage investment. may be an evidence of expected expected profitability. -25— -25- Even availability Banks and other investors will be reluctant to supply funds if investments do not appear sound, that is, profitable. Ultimately the total amount of saving and investment investment in the economy may be seen to depend upon total income and output and proclivities to save for future consumption instead of consuming r.ow. now. As long as employment employment is less than full and output and income are hence less than total of which the economy is capable, saving and investment can the total and would be increased by coming closer to full employment, employment. Given a situation of less than full employment, virtually any increase in output, whether of consumer goods or goods and services produced by investor purchased by government, would also generate more saving and investment. The underlying economic relation, indicating that higher income implies more saving and investment, is relatively unassailable. The financial counterparts to this underlying real relation may be varied. With aa higher national income, there may be greater personal saving, more in the way of undistributed corporate profits, elimination of dissaving by the unemployed and financial flows in one way or dnother another from the savers to those requiring real capital, to the extent those in these categories are not identical. Once full employment is attained, the story story is aa different one. Any attempts now to increase investment, that is output not contributing to current consumption, must involve aa reallocation of resources rather than merely merely the utilization of previously previously idle people and and productive productive capacity. In such aa situation, difficulties experienced by corporations in financing more investment may reflect simply the reluctance of -26—26— • government, or non-business investors, to give up their business or ~overnment, shares of output. While fiscal fiscal and monetary measures may well bring about some alteration in the mix of output for current consumption and investment for the future, much of their effect is rather to alter the composition of investment investment itself. Investment may properly and usefully be viewed contrimore broadly as all current output or productive activity which contributes to future output. Alongside of the traditionally included business business acquisition of plant, equipment and additional inventories, we should then place similar acquisitions by government, federal, state and local, and by non-profit institutions. We might also note that acquisitions of automobiles by households are as much investment as similar acquisiacquisitions by taxi companies or firms. Washing—machines and dishwashers Washing-machines acquired by households are as much investment as those acquired by laundromats or restaurants. Not only are durable goods of households, government and non-profit institutions investment, so too are education and training, trainin9, whether onthe-job, in school, or in the home. future output. For these also contribute to By many measures, measures, the last dollars spent in education and training have been more productive productive than the last dollars spent on plant and equipment. In addition, we might include in investment child rearing expenses and provision for health and mobility, all of which make possible future output. And, of course, few deny that expenditures develpment have contributed mightily to productivity. for research and develpment Our stock of knowledge is in many ways more valuable than our stock -27— -27- of brick and mortar. Much of the brick brick and mortar, of course, is investment conventionally counted as part of gross private domestic investment relatively little of this in the form of residential construction, but relatively residential construction will be included in business investment. Hence we find business investment aa quite minor proportion proportion of total capital accumulation in the economy. In connection connection with certain on-9oing on-going research on extended concepts of national income and output, T~.7, we utilizing in large part recent estimates by John Kendrick L[I§], take total capital accumulation in the United States economy during 1969, excluding "net “net revaluations" revaluations” or capital gains, to be $671 billion. Against this we may note that all non-residential non—residential business investment, corporate and non-corporate, amounted to only $98.5 billion for structures and equipment equipment and $7.8 billion more for change in inventories. Non-residential business investment was thus less than 16 percent Non—residential of all investment in the economy. economy, For the great bulk of capital accumulation which takes place in under-investment tangible or human form, there are basic reasons to expect under—investment and hence higher marginal returns. Where aa company constructs constructs or buys plant and equipment, it can retain it and its benefits for itself, itself. Where it invests in research, development, know-how and training, since knowledge and skills are generally freely disseminated in a free society, differences between marginal return to the investor and marginal social return may be substantial. social Most particularly, particularly, since we we are not a slave society, it does not pay individual private enterprise to invest in human beings for more than the expectation of returns from -28- their uncertain and usually short run employment. Yet the serious imperfection in human capital markets, along vi dual risk aversion, makes it very difficult with understandable indi individual for people to invest adequately in themselves, themselves. transInformation and trans- action costs curtail drastically the supply of finance for human human capital. What youth with aspirations for business leadership or service as an engineer, political leader or economist can go to the bank and say, “Invest in me! "Invest My expected life—time life-time earnings are high. I would be happy to give you a promissory note or sell you equity rights in my human capital"? capital”? Attention to human capital may lead us to aa large issue which perhaps underlies much of Of the heat in discussion of government policy towards investment. We are frequently told that we need more capital or investment for output, productivity, jobs and growth. Measures are devised presumably to increase the aggregate of business investment, of investment investment in housing and of various particular forms of capital accumulation. regulation of particular industries industries are Protection and regulation Protection put in terms of inducing desired investment. Yet, aside from measures to bring about full employment and full utilization of existing capital, government policies may influence the aggregate of investment far less than widely supposed. Given full employment, we may find investment investment heavily dominated by people’s people's desires to save. These latter may well be relatively inelastic with respect to parameters readily susceptible to control by government in a reasonably free economy in aa democratic society. -29— -29- What much of the argument may really relate to, therefore, is not how much investment but what kind of investment, and who should own the resultant capital. income and This comes down to the nitty-gritty of the distribution of Income particularly of wealth. Thus, tax concessions to tusiness, tJsiness, allegedly to encourage investinvestment, offer ownership of additional capital to current equity holders. General cuts in taxes to stimulate demand, indirectly indirectly encouraging investment, give the additional capital to those who save more out of increased after—tax after-tax incomes. Government expenditures or subsidies to stimulate employment, or to further education and training, increase wealth primarily of those whose only capital is human. Why do we hear so frequently that the business coninunity community is frightened by government spending which, it is suggested, may discourage “investment”? “spending” is. "investment"? Is it perhaps perhaps because the government "spending" is not perceived as necessarily adding to business capital? Business rarely objects to government contracts to purchase its output. But government literal~y expenditures which might properly be directed to bringing literally millions of youths, minorities, women and many men into productive or more productive employment represent essentially investment in human capital. They increase most directly the wealth of those who are now owners of business capital. v/hat Government Policy Should Be What As I indicated at the outset, business investment suffers severely sev~rely bus.iness investment, in situations of generally inadequate aggregate demand and unemployment. By far far the greatest tonjc., tonic for investment is full full employment. -30- To attain this, this, one may best focus on measures not directly concerned with business investment. The government expenditure-transfer—tax— expenditure-transfer-tax- package should be such that effective demand is equal to the value of full employment output, whatever the implications for fiscal and monemonetary policy. undertaken In addition, appropriate measures should be undertaken in the way of employment credits, particularly for youths, blacks, new workers and generally those hard to employ. These should be supplesupple- mented by improved efforts at job training training and placement. Well planned public employment is likely to prove aa necessary and useful tool in the full employment arsenal. If there is to be some kind of direct subsidy to plant and equipment investment in connection with efforts toward full employment, the most subappropriate tool would be a variable but high, marginal credit or sub- sidy, which may be negative. sidy, negative, Thus instead of a ten or twelve percent, permanent tax credit on all business equipment expenditures, we would be much better served in time of recession by a direct subsidy of say 50 percent for all investment over some reasonably high base figures. That base might be set equal to depreciation charges or, for example, years’ investment. investment, 80 percent of the average of the past three years' Ideally, profit—making business but the subsidy should be available not only to profit-making to unprofitable business, to non—profit non-profit enterprises, to government enterprises and government bodies, and indeed to households. If the benefits were high at the margin and variable, their impact could be very great. substitution, as suggested Low elasticities of substitution, earlier, may preclude any major effect on investment, particularly in aa -31—31— permanent credit of ten or twelve percent. recession, from a permanent A A marginal dissubsidy of 50 percent would cost the Treasury less and have less distributional effect and yet bring on more investment. But most important, if affected taxpayers and individuals recognize recognize that the credits were temporary, they would have major motivation to proceed while it is in effect. For all would be forewarned that the 50 percent credit might turn to zero next year, or even to aa 50 percent tax on marginal investinvestment, if policy needs dictated discouragement of aggregate demand. Prohibitions, restrictions and ceilings on the payment of interest by banks and financial institutions should be removed with all speed and in aa manner consistent with orderly adjustment of portfolios. Particularly with continuing inflation, inflation, small savers would then have some opportunity at least to avoid negative net returns, as nominal rates of interest on demand and time deposits would rise to reflect expected rates of inflation. To the extent that substitution effects do dominate income effects, this would induce more saving. Under conditions of full employment one might then expect more investment. Individual and corporate income taxes should be integrated. This would mean elimination of the corporate income tax with ~lith stockholders having to credit their full shares of corporate earnings, whether retained or paid out in form of dividends, to their own individual taxable incomes. II do not see this as aa measure likely to offer general stimulus to business investment. investment mix by It v1ould would rather improve the investment by forcing firms to compete in the marketplace for capital. It would would eliminate the current major major tax advantage of retaining earnings within the firm, regardless of profitable investment opportunities. -32- Without integration, the accumulation of retained earnings, perhaps invested in taxed capital outside acquisitions, yields stockholders untaxed or little taxed gains instead of taxable dividends. If no further exemptions exemptions or exclusions of capital gains were added, firms would be pressed to pay out earnings so that stockholders, having to pay tax on the earnings in any event, would not have an additional gains tax on the value of corporate retentions. This should not, however, reduce the supply of funds to business as a whole. Corporations could offer reinvestment options with dividend checks, as some firms do already. themBut with full integration, corporations would find them- selves bidding against each other, in a vastly enlarged capital market, for the opportunity to reinvest their own earnings and those of their competitors. major role for government in proproThere is still likely to be aa major moting investment investment with genuinely positive external economies, as well as a role for taxing or otherwise discouraging investment investment with negative externalities. There may be similar needs for intervention, ideally in the form of taxes or subsidies, where unavoidable imperfections in capital or other markets call for compensation. I have already pointed to the investment in human capital. likelihood of needs for major investment These do clearly relate most to imperfections in capital markets and to exterexternalities. Society benefits from taking youths off the street, out of into productive jobs. lives of dependence of crime, and getting them into And the relative nonexistence of private markets for investment in youths, particularly of minority groups, suggests that, even ignoring exterexternalities, considerable investment of human capital may well be subsidized —33— -33- in ir. the interest of closing the gap between marginal private returns and cost. More investment and moves closer to an optimum may be expected as well from removal of a host of government interferences with free CAB-imposed high airfares, rather than stimulating Investinvestcompetition. CAB—Imposed ment by giving the airline industry funds to acquire additional planes, may be discouraging investment by reducing the rate of utilization of existing capactty. Protective tariffs or quotas on steel imports may eventually leave the United States steel industry with less demand for steel and less need for additional steel mills. Beyond the achievement and maintenance of full employment, attention to externalities, and the removal of uneconomic government interferences in capital markets and elsewhere, our policy should be directed to the promotion of free competition. With such a thrust, I am confident that we would have more investment in business plant and equipment, in research and development, in human capital generally a 11 forms of investment in all a 11 sectors of the economy. Whether and in all they would gtve give us the most capital or the greatest amount of investment, I am not prepared to say. But In in closing I will wi 11 return to some thoughts and words I have offered previously. I see no reasons of state or religion why we must always more rapidly accumulate capital for future production. Such accumulation is, serafter all, at the expense of current, private and public goods and ser- vices. It is Is not necessary and desirable that we should always have more in the future than in the present. It is not axiomatic that we should sacrifice more when we are ycung yNmt1 in order to 1 ive better when we ~1e are live -34- that our older, or that our generation should sacrifice in the prospect that great-grandchildren would live better. great-grandchildren Our golden rule need not be, "Jam today!" Jam tomorrow and jam the next day, but never jam today!” -35— -35- 1. Taxation," in The Bailey, Martin J. "Capital “Capital Gains and Income Taxation,” Capital Edited by Arnold C. Harberger Taxation of Income and Capital. and Martin 3. J. Bailey, Bailey. Washington: The Brookings Institution, 1969, pp. 11-49. 11—49. . 2. “Hypothesis Testing and the Demand for Bischoff, Charles W. "Hypothesis Capital Goods,” Goods," Review of Economics and Statistics, Aug. 1969, 1969, 51(3), pp. 354-68. 354—68. 3. Bosworth, Barry, Capital Needs in 1975. 4. Eisner, Robert. "Issues Formation," Statement “Issues Regarding Capital Formation,” Before the Joint Economic Committee, Congress of the United State~, State~. June 9, 1976. Washington: U.S.G.P.O., 1976. 5. . “The "The Corporate Role in Financing Future Investment ~N-ee-d~s-,n~J-o~i n.t Economic Committee, U.S. Economic Growth from Needs,”.. -,~. in Joint 1975-1985: Problems. Washington: U.S.G.P.O., 0.S.G.P.O., 1977. 1975—1985: Prospects and Problems. 6. -.-.--..-,--...--· 7, 7. _______________. 8. ______________. Carron, Andrew the Seventies. S., and Duesenberry, James S. Washington: The Brookings Institution, _______________. "Capital Shortage: Myth and Reality,” Reality," presented “Capital at American Economic Economtc Association Meetings in Atlantic City, September 1976, to be published in American Economic Review, February 1977. ______________. . “The "The Outlook for Business Investment,” Investment," in Capital for Productivity and Jobs. Edited by Eli Shapiro and William L. White, White. New York: Prentice-Hall, Prentice—Hall, 1977. “Government Pol Policy, "Government icy, Investment and the Return on Investment, in Le ca ital Dans La Fonction De Production, forthforthCapital coming Conference Volume Vo ume of International Symposium of C.N.R.S., Paris X X - Nanterre, November 18-20, 18—20, 1976. ..---,----,,--~· 1 — 9. .,....--~-.-..,,.,-- and Nadiri, Nadi ri, M.I. M. I. “Investment "Investment Behavior and the NeoNeo- 10. ________________________________. “Neo—Classical Theory of InvestInvest-~~~~-~~--~~~· "Nee-Classical ment Behavior: A Comment," Review of Economics and Statistics, A Comment,” May 1970, 52(2), pp. 216—22. 216-22. 11. Friedman, Benjamin N. "Financing “Financing the Next Five Years of Fixed Investment," Investment,” Sloan Management Review, Spring 1975, 1975, ]&, 16, 51-74. 51—74. 12. Friedman, Milton. A Function. A Theory of the Consumption Function. National Bureau of Economic Research, 1957. ______________ Classical Theory,” Review of Economics and Statistics, August Class ica 1 Theory," 1968, 50(3), pp. 369—82. 369-8 . -36—36— Princeton: 13. “Trends in Corporate ProfitHolland, Daniel and Meyers, Stewart. "Trends Profitability and Capital Costs." Cambridge: Sloan School of Management, Costs.” M.I.T., 1976, xeroxed. xeroxed, 14. Jorgenson, Dale W. “Capital "Capital Theory and Investment Behavior,” Behavior," American Economic Review, 53(2), May 1963, 1963, pp. 247—259. 247-259. 15. and '.::tephenson, Stephenson, James A. “The "The Time Structure of~I~n-ve-s~t-m-en...,t~B~ehavior of Investment Behavior in in United United States States Manufacturing, Manufacturing, 1947-1960," 1947-1960,” Revie~, 1967, pp. 16-27. Review of Economics and Statistics, 49(1), Feb. 1967, 16—27. _______________ 16. Formation and Stocks Jf Kendrick, John W. The Formation of Total Capital. New York: National Bureau of Economic ReseariTh, Research, 1976. 1976. 17. Lucas, Robert E. "Labor-Capital Manufacturing," “Labor—Capital Substitution in U.S. Manufacturing,” £dited by Arnold C. Ca~ital. idited in The Taxation of Income From Capital. Brookings Harberger and Martin J. 3. Bailey. (ashington, Washington, D.C.: The Brookings Institution, 1969, 1969, pp. 223-274. 18. Modigliani, Franco and Brumberg, Richard. "Utility “Utility Analysis and the Consumption Function: An Interpretation Interpretation of Cross Section Data,” Data," K,K. Kurihara. New Brunswick: Economics. Edited by K.K. in Post—Keynesian Post-Ke{nesian Economics, Rutgers UniversityPress, 388—436. On versity Press, 1954, pp. 388-436. 19. Nordhaus, William “The Fa Falling Wi 11 i am D. "The 11 i ng Rate of Profit,” Profit," Brookings Papers on Economic Activity, 1: 1974, 1974, pp. 169-208. 20. “The Prospects of a Capital Shortage in the U.S.," U.S.,” Sinai, Allen. "The Euromoney, May 1976, as reprinted reprinted by Data Resources, Inc., as Economic Studies Series Number 24. 21. “Corporate Taxes and Financing Under von Furstenberg, George M. "Corporate Continuing Inflation,” Inflation," in AEI Studies on Contemporary Economic Problems. Edited by William Fellner. Washington: American EnterEnter225-254. prise Institute for Public Policy Research, 1976, pp. 225—254. 22. Bureau of Economic Analysis. AA Stud~ Study of Fixed Capital Requirements of the U.S. Business Economy 1971-l~O 1971-1980 (prepared under the direction BeatriceN. Beatrice N. Vaccara), Washington, December 1975 (Processed). 23. New York Stock Exchange. The Capital Needs and Savings Potential Potential 1974. of the U.S. Economy, Projections Through 1985, New York, Sept. 1974. 24. Tax Reform. Public Hearings Before the Committee on Ways and Means, House of Representatives, Ninety—Fourth Ninety-Fourth Congress, First Session, On the Subject of Tax Reform, Part 5, Statement of Hon. William E. Simon, Secretary of the Treasury, July 31, 1975, 1975, Washington 1975. 25. Survey of Current Business. January 1976, 1976, Part II. 26. __________________________. July 1976. 1976. -37-37— CAPITAL FORMATION CAPITAL FORMATION AND U.S. ECONOMIC PERFORMANCE Allen Sinai Allen Sinai Three years ago the physical capacity, supply of labor, and financial resources of the U.S. economy were insufficient to satisfy demands. Symptoms of these capital shortages included sharply rising prices, peaks in factory operating rates, increased unfilled orders, long delivery delays, higher wages, low unemployment rates, rapidly accelerating interest rates, widening yield differentials between risky and “safe” "safe" financial assets, surging loan demands, decumulation decumulation of of financial assets, and credit rationing. 11 Indeed, the unprecedented inflation of prices, wages and interest rates was the principal cause cause of the deep recession that followed. A by-product of the 1973-75 1973—75 slump has been a shift from capital A "shortages" 1ack in productive capacity, 1labor, abor, “shortages” to surplus with great sslack and financial markets.22 However, the recession also induced a low rate 1As used here, the term "capital" “capital” refers to physical capital, human capital and financial capital. 2Utilization rates, whether measured by the Bureau of Economic Analysis or as newly revised by the Federal Reserve Board, are far below peak 1973-74 levels and in a majority of cases are less than the average over 1960 to 1975. Excess supply in the labor market is indicated by a national unemployment rate of 7.5%, 7.5%, compared to the less than 5% of three years ago. Also, the current rate of unemployment, in an expansion that is two years old, exceeds the previous peaks of 7.4% in 1958:2 and 7% in 1962:1. Currently, there is also a large (17), financial surplus; see Sinai (17). Dr. Sinai is Director of Financial Economics, Data Resources, Inc. and Visiting Associate Professor, Sloan School, Massachusetts Institute Institute of Technology. —39— -39- of capital formation, especially by business. The failure of business fixed investment to rebound significantly, even in the ensuing recovery, has raised numerous questions about the relationship of capital formation to future economic performance. 1) Among them are: will capital formation be adequate to support aa full employment level of output in the years ahead, without a resurgence subsequent bust? of inflation and subsequent 2) what mix of policies would significantly raise capital formation? Should selective business tax incentives incentives be used? Personal tax cuts? Easy money policy? Or, some combination of general monetary and fiscal measures? 3) will heavy doses of capital formation provide a large enough increase in productive capacity to ease inflationary pressures on prices and wages? This study examines the role of capital formation in U.S. economic performance and, in particular, particulai?~, the effects of some alternative sets of policies that could stimulate the formation of capital. The Data Resources, Inc. (ORI) (DRI) model of the U.S. economy provided the framework for analysis, with computer simulations of economic activity in response to policy changes through 1980. In brief: - the present rate of capital formation, broadly defined, is insufficient to achieve full employment. The primary causes are the deep recession of 1973-75, 1973—75, a sluggish economic economy's instability expansion, caution engendered by the economy’s over the past decade, and the desire of business business to reduce financial risk by restructuring balance sheets. -40- So far, nonproductive spending for nonproductive investment, investment, such such as as spending for pollution pollution abatement equipment, has not been sizeable enough to bear a major responsibility for the weakness in physical capital formation; — given the current surpluses in productive capacity, labor and finance, aggregate macroeconomic policies can be more effective in raising capital formation than specific business tax incentives. incentives.33 Of the policies considered here, a combination of permanent reductions reductions in personal income taxes, minimal growth in Federal government outlays, and easier money would provide the greatest stimulus to capital formation. money'' approach, in the sense of This "tight “tight fiscal-easy fiscal—easy money” keeping a tight rein on growth in government spending, would have little cost in terms of additional inflation, even with monetary growth between 8 and 9% per annum in 1977 to 1979; 1979; 3Brimmer and Sinai (2) studied the effects of several business tax incentives on capital formation and found significant, but only small impacts. The real case for changes in business taxation rests on grounds other other than capital formation; it is to reduce the impact of higher prices on corporate taxes. Inflation reduces the real purchasing power of corporations much as in the case of households. Profits are depending on the method of inventory accounting and historical overstated depending cost depreciation does not keep pace with replacement costs. Thus, periodic reductions in business taxation may be necessary to prevent an “inflation "inflation drag” drag" on corporate spending. This might take the form of indexing depreciation expenses to capital goods prices, aa policy suggested by Brimmer and Sinai, or even as reductions in corporate income taxes. Integration of the corporate and personal income tax Fellneris also desirable, but on grounds of allocative efficiency. See Fellner— Clarkson-Moore (8) for a good discussion of tax indexation issues; Clarkson—Moore also Tideman and Tucker (20). -41- - as the economy nears full employment, monetary and fiscal policies must become less stimulative so that that growth in aggregate demand slows to balance that of potential supply. Business tax incentives would then provide aa more appropriate means for increasing productive capacity further, since improvements in the financial position of business business would accompany the additional capital spending. Also, the tax incentives would shift the mix of spending toward business fixed investment and away from other sectors. The share of total L3NP GNP in business fixed investment, vis—a—vis vis-a-vis other sectors, is really an issue only at full employment; — the capacity added through aggressive policies policies to stimulate capital formation can only bring small reductions in the inflation of wages and prices, given the relatively small small impact of physical capital formation on potential output. The best insurance against aa resurgence of inflation is aa gradual approach to full employment with real GNP rising by 55 to 6% for the next few years, rather than any massive program of stimulus designed to increase capital formation. The paper is organized as follows. The next section reviews the importance of capital formation and presents a simple framework for analyzing the effects of measures to enhance the formation of capital. policies The analytical model presented helps explain how different policies affect capital outlays, with resulting increases of business, housing, and labor capital. Subsequently, the outlook for capital formation ORI forecasts of the U.S. to 1985 is briefly presented, using recent DRI -42- economy as a basis. The following section provides the results of computer simulations with the DRI model which show the effects of various policies that could stimulate capital formation. The policies considered are 1) sustained reductions in personal income taxes during 1977, 1978, 1978, and 1979; 1979; 2) these personal income tax reductions accompanied by accommodative accormiodative monetary policy; 3) easier money in terms of accelerated Ml growth; 4) personal tax reductions and easier money; 5} 5) personal tax reductions, slowed growth in Federal government spending, and easier money; 6) selective business tax incentives such as the investment tax credit or reductions in corporate profits taxes. selected The policy sets selected for study, while certainly not exhaustive, are those most likely to benefit capital formation. The variables studied include real 01W; GNP; inflation; the unemployment rate; interest rates; real business fixed investment; the tangible physical assets of households including housing, autos, and durables; the tangible physical assets of nonfinancial corporations including plant, equipment, and inventories; the employed labor stock and labor force; capacity utilization, productivity; productivity; and potential output. The final section then offers some concluding observations on the relation between capital formation, productive capacity, and inflation. The Importance of Capital Formation The recent concern with the pace of capital formation has primarily been focused on the business sector. 44 One line of reasoning has the capital needs of the U.S. economy so great that adequate adequate financing 4See {10), (11), (14), (21), (23} see (2), (7), (9), (10), (23) and (25). -43- will not be forthcoming in the next decade. As a corollary, business fixed investment would be insufficient to create the necessary productive capacity for preventing a recurrence of the shortages that characterized 5 Labor productivity and growth in potential the economy in 1973 and 1974. 1974.~ output also would be limited. Another serious round of accelerating inflation would result, then a deep recession as policymakers once again applied restrictive measures in order to contain the inflation. Indeed, as Table 11 and Charts 11 to 4 show, show, the rate of business capital formation has been quite weak since the recession trough in March 1975. 1975. investment to GNP was 9.3% The ratio of business fixed investment in 1975 and only 9.0% last year.66 These figures compare with averages of 9.4% during 1955 to 1964 and 10.1% in 1965 to 1974. The only other investment to GNP has been years when the proportion of business fixed investment as low or lower were 1930 1930 to 46, 1952 to 54, and 1958 to 64. Furthermore, the upswing in real business fixed investment since the trough of the recession in 1975:1 is the weakest in the postwar period. Real residential construction, on the other hand, has been near average in its expansion. 5vaccara (23) presents the most extreme view. On the basis of a BEA study, she argues that fixed investment must average at least 12% of GNP in the next four years "to stock sufficient “to assure a 1980 capital stock to provide for increasing productivity, full employment levels of output, pollution abatement and decreasing dependence on foreign sources of petroleum". petroleum”. Most studies project a necessary ratio of 11.5% for fixed investment to GNP for 1977 to 1980. 1980. Sinai and Brinner (19, p. 44) are an exception, finding that ratios within historical ranges can be consistent with a full employment economy by 1981. 6These ratios are net of spending spending for pollution abatement abatement equipment, 1975 and 1976. 1976. estimated at 0.4% of nominal GNP in 1975 —44-44- TABLE 1. Gross Private Domestic Investment: Investment: Historical Profile and DRI Projections* (GP{11—PASL)/UN1’ {i,FDI-PAtJl)/l,i~i' l14.3 1,. 3 111.9 ' . ,1 11955 '} ') ::, 14)56 )'..,(, I·; 'Jr 1957 l 'f ';i8 1956 4959 t ·J '\ 9 I<,. ‘4.8fl 1'.i.'.> 15.5 lII.? 5. r 14.3 I 4•e l 1,. 2 14.2 13.4 13.fti,.& 1’..6 I14.9 4•9 115,0 5. (. l(,.l 16.1 H,.4 16.4 145.! 5. I 45,3 l'.J.11 115.0 ~,. -'.) i·H,J 4150 l14.1 1,. l l-; r, 1 1954 1962 t '.162 1l,,u ', .u t ri. l 15.1 l'>,I 15.1 15.2 lh.? 1)51 1-1 b 5 14964 9 E:, 1, 19,5 1'1·1'3 I1)56 l 6 f, 1-16{ 4,61 19/if\ t1966 1949 t(,.1, 46,’. 1 :, • ,) 13.0 l 4•9 14.9 l'i.1, 15.4 16.) ti,.•:: 11,.,, 16.’. 115.6 'i .6 ir,.4 14.6 116.7 I+ • 7 11.5 lt.6 13.6 I 3. & 116.:) 4. ') 11, .6 16.6 l15.0 5 .') I 'i. r 15.7 115.9 5. 9 ltl.5 16.3 l15.1 r,. r I 6. 6 16.6 lf,.J 14,5 ,,r, ,-, (.)1 U’i 1110 1}7') HTl 1)11 Hf 1)122 1'.,13 1973 1)14 HI 4 1,, rs 1975 I9’6 l9I 6 1)77 1 -J l l l '1 T Fl 1918 1919 1'179 1930 1,dO 1991 I 'J 'l l lii? l'J'!2 1933 l'H3 19 d4 1936 1')135 49335 ' GNP GrIP 05372 GNP72 ICR ICR 1CR72 ICR72 IFIXNR IF'IXNR IFSXNR72 IFIXNR72 Jrnv 3159 J01.5972 INV72 PARE PABE Sources; Sources: l ~ •r 45.1 43.5 1:\.5 115.4 '.',. C l) . 3 13.3 \ l, • 2 16,2 112.3’ ? • (1 \!,.') 45,5 lh3 V53 1954 1i51, _.,I CCIII 7213,537? Gf'Dl 72/t,NP/Z = 115.1 5. 1 l15.5 '",. 5 1II.! ,, • ~ I5 •G 15.0 lo.,., II.) I;., •7 36.7 l 1,.·; 6.) 11.55 11. 13.44 13. 13.8 LL~ I 1, • 3 I’..) l 4•S 14.5 15.0 I 5. IJ 46.? t 5. Z 1 '>. '.3 15.0 1 15.8 t':i.f< 15.1 15. 15.6\l s. e If 139/3)53 IF IX~EUf;l\/!' 'I.I, 9.4 'l‘.3 • 3 >,6 >." 1J• 4 11,4 l15.5 ( •5 9.5 9. ' 9.~ ?. I 9, r, 9,6 ')•I) 9.0 '.<1,ry 9.9 9.5\ 9•4 9.4 110.4 iJ, 1, I11,8 3. Fl 10d 10.3 1 0. 1 10.3 ( If !f II XNR.Pt.RF)/GNP XNH"'P A.Rf )/GNP 9. 4 9.4 ?9.3 • 3 9. 6 9.6 O. 4 l10.4 11. 10.55 9. J 0,3 99.3 •3 9.4 9 • ' 9.0 ,.o 9. l 9.1 9.0 9.C q. ,. 9.4 1:). 10.64 l O. ~ 10.8 10.2 50.2 l•L? 1-:.,,1 10.9 10.2 1 J. (, 10.4 10.0 10 • 0 9. 9,55 '). 6 ‘1.6 1').t, I0~ l40.0 O .C l49.4 ·". h 10.2 10.2 9. J 9.3 1}.f, 11.6 10.2 1 ').? 9.' 9.” 9. 9,77 (). 5 ‘1.5 161 XNRT2/6N312 lflXNR72/GNP72 'l.', 9.5 9. (') 9.0 9.1I 9. '9.1 .7 lll, l 10.1 11,. 113.5'j 10.6 10-6 111.1 10.9 l11.1 l. l 111.2 I.? l t.? 11.2 9. J 9.3 '}. 7.66 I/). •J 10.’) l10.2 '). ;> t40.’. 110.1 0. l IO." 10.8 l O. 8 10.8 fl.,. ICR/GrIP I CR/GNP 1C977/GNPZ2 I CR72 /GNP72 9.0 9,0 5.0 5.0 4. 4 4.4 9.00 9, 5. 4 4.9 4•9 5. 5.3J 0.4I. -o. 5.3 ~.1 ' •7 4. 7 4.? 4.3 ' • 3 4. 1, 4.4 5.2 5. 2 4.1 4.6 4,1 4•7 4.7 5.1\ 5. '. ' 9.4 9.8 9.8 9.1 '. 7 '8.1 .7 8.1 '. 7 9.(,) 9.0 8.17 e. 8.9 8.9 '. 9 9. J ‘1.3 IC.) l C. 3 110.8 n. fl l C. 3 40.3 t O. 3 10.3 10.6 10.6 10.2 10.2 9. 7 9.1 l10.0 O. 0 1\.).6 10.6 IO. 6 10.6 9.3 '. J 9.2 9.2 ,.2 9.2 ,., ,., 9.4 9. ' 9.6 9.9 10.1 1 C. l IC. 10.33 110.6 D. 6 1 I). 7 10.1 1 0. 7 10.1 5.4 ,., 5.9 5.J ,., 4.8 ,., ,., 5.4 4. fl 4,8 4,1 4.8 4.B 5.0 'LO 4.6 4.8 '4.4 .4 J.7 3.1 LS 3.5 l. 9 3.9 4.0 4.0 3,6 5.& 4.6 4.6 5.2 5.2 5.0 5.0 3.8 l.l 3.3 l.9 3.9 4. l 4.3 4. (, 4.4 4.4 4.4 4.6 '4.7 .7 4.8 4,8 4.8 4.8 6.1 '. 7 4.6 4.6 ,., , .. ,., 4•9 4.9 4. (, 4.6 3,8 3.' 3.6 3.6 4. 0 4.0 J.9 3.9 3.1 J. 7 4.6 ' • 6 s.2 5.2 4.1 ' •7 J.6 3.6 J.I 3.1 J. 6 3.6 4-0 4.0 4.0 4.0 4.1 4.1 4.1\ 4.;;, 4.2 4.2 4.2 4.1\ J .' 3,9 ,.o ,.o '. '. INVClIfG~4l’ l NVC!I/GNP I3IV7?CH/GNPI? !iJV7?CH/GNP72 -—0,6 0. i, C. J 0.) 0,t) 0.0 1.55 1. 1.2 1.2 G.O 0.0 1. 1 1.1 0. 3 0.3 0.41, I1.1 •1 0.7 0,4 I.! I. I 1.0 l.O 0.9 1.4 I. 4 I. 9 1.9 1. 1.3J 0.99 \. 1.00 0.4 0,6 0.8 1.4 1.4 0.8 —1.0 -1.0 o.7 0.1 0.6 0.6 0.9 1. 1.00 1. 1.11 1. 1.00 LI 1.1 1. 1.11 I. 1.00 0.9 0.9 0.9 0.2 0.2 ‘0.3 0.9 0.6 0,6 0.4 1.0 l.O 0.9 o., •). J 0.) 0.J 0.0 J.0 5,0 )1.3) ·J. 3.) ) ij. ·) 0.0 o., o., 0.8 ().') 0.0 9.00 'J. ◊. ·) 0.0 1.? L2 1,7 \.7 \.2 1.2 0. ,) 6.0 2. ,) 0.0 '). I 0.! 0. 1 0.1 -o • o.r o., o., v. o., o.& ,.o o., o., o., Gross National Gross National Product Product Gross National Dollars Gross National Product Product In In Constant Constant Dollars Residential Construction Residential Construction Residential in Constant Residential Construction Construction in Constant Dollars Dollars Fixed Private Fixed Private Nonresidential Nonresidential Investment Investment Fixed Private Fixed Private Nonresidential Nonresidential Investment Investment in in Constant Constant Dollars Dollars Change in Business Inventories in Business Inventories Change in Business Inventories Inventories in Constant Dollars Change in Business in Constant Dollars Pollution Abatement Expenditures 3.5. Business on Capital Capital Account Account Pollution Abatement Expenditures by u.s. Business on Bureau of Economic Data Resources, Inc. Department of of Commerce, commerce, Bureau Economic Analysis, Analysis, Data Resources, Inc. * * t'Ail[ /1;NP t’A0[/6NP 1977—80 forecasts from OR! Control 2/23/77; 1981-85 figures from long-run projections of March 1977. 1977-80 forecasts from ORI Control 2/23/77; 1981-85 figures from long-run projections of March 1977. 0.2 0.2 ~o.J o., O.B 0.8 I. 0 1.0 0.4 0.6 0.8 I•l 1.3 0.1 —1.0 - l .0 0.6 0.5 0.9 0.9 1.0 1.0 1. 0 1.0 I. 0 1.0 1. 1.1I 1.0 1.0 0.9 0.9 o., o., o.o o.r o., o.s o., o., . ;) • l 0.1 J. 2 0.2 ·.). 2 0.2 J. 3 1.3 :,.1 0.3 J. 4 0.4 u.,, 5.6 5.4 ,., ,., 1.4 t,;. 4 0.4 J.S 0.5 V • 'j u.S J.5 3.5 J.5 0.5 0. ,, 0.4 0,4 0.4 v.4 0.4 J.4 0.4 CHART 1. Real Business Fixed Investment in Recovery CHART 2. Real Producers' Producers’ Durable Equipment in Recovery I 1.20 t.20 I 1.:r,s 11.25 N 0 "£D l ,.....__ i / £I t . 2 0 f - - - - - - - - - - - ~ . . . , __ _ _ _-I I 1.—’. • 1.1st------------'--_:..-...::.._--t 1.15 IT A' // 960-1)61 )96Q..IJ6! / a G / 8 - .. ... -: / " 1 . I :N t.15 0 I -- .• • •i9s~!I9~~’ ~958-1959 ,,, 9601961.7 1960-!961 •• \a/•-.;,,,.• , — 0 H .tot-------;'- , , ~ -/‘~‘) -,/,:------i N I 1.10 ;/. •1 tI --·/·-✓·.,,,,, .,,,- . ..,_,,,,, ..I#- /.e/t9loi9n ••• 1---------~""·:...·...,... 1954.1955 ~v1...;.i._:.,.....,,..:/~~ ~Y” U '953-1959 .,,.. / -- 1 . o , t - - - - - - -......-'---,.--'--\------1 1.05 ~ )954-~ .·_ .......... ·;-·-~- t f/ ' .-~---)-· •• \~. 8~ 1.10(-------\1..<:.._. --,---;;<--..---4 1,10 / — 1954.1955 1954-!955 . . . .. / a’ ( :91o;.1971 1970-1971 // .• 1.o,1-----=-.,....--,,----------1 1.05 j’’ / . .1 ~ 1.oof--~=,...:,.._----7.f-------l ~ 1: .,st----t---,t---,t---,t---,1----,1----,,--~ ,,,, ~L~- 2. Z, 3 ;,) - I -44 5S 6 Quarters free Q\larten f ~ Tro.nh Tro~h l ' B I .. .. ,r,, I~ 1.20 t.20 6 "" ' ' ·1 : 1I l.S 1.~ /, M N ' Investment GHART CHART 4. Real Residential Residential Investmeht in Recovery CHART 3. Real Real· Plant-Expenditures Plant Expenditures in Recovery D 0 5· , Q*tterstr~estrough~ Qu,vter • - fl:GI 'ttou;h ·, -. N 1975—l976 D •• £E A 1.1' 15 I - I0 u 8 1.10 G 0 • / 9541955 1954.-1955 / H H l.05 I .05 ,1~ - 1960-1961 1960.1961 / !958-1959 l958—1959 \iI . i 3l.3 ~J. /S'SS..1959 958.1959 / 1.2 1 12 .~-~__1$- .,. . / - / J’1954-195$ : I 1 I 2 I 3 1960-196! 1960z1961 ----·---- \;<—~C’ ‘T970!971 :9i~isiii' _... .115 ,,. — _%. ",{'':' I 1.00 — /7’ G H .. !.I, •.~ ., . — "'I/ A 1.4 ~1.4 T \. - 1970—1971 1970-1971 • 4 I - I 5 ' Quarters from. tr0111 Trough Quarters - 6 ' I - 7 I 1.1 - • 6 -46- 1.0 .. 1 t<. I 2 I 3 I- 4, I 5 I QuarterS free Trough Quart.en tro. TrOUCJh • ' ' ; - • Several factors account for the recent poor record of capital capital formation by business. First, the 1973-75 recession was the most severe of the postwar period. Aggregate demand dropped sharply late in 1974, 1974, providing a sudden shock to business business' sanguine expectations of future final sales. In addition, this episode, in contrast to others, was characterized by extraordinarily high interest rates, greatly cash flow, and badly badly deteriorated balance sheets, sheets. 77 Corporate diminished diminished leverage moved dangerously high, debt burdens became overwhelming, the average maturity of outstanding debt shortened considerably, and the ratio of financial assets to short-term liabilities reached a record low. Serious threats of bankruptcy and default arose for many corporations. Debt or equity finance became near impossible to obtain at any cost. Under these conditions, business business spending had to be severely cut back. back. Second, the expansion expansion has been extremely weak since the 9.2% rise of real GNP in 1976:1. 1976:1, There is considerable slack in the labor market and capacity utilization rates have only slowly recovered, recovered, so that much excess capacity remains to be eliminated in relation to the same stage in other expansions. Without the pressure of increased final sales relative to utilization, probably the most important determinant of capital spending, business has had little incentive to invest. Furthermore, fears of continued instability in the economy, similar 7 For a discussion, see (2), (11), (19), (25). Brimmer and Sinai 288-94) describe how deteriorated financial positions affect (2, pp. 288—94) business fixed investment in the DR! DRI model of the U.S. economy. AA similar view appears in Minsky (13, chs. ch's. 4 to 7). -.47-47- to the ups and downs of 1965 to 1975, have kept businessmen cautious commitments to heavy doses of capital outlays. about conritments Finally, an unprecedented restructuring of balance sheets and strengthening of liquidity has prevented prevented business capital outlays from sharply rebounding. rebounding. 8 With a resurgence of cash flow relative to capital outlays, business has increased financial assets relative to liabilities, short—term debt, restructured debt maturities retired a record amount of short-term to aa- longer term,term, sharply reduced the burden of debt service, and lowered debt-equity ratios for-the for the first time in many years. Much lower inflation and relatively easy monetary policy has helped by reducing interest rates and easing the external risk to balance sheets. The return to this process of corporate “reliquification” "reliquification" in terms of reduced risk, risk, higher credit ratings, reduction of prior claims on income, returns on financial assets, and accumulation of the liquidity to finance future outlays, has far exceeded the expected rate of return on the acquisition of physical assets. The current weakness in business fixed investment investment is not without precedent. As noted, similar patterns appeared during the 1930's, 1930’s, early 50’s, 50's, and in 1958 to 1964. 1964. early In particular, the 1958 to 1964 experience was characterized by an approach to full employment without any decided rise in the ratio of business fixed investment to GNP. Thus, full employment has not necessarily been precluded in the past because of weakness in business plant and equipment spending. 8See see Sinai (17). -48- In each case, case, however, in this the process of getting to full employment employment took many years, and in sense it can be argued that capital formation was inadequate. Despite the focus of most researchers on capital formation by business, the problem is not limited to that sector. Tangible capital also is found in the household, financial, and government government sectors. sectors. 99 The stocks of housing, autos, and durables provide direct utility to households and make household production production easier. Even household inventories productivity of probably matter for social welfare, if not for the productivity The equipment and buildings of financial institutions certainly labor. provide an input to the production process. Social overhead capital or infrastructure such as railroads, urban mass transit, and highways is important to maximize economic productivity in the private and public sectors. And lately, the capital necessary for clean air and water, energy independence, and urban repair has attracted attention. Human capital, too, is now generally considered a part of the total capital stock, with spending for maintenance and improvement of labor perhaps as important for productivity as increases of physical capital. But the growth in these forms of capital also has slowed in recent years. The preoccupation with business capital formation is understandable, since measurement has been concentrated on this category and traditional production theory includes only business capital. But it should be clear that the physical assets of households, labor capital, and social overhead capital are also critical to society’s society's welfare and the productivity of labor. Accordingly, in this paper, concern with capital formation is not limited to the business sector, but includes the stocks of 9See Kendrick 9see Kendrick for different different types (12) who presents (12) who presents of capital in the —49— -49- an exhaustive set of estimates an exhaustive set of estimates U.S. economy. housing, automobiles. automobiles~and and other other durables durables in the household sector. The induced changes in the labor force and employed stock of labor also are considered. The resulting coverage of capital formation is still still conceptual point of view, but this is only because of limited from a conceptual the scope of the DRI model. The case for capital formation can be illustrated with a simplified analytical framework of the U.S. economy. Consider a model of aa closed economy that focuses upon the short-run short—run dynamic behavior of households, authority, firms, bank and nonbank financial institutions, the monetary authority, and government. Uses and sources of funds behavior of the various recognized.10 Markets for output; money; sectors are explicitly recognized. non—monetary non-monetary financial assets; the earning assets of banks; household, business, and government debt; and labor are included. Price inflation depends on wage costs, external elements such as OPEC oil price increases, and demand-pull pressures. Wage inflation depends on inflation inflation expecexpec- tations, the unemployment rate, and the existing framework of institutions. Employment depends on the demand for labor and real wages. Disequilibrium 110 °Funds Funds can be used for acquisitions of physical or financial assets. For example, households purchase houses, autos, and consumer durable goods; but also increase holdings of money, deposits, bonds, or equity. Firms may accumulate inventories, plant, equipment, or labor; but also place funds in various financial assets. Debt repayment and retireretirements are a use of funds. Financial institutions use funds to acquire loans and investments. The government sector purchases purchases considerable capital and labor. Sources of funds are current new money flows, borrowing, or the sale of assets (a negative use}; use)-; where new money flows refer to current exogenous exogenous sources of funds such as disposable income (households}; cash flow (corporations); deposit inflows, adjusted for (households); reserve requirements, and loan repayments (financial institutions); contributions to retirement programs (pension funds); funds}; and tax receipts (Federal, state and local governments). Viewing the activity of the various sectors in aa uses and sources of funds framework generalizes analysis that is based on physical asset the more standard macroeconomic analysis purchases and current income flow financing. For some discussion of these notions, see Sinai (16) and (18). -50- is the usual state, with interrelated adjustments of spending and financial behavior as the various sectors move from existing to desired positions in assets and liabilities. Expectations are critical because certainty and perfect foresight are not assumed. Also, the recognized for households, business, risks of default and bankruptcy are recognized and government. Taxes, too, are permitted. AA large number of financial markets are assumed to exist for both short- and long-term long—term securities. The demand and supplies of financial assets and liabilities interact to determine the structure of interest rates. (underThe equations describing this system can be summarized as (under11 lined variables are exogenous):11 Real Sector rse· hfaet-11 (cl/yd) (ds/yd)e·' cst '· kc~ kc t-11]] Ct = = f [yd~rs~rl~ret; (cl/yd)~ ~ 11.• Ct t' rle. t' ree· t' hfa t-1'·1(ds/yd)e; 11 (ydte., 2. ifixedt = 3. irest = f3 4. invt = f 5. it ifixedt 6. t.~ = f6(y~) 4 f2 [(py/r)e; (db/cf)e; Uek ~ [remort; Amortt ~ vac~~ kti] krest_i] [ye; delaye ~,ue; (db/cf)e; kinvtij + irest + . - - invt - 11 1tThese lhese equations reflect the structure of the DRI model of the U.S. economy, although not exactly the model generating the simulations presented below. The conceptual framework that determines national income is reprerepresented, but some detail is omitted. For example, not all of the variables specified and many of the exogenous variables appear in the equations as specified are actually endogenous in the DRI model. See Data Resources, Resources, Inc. (5) and Eckstein-Green-Sinai Eckstein-Green-Sinai (6) for aa more complete discussion. -51—51- 7. yd.~ Ey~—t~ yd t = y t - tt 8. g=~ 9 = .!!. 8a) deft 9. - tt 8a) deft =_g_ = f 8b) A~debt~ llgdebt t = f88 (deft; ( def ; gdebt~.. gdebt 1)) t t-1 - 9. y~= ct i~+ g + Capital Stock Identities 10. 10, kc~ c.~ + 11. 11. kt 12. kres krestt 13. kinv~ ~ ifixed~+ 62 kti ires = irest t + + 6., o~.o3 kres t-1 inv~+ kinv~1 Financial Sector 14. md~= f [yr; rs~rd~ret; rl~A9debt~td~,,1 usbondst_1 md~1] 15. mst = f15 (mb; rsf4; rloan4; resreq; curratio) 16. mst = mdt 14 = m~ Potential Output 17, yP = f 17 (nft; kt; T) Employment, Prices and Wages 18. n~= f18[y~kti; (w1p)~ (r/p4; (db/cf4] 19. 4 = ~ PQEt; jjp~(w/p)~] -52—52— 20. 20. = n5 = nndt =n t =nnt 21. p . [(y~- yP); Pstruc. ~struc. ; wtJ ~i 21[(yt t == ff21 - yP>O, then Pt>Pstruc. if yt - y~>O, ~t>~struc. if - 22. ~t 23. ~t = + . yP<O, then then ~t<~~struc Yt - y~.cO, Pt<Pstruc. if if — nt-i f23[(l/ru)t; ‘~w~~] 24. 24. w~!~ wt =Wt+~wwt-l 25. 25. rut == ~25 rut f25 [[zi: (yP/y)~.] (yP/y) t-il i=o -3 Definitions (superscript ee refers to expectations or expected value): . C c yd yd rs rl re hfa cl ds = = = = = = = = = = = = = cs kc ifixed = p = y y = rr db db = = = = = = real consumer expenditures real disposable income real disposable income short-term interest rate long—term long-term corporate corporate bond bond rate return on corporate stock real household financial assets consumer installment credit liquidations debt service, defined as a weighted average of outstanding mortgages and consumer credit. The weights are arithmetic averages of the current and past interest rates for each debt instrument consumer sentiment stock of consumer goods real business expenditures on plant and equipment price level of physical output physical output of goods and services rental price of capital debt burden, defined as a weighted average of outstanding bank loans, commercial paper, and corporate bonds. The - .53-53- cf = u kk = = ires rmort rmort mart mort vac = = £2.e. kres inv mv delay = = = = = = = = = = = = kinv = = ii = = tt 9. .9. def gdebt md rd td us bonds usbonds = ms mb rsff rloans res reg resreq curratio m m yP nf T T = = = = = = = = = = = = = = = = = = = = = = = = = = = weights are arithmetic averages of the current and past interest rates for each debt instrument. cash flow, after inventory valuation adjustment capacity utilization rate stock of plant and equipment real residential construction mortgage rate outstanding mortgages vacancy rate population stock of housing real inventory investment delivery delay, precent of companies reporting slower deliveries del iveries stock of inventories real gross private domestic investment tax receipts real government spending Federal budget deficit (NIA basis) outstanding issues of Treasury debt demand for money effective yield on passbook deposits time deposits holdings of U.S. Treasury securities securities by households, firms, and state and local governments supply of money monetary base Federal funds rate prime rate on bank loans reserve requirements on deposits currency ratio MI, narrowly defined stock of money MI, potential real output full employment technology - —54— -54- nd n’~ = ns = = = lf = li = = Q2£. lfpr = = lier. = ww = .p = Pstruc ~struc = = W w = ru = = = • = = demand for labor supply of labor labor force population population labor force participation rate level of wages rate of price inflation structural inflation structural inflation rate of wage inflation unemployment rate. The uhexplamned unexplained endogenous variables in equations equations (1) to (25) fall into three categories: interest interest rates (rs; rl; re; rmort; rd; rsff; rloans), the rental price of capital r, uses and sources of funds (hfa; 6mort; Amort; td; usbonds), and balance sheet indicators of financial instability (cl/yd; ds/yd; db/cf). In the ORI DRI model, the interest rates are determined in aa segmented market framework where where the demands and supplies for a particular instrument, across sectors, stochastic equations. interact in stochastic flowsFull explanations of sectoral flows— liabilities of-funds, of—funds, the holdings of financial assets, physical assets and liabilities for households, nonfinancial corporations, commercial banks, savings and loan associations, mutual savings banks, and life insurance insurance companies are provided. • This includes hfa, 6mort, tmort, td, usbonds, cl/yd, and db/cf. A A total of 103 behavioral equations and 99 identities describe the financial 12 system. 12 t2There is no need to present such detail here. 12 There is no need to present such detail here. full description. —55— -55- See (5) for aa See (5) for The above system generalizes standard macroeconomic analysis to aa more realistic framework in several ways. dynamic. First, the model is There are own stock adjustment processes processes in each of the major expenditure equations; but also interrelated dynamic adjustments in sector. 13 the other assets and liabilities of each sector. disaggregation. Second, there is considerable disaggregation. has 718 equations; 379 behavioral and 339 identities. variables also are included. ORI model The DRI Some 170 17D exogenous The breakdown is final GNP demands (176); incomes (31); financial (202); supply, capacity, and operating rates (10); employment, unemployment, and the labor force (10); prices, wages and productivity (81); industry production, investment, capital stock, and employment (208). (208}. Third, expectations play a major role in the economic behavior as modeled. In a world of uncertainty, almost all the right-hand right—hand side variables in the equations should be expected values. true for prices and other signal mechanisms. This is especially The formation of expectations is generally adaptive or extrapolative, and current period actual values current-period 4 Explicit survey measures of sentiment (cs) (~) and delivery are eschewedJ eschewed. 14 delays (delay) are used. Thus, distributed lag specifications are pervasive. • 13See see (2) for an example. 14 There rhere have been no attempts yet to incorporate rational expectations into the structure of large—scale large-scale econometric models. While the inadequacies of extrapolative methods for projecting expectations are well-known, well—known, it is not clear at this time whether implementation of rational expectations, even if possible, will improve upon the current formulations. -56—56— Fourth, disequilibrium is the normal state with equilibrium of the system aa special case that is never attained. The flows of spending and financial activity describe quarterly behavior, a period • that is too short for full equilibrium to be reached. The interrelated adjustments of real and financial activity within each sector, as actual states approach those desired, make disequilibrium dynamics dynamics the focus of the analysis. Steady state growth dynamics do not appear until many periods after a shock, but then show numerous familiar characteristics. Fifth, there are many nonlinearities in the system. These range from ratio variables on the right-hand side of an equation to nonlinear specifications specifications for the effects of capacity utilization, delivery delays, and financial constraints. on—and-off mechanisms exist Numerous on-and-off exist and ceilings on variables such as interest rates are specified. Sixth, there is a very detailed financial system, with explicit modeling of the balance sheets for households, firms, and financial institutions. Government financing is an endogenous result of spending and tax receipts, with effects on interest rates for municipal and U.S. Treasury securities. U.S. Interrelations between the spending and financial activities of each sector generate the balance sheet items items and measures of bankruptcy or default risk that appear in the main spending equations. Financial Financial markets are imperfect and almost all of the instruments in the portfolios of the various sectors are included in the analysis. Traditional interest rate linkages from finance to real final demands appear, but in addition, there are variables that reflect the supply of funds for markets in disequilibrium (mortgages (mortgages and housing); recognize the interrelated adjustments of financial assets, -57—57— physical assets, and financial liabilities (consumption (consumption, investment);investment); and capture the inhibiting costs of balance sheet instability, potential (consumption, investment bankruptcy, or debt default on real final demands (consumption,--investment and state and local government spending). is endogenous, with changing stocks Seventh, potential output output is of labor and capital the major inputs. Given utilization rates and the state of technology, potential output affects the unemployment rate (equation 25); wages through the unemployment rate (equation 23); and price inflation directly via the relation between aggregate demand and supply (equation 21). Thus, business capital formation tends to Thus, -- ease inflation by increasing the capital input to production. production wage-price interactions heavily reflect inflation inflation expectations expectations. , Finally, wage—price ,Inflation policy,, Inflation itself arises from external sources such as OPEC pricing policy, ',•·' the existing institutional framework, the price-setting price setting practices of business, and commodity shortages. Thus, aa base rate of inflation, Thus, is assumed to exist at full employment, with deviations Pstruc., deviations, struc. about p due to changes ch in unit labor costs and the relation p struc. of aggregate aggregate output. of demand to to potential potential output. Capital formation affects - - inflation to the extent extent productive is increased. productive capacity capacity is increased'. - - - Equations (1) to (25) can can be collapsed to an IS-LM IS—LM model by removing the dynamic elements; assuming certainty in in order to eliminate expectations; treating the financial financial markets markets as as perfect perfect so so there is only aa single rate of interest; and eliminating the sectoral portfolio approach to finance. Thus, in a sense the macroeconomic model utilized here is an extension of IS-LM analysis, analysis, but its necessary realism makes difficult so simple aa categorization. categorization. -58- - - - By tracing through the effects of autonomous shocks to the macroeconomic system that is depicted, the case for capital formation can easily be seen. Consider an autonomous increase of business fixed investment, perhaps because of improved confidence in the stability of policies to emanate from the Administration. Aggregate demand rises, but so does potential output as business capital is formed (equations 11 and 17). 17). Any resulting rise of inflation depends on the relation between actual and potential output (equation 21), and is less than if the rise in aggregate demand were due to another source. With no change in the monetary base, interest rates rise to provide a negative feedback 5 The constraining impact effect on both consumption and investment.’ investment. 15 of the rates operates directly on consumption, raises the rental price of capital, and increases the debt service charges of households and firms. Higher interest rates also cause a decline in stock prices, a reduction in the market value of household financial assets, and reduced consumption. The higher rental price of capital and debt service burden facing corporations keep business fixed investment lower than under aa regime of constant interest rates. Deposit flows to banks and nonbank financial intermediaries diminish with the increase of interest rates, reducing the supply of mortgage money and constraining constraining residential construction. However, the net effect is still higher output; greater rates of investment and consumption; more employment; upward pressures on prices and wages; and increased stocks of consumer durable goods, business capital, and housing. Whether the housing 15 Also state and local government spending. —59-59- stock rises or falls depends on the relation between the increased demand for housing and previously existing stock, as manifested in 6 A a measure of vacancies.’ vacancies. 16 A lower vacancy rate stimulates housing starts, as evidence that the backlog of housing demand is rising. But diminished funds flows lessen the availability of mortgage money as an offset. The increased capital stock of business raises the productivity of labor labor (equation 18), so there is a rise in the demand for labor. Thus, the case for capital formation includes 1) increased productive Thus, capacity for the economy; 2) an easing of the inflationary pressures from aggregate demand against potential supply; 3) 3) greater productivity labor and increased employment; 4) and the enlarged purchasing power of labor that goes with slower increases of prices. Now, by equation (2), business capital formation will occur increas,ed output. regardless of the cause of increas.ed Thus, any measures to stimulate the economy would promote this type of capital formation. 17 So would changes in tax incentives that affect r, the rental price. price. policies is However, the relative size of the effects from different policies uncertain. And, the tangible physical assets of households as well as labor capital also would be affected, but not always in the same direction. Consider further the effects of several policies on capital formation -- a sustained sustained reduction in personal income taxes; increased increased —— 16See see Eckstein, Green, and Sinai Sinai (6, pp. 598—602). 598-602). 17 See see Brimmer and Sinai (2). —60-60- government spending; easier monetary policy; changes in tax incentives; and a mix of restrained government spending and easier monetary policy. In assessing assessing the effects of these policies, impacts on business, human and housing capital will be examined. Reductions in personal income taxes raise expected disposable and increase consumption. income (yd~) (yd~)and increases the deficit (deft) At the same time the tax reduction Agdebt). and Treasury issues of debt (( 119debt). The increased issues result in aa higher demand for money (equation 14) and, in the absence of accommodating monetary policy, raise interest short—term)188 The resulting rise in national income rates, especially especially short-term. also increases the demand for money, hence interest rates. The higher output and higher prices as demand closes on potential output cause an increase of business fixed investment. This This enhances productivity, capital formation by business, raises capacity, increases productivity, and exerts downward pressure pressure on prices. But the increases in debt service for households and firms as interest rates rise, a higher rental price, and the possible negative feedback effects on the market value of financial assets because of falling stock prices, all act as restraints on the increased spending. In particular, higher money market rates of interest draw funds out of financial institutions, lower the supply of mortgages, and cause a cutback in residential construction. Thus, housing capital would grow more slowly, or even drop, drop, relative to business capital formation. Of course, an accommodating monetary monetary policy could could 18Accommodating monetary policy is defined as maintaining constant 18 Accommodating monetary policy is defined as maintaining constant nominal interest rates in the face of a change in fiscal policy. -61—61— alleviate this problem. The only question is how severe the inflation reaction from an extra monetary stimulus. This is primarily an empirical ~ 0,19 question, depending on dp/dt when J5’ - 5’JPp al,, o. 19 — In summary, sustained sustained reductions reductions in personal income tax rates increase real output, raise inflation, lower the unemployment rate, and cause aa rise of interest rates. Consumption is higher, business fixed investment investment rises in response to the greater real output, and the rate of capacity utilization moves up. The tangible physical assets of households, including autos and durables, rise from the higher consumer spending. Business capital stock rises higher, too, though not so strongly as in a case where where monetary policy is accommodating. The outcome for housing capital is less clear, however, with the positive effects on housing of demand-induced demand—induced declines in the vacancy rate perhaps more than offsetting aa reduced supply of mortgages. Finally, employment employment is increased because of a rising demand for labor. A second policy for stimulating capital formation is increased A Federal government spending. A higher rate of government expenditures A directly affects output, employment, and income. An increase of disposable income stimulates spending on autos, other consumer durables and housing. Business fixed investment and inventory spending rise in response to the stronger utilization of existing capacity causing a rise rise in replacement spending for plant and equipment (equation 2). Thus, the capital formation enhanced. of households and business is enhanced, 19 No link of mm and pp through expectations is assumed. -62— -62- However, the benefits of increased government spending are accompanied accompanied by some negative feedback effects. and higher interest rates. Most important are more rapid inflation The extent to which prices rise depends on the position of the economy relative to full employment output. The increased inflation restrains spending by reducing purchasing power. The rise in interest rates stems from the financing of a greater Federal government budget deficit and the effects of a worsened inflation. Higher interest rates directly restrain consumption and investment {equations (equations 11 - 4) 4) but also do so indirectly through a worsening of — the debt burdens of households and business (equations 11 - 2). 2). — Further, higher interest rates tend to reduce stock prices and diminish the real value of household financial assets. weaker (equation 1). Consumer spending is then AA higher financial cost of capital also causes a reduction in fixed investment through the rental price price of capital goods (equation 2). Finally, higher market rates of interest draw funds out of financial institutions and reduce the supply of mortgages. of funds causes housing outlays The mortgage rate rises and a lack of· to weaken (equation 3). - The net impact effect from all of these factors, however, would be increased GNP, a higher rate of investment, lower unemployment, and greater capital formation throughout the economy. But the negative feedback effects restrain the beneficial impact -of of the government sector’s sector's expenditures, especially in housing. The closer to full employment of labor and physical capacity, the more substantial the negative impact of rising interest rates and accelerated inflation. -63— -63- In an extreme situation, the increased expenditures by the government can can totally “crowd— "crowdout” the gains to the private sector, with no real benefits for overall out" capital formation, formation. self—defeating element in using Thus, there is aa self-defeating Federal government spending to enhance the capital formation of the private sector. A third A policy to increase capital formation is easier money. An increase in nonborrowed reserves raises the monetary base and the supply of money. The federal funds rate declines and other short—term short-term rates follow a similar pattern, caused by commercial bank arbitrage of assets and nondeposit liabilities to minimize the costs of funding loans. The lower interest rates stimulate consumption and investment. Further, given a slow response of deposit rates at bank and nonbank financial institutions to the easier monetary policy, the returns on these deposits become relatively more attractive to households and businesses than the yields on money market instruments. Funds flow into financial institutions, substantially increasing the supply of mortgage money and raising expenditures on housing. Another effect is aa reduction of debt burdens for households and business because of the lower interest rates, higher disposable income, and greater cash flows, flows. associated The reductions of interest rates are initially associated with higher stock prices and an increased market value of household financial assets. In turn, consumer spending rises rises even further. The easier monetary policy will have the net effect of increasing capital formation throughout throughout the economy, in contrast to the policies of reducing personal income taxes or increasing government spending. -64- The housing stock, stocks of durable consumer goods and cars, and business business plant and equipment all rise under the easier monetary policy. policy. does the employment of labor. So The increased capital formation in the business business sector leads to a higher potential output. There is an There easing of pressure on prices from the increased increased supply, although to some extent offset by a lower unemployment rate, increased wage inflation, and subsequent cost-push cost—push effects. There are several negative feedback effects associated with the stimulative monetary policy, however. The growing economy will raise inflation as actual output moves closer to potential. This greater tend-to inflation will tend to push interest rates higher and also reduce the purchasing power of households and business. The borrowing that is associated with the increased expenditures raises outstanding debt, debt, hence the debt burdens of the various sectors. Of course, these negative feedback effects take time to develop, so that the economy could benefit considerably from the easier monetary policy for a number of quarters. The main danger of the easier monetary policy approach is the possible resurgence of inflation and high interest rates if economic growth accelerates too rapidly. Another potential problem has to do with the formation of inflation expectations in response to the easier monetary policy, and whether in fact, a temporary speedup in monetary monetary growth will cause aa sharp enough rise in inflation expectations to defeat the thrust of the policy. empirical. These issues, like many others, are The results of the policy simulations in the section entitled "Simulation Results" “Simulation Results” give some quantitative responses. —65— -65- A A fourth policy to stimulate capital formation is through reductions of business taxes. Corporate profits taxes could be reduced, depreciation allowances increased, or the investment tax credit raised. have been analyzed in Brimmer and Sinai (2). These policies Only small impacts on incentives unless business capital formation were found for these tax incentives monetary policy was accommodating. Modest increases in potential output and productivity occurred, but there was no real improvement in inflation. inflation. The tax incentives primarily shifted capital formation into the business sector from housing and improved the financial position of business. Thus, it is not clear clear that business business tax incentives would would be beneficial beneficial overall, overall. A "tight fiscal—easy fiscal-easy money” money" approach. A final possibility is a “tight By tight fiscal policy is not meant decreased expenditures by the Federal government. More realistically, it refers to slower growth in Federal government spending than has been been the case in previous years. The component of of the-tight fiscal—easy money “easy money” component "easy money" the.tight fiscal-easy money policy policy also also does does not refer to a radically extreme measure. Federal Reserve policy that By easy money is meant a permits money growth between 8 and 9% per annum, in recognition of the difficulty of reducing the core 55 2° economy.20 to 6% inflation in the U.S. economy. 20The Federal Reserve's long-run targets for monetary growth reflect Reserve’s long—run a set of goals, explicit or implicit, for real economic growth, inflation, and unemployment. However, a target of 5-1/2% 5—1/2% growth in Ml (the midpoint of the current long—run long-run target range of the Federal Reserve) implies structural an inflation rate goal that is unrealistic, given the basic structural inflation that exists in the U.S. economy. This price inflation inflation results from an institutionally determined wage inflation; (Continued ... ) (Continued...) -66—66— fiscal-easy money” money" In order to highlight the effects of a "tight “tight fiscal—easy policy on capital formation, consider an extreme case of reductions in Federal spending and aa simultaneous easing of monetary policy. The decline of government expenditures will cause a drop in real output and employment. Consumption, investment, and inventory accwnulation accumulation would decline via multiplier effects. Potential output would drop but there would be less inflationary pressure with the larger declines in spending relative to supply. The remaining effects would be the opposite of those described for the case of increased government expenditures. Along with the reduction in Federal government spending would come a smaller budget deficit. The flow of new Treasury issues to the financial markets would drop, with a resulting easing of pressure on short-term short—term interest rates. The lower output and easing of inflationary pressure reduce transactions demands for money, further lowering interest rates. flows-of-funds to financial institutions would In response, flows—of—funds rise, mitigating the negative effects on residential construction from the weaker economy by increasing the availability of mortgage money. 20 (Continued)imported (Continued)imported inflation, inflation, e.g., e.g., from from OPEC; OPEC; and and the the price— pricesetting practices of business, which include rapid markups over shortrun rises in costs. The OR! ORI model suqqests suggests this “core” "core" rate of inflation run to be near 55 or 6%, with no perceptible near-term response to cyclical cyc1 ical demand forces. Thus, current monetary growth targets can only result in a ions weakness of real output and high unemployment rather than sharp reductions in prices. On the other hand, too rapid monetary growth of 10% or more is potentially destabilizing, resembling the Federal Reserve’s Reserve's "easy money” money" of the "stop-go" approach of previous years. Thus, the “easy “stop—go” "tight ffiscal—easy i sea 1-easy money” money" policy po 1icy com bi nation will wil 1 be taken to mean “tight combination Ml growth of 8 or 9% per anntsn. annum. -67— -67- Most importantly, however, restraint on fiscal policy would would enable the Federal Reserve to ease monetary policy, policy. Sustained periods of heavy deficit spending by the Federal Government eventually constrain the monetary policy posture of the Federal Reserve by stimulating the economy too strongly. As a result, monetary policy is often tightened when fiscal policy is stimulative. AA stimulative fiscal policy increases pressure on the financial markets directly, but also because of an induced expansion in the private sector. At the same time, a tighter monetary policy intensifies the rise in interest rates. The result has almost always been aa credit crunch and recession because of the powerful effects of money and finance on the economy. "tight fiscal—easy fiscal-easy money” money" approach AA “tight could lead to an opposite situation. In the face of restrained growth in Federal Government spending, an easier monetary policy, defined in terms of higher targeted money growth rates, would lower interest rates, reduce debt burden impacts, increase flow—of—funds flow-of-funds in markets where rationing occurs, improve the stock market and stimulate housing, consumption, and fixed investment. If If sustained, aa greater rate of capital formation would occur than under any other policy. Further, with aa lower lower rate of growth in Federal Government spending, Treasury debt issues would comprise aa smaller proportion of "crowding the total financing in the economy, lessening the chances of “crowding out". out”. -68- Prospects for Capital Formation Tables 2 2 and 3 provide the profile of the current outlook for capital 2’ The economy shows steady growth through formation over the next decade. decade. 21 1980, the result of aa moderately paced but well balanced expansion of real final demands. TABLE 2. GNP grows at rates above the economy’s economy's Real GNP Profile of the Economy to 1985* History Forecast 1955-65 1966-75 1976 1977 1978 1978 1979 1980 1980 1976-80 1976—80 1976-85 1976—85 Rates Rates of Change (~) (%) ----- -- ------ 10.9 10,3 10.4 10.9 10.9 11.3 10.3 4.8 5.2 4.4 4.5 5.0 3.3 3.4 3.3 34 3.4 J.J J.4 J.J J .• J.4 GNP -- Current Dollars - Constant Dollars Do 11 ars Potent la I 81W GNP Potential 5.9 3.8 J.8 LB J.8 8.2 2.6 3.9 J.9 11.6 11.6 GNP 61W Oeflator Deflator Wholesale Price Price Index Average Hourly Earniogs Average Hourly Earnings 2.0 2-0 0.9 3.6 J.6 5.5 6.2 6.5 5.1 LI 4.6 72 7 .2 Personal Savings Business Savings 7.5 7 .5 5.7 12.3 8.8 -8.9 -8.9 16.6 3.9 9.9 126 11.4 J.9 9.9 12.6 11.8 13.0 11.6 11.4 11.4 63.5 9.6 9.6 0.0 5.0 o.8 0.8 20. 20.1l 62.4 624 10.3 10.0 0.2 4.1 0.8 21.9 63.8 63.8 9.5 9.0 0.4 3.9 J.9 0.7 21.6 21.5 64.0 9.5 9.1 0.4 43 4.3 0.6 21.3 63.4 9.7 9.3 9.J 0.5 U.S 4.4 0.9 21.l 21.1 5.J 5.3 5.8 5.8 -0. -0.1l -0. -0.1l 4. 25 4.25 4.24 5.0 7.0 -1.2 -1.2 0.4 77.10 .10 7 .40 7.40 7. 7.77 6.5 —3.5 -3. 5 0.8 6.84 8. 33 833 7 .4 7,4 6.5 —4.0 -4.0 1.3 1.3 6.56 8.25 8.25 6.4 6.1 —2.6 -2.6 1.1 1.1 7.01 7 .01 8. 27 8.27 6.1 3.4 J.4 5.8 6.3 L3 77.1 .1 5.9 5. Li7 5.7 6.J 6.3 6.4 6.3 7.1 7. 1 7.0 7.2. 7.2, 9. 9.77 4.2 J.2 3.2 5.6 6.0 7.1 7 .1 5.2 5.2 7 .o 7.0 5.8 5.8 12.9 6.5 10.3 103 63.1 10.l 10.1 9.6 0.5 4A 4.4 1.0 21.0 21.0 62.5 62.5 63.4 10.5 9.8 9,8 10.0 9.4 0.5 0.5 4.6 4.4 1.1 0.8 Li 20.9 21.2 20.9 62.4 10.4 .10.0 10.0 0.4 4.5 0.9 21.2 21.2 6.0 6. 1 63 —1.7 -1.7 0.9 6.55 7 .95 7.95 5.6 6.6 6. 6.3J 6.3 63 .2.5 —0.8 -2. 5 -0.8 o. 5 8.9 0.5 0.9 690 6.90 6.77 8.36 8.23 8.36 5.9 6.3 -1.4 —1.4 0.7 6.55 a. z5 8.25 Shares of Real Reel Demand (%) (t) ------ -- ---- -----Consumption/GNP Consumpt ion/GIIP Business Fixed Investment/GNP Investment/CliP { Exe 1. Pollution Po 1 Jut ion Control Contro 1 Expenditures} (led. Expenditures) Pollution Expenditures/GtlP Pol lution Control Expenditures/CliP Residential Construction/CliP Resident la l Construct ion/GNP Inventories/GNP Inventories/Clip Government Purchases/CliP Purchases/GNP Key Indicators of Activity Activity (%) --- ---------- -- -------Unemployment Rate tinea~loyment Personal Savings Rate Personal Federal Government Oeficit,GNP Deficit,CNP State & Local Deficit/Clip State Local Government Government Deficit/GNP Prime Rate Hew High—Grude Corp. Bond New Hlgh-Grude Bond Rate ~ased DR! Control of February Februory 1977 and Month Morch 1977 proiec:tions. ‘Boned on DRI 977 and 977 !~un ong.ron proiecflons. 21 21Projections 1980 are based on DRI DR! analyses of short-run to 1q80 short—run Projections prior to conditions. The assigned assigned probability to this baseline forecast business conditions, is 60%. Beyond 1980, the forecasts are based on a balanced, near full employment path for the economy. Such a projection is primarily designed for planning exercises that require stable economic growth as an input, rather than as a "forecast" “forecast” of expected actual conditions. -69--69- potential, although slowing somewhat in 1979-80. Relatively stable fiscal and monetary policies, the absence of any destabilizing external shocks, cautious spending attitudes in the private private sector, sector, and constant, although high, inflation rates are the principal determinants of the economy’s economy's performance. The greater than average inflation during the period restrains purchasing power, limiting economic growth and reductions in the unemployment rate. In 1980, the various price indices are still still rising rising near 5—1/2 5-1/2 or 6% and the unemployment rate averages 5.6%. Private sector savings flows are ample to finance the moderate pace of economic activity, especially in the business sector. The primarily share of GNP going to business rises later in the decade, primarily TABLE TABLE 3. 3. Capital and Productivity Items Average Average Percent Changes ----------------History History Forecast 57-66 67-76 57-76 57-66 67—76 57—76 77-85 77—86 ----------------Labor Force (Mils. (Pills. of Person!) Persons) 1.3 Laboi- Force Calculated at at Full Labor - 2. 2.33 1.8 1.6 1.6 £mployment (Mih. of teployeent (Pills, of Persons) Parsons) 1.4 1.4 2. 2.33 1.9 1.9 1.6 1.6 Real Full Level of of CliP GNP Real Full tmployment Employment Level (Billi, (81 15. of 1912 1972 $'s) i’s) 3.6 3.9 3. 7 3.7 3,2 3.2 4.1 4,1 4.9 '· 9 4.5 4.5 2.6 2.6 2.1 2.7 2. 2.77 4. 4.77 ,. 2 2.2 4.1 4.1 4.7 4.7 2.' 2,6 2.6 2.6 4.4 4 ·' 2.6 2.6 4.6 4.6 2.1 2.1 3 .a 3.8 l. 7 3.7 4.9 4.9 3.1 3.1 4.3 4.3 3.4 3,4 4.9 4.9 2.2 2.2 Capital Stock Stock of Housing Housing (Mils. Unlt!l) (liils. of Units) NA NA 1.6 1.6 NA NA LB 1.8 Capital Stock of Households HousehOlds (Bils. of S's) (Oils. l’s) NA hA 77.9 .9 NA NA 8.9 .J, 3 .3,3 LB 1,8 2.6 2.6 2. 2.99 of Gross Stocks (Bils. (Oils, of 1972 1972 S's) l’s) Gross Capital Capital Stocks Nonres. Producers Producers Durable Equipment Plonres. EquIpment Nonresidential Structures flonrasiderntlal Structures Eff1:1ct1ve Effective Nonr@s. Nonres. Capital Stocks Stocks (Bils. $'s) (Oils, of 1912 1972 i’s) Producers Durable Durable Equipment Producers Equipment Nonresidential Structures Nonresidential Structures Capital Stocks (Oils, i’s) Net Capita! (Bils. of of 1972 S's) Nonres. Produr;.ers Durable Equ1pme,1t Nonres. Producers Durable Equipmeit tfonresidenft1:1l StructurH Nonresidential Structures Labor Productivity *1971 to 1980 frl:!m DR! For-reast of of February February 1977; 1971; 198\ *f977 vo 900 from DPI ContM! Control Fortcn,o 1901 to 1985 905 figures frort'I Mateh 1911 LOtlg ttm Trend Fotecoto. F'oteetnt, floes March 1977 Long T tenon -70- ,., - 9 at the expense of government. Both the ratios of government purchases to GNP and the Federal budget deficit to GNP decline steadily steadily over the next four years as the Carter administration seeks to balance the budget by 1981. The proportion of residential construction to GNP increases as interest rates do not rise enough to cause the severe disintermediation of deposit inflows to financial institutions institutions that could disrupt housing. Capital formation is not sufficient to achieve full full employment of labor by 1980. The gross effective capital stock of producers’ producers' durable equipment (excluding the stock of pollution control equipment) shows aa 3.9% average rate of growth to 1980, significantly significantly below the high high performance 4.7% rate of 1967 to 1976. even more slowly, at 1.8% 1,8% per annum. rate of increase from 1967 to 1976. The stock of plant grows This compares with a 2.6% average The moderate growth in aggregate utilization, aa high rental demand, slowly rising rates of capacity utilization, price of capital, and near 6% inflation prevent the kind of investment boom that has typified most business expansions since World War II, II. A A further deterrent is a a still still high debt service burden as 1980 is approached. Diminished cash flow from eased profits growth, 88 to 9% long-term bond yields, and aa rising volume of outstanding debt are responsible. The net capital stocks of plant and equipment behave similarly to the gross concepts, although the high business fixed investment to GNP ratio between 1981 and 1985 raises the average rate of increase to 4.9% for 1977-85, the same as in 1967-76. 1967—76. The effects of the slow growth in business capital formation to 1980 are threefold. First, potential output grows slowly, at 3.4% -71—71— per annum annt.zn for the next few years rather than the earlier 3.7%, adding to the pressures for more inflation. inflation. Greater inflation lessens real purchasing power, aggregate demand, and hinders the reduction of unemployment. Table 2 shows that the GNP price deflater deflator rises 5.6% per annum from 1976 1976 to 1980. Second, the demand for labor increases less rapidly with a more slowly growing capital stock, so that slack in labor markets remains for aa longer period of time. Finally, labor productivity productivity rises less, causing higher unit labor costs and more inflation. inflation. All of these economy’s progress toward full employment. effects slow the economy's The rate of capital formation by households is above the average of 1967 to 1976, given steady rises in durable consumer spending and housing. From 1977 to 1980, household physical assets rise by 9.5% a year with concentration in autos and houses. 1976, was 7.5% for 1967 to 1976. The corresponding figure Thus, the projections indicate the only real shortfall of capital, at least by historical standards, to be in the business sector. Nevertheless, there exists some more rapid stock of households that would cause full growth rate for the capital stock employment to be achieved. especially What accounts for the insufficient capital formation, especially in the business sector? First, the recession of 1973-75 businessmens' 1973—75 shook businessmens’ expectations of future sales as real GNP dropped more sharply than in any other slowdown since World War II. Further, growth in real final sales since the March 1975 recession trough has been quite moderate relative to similar stages of previous expansions. Chart 55 shows that the rebound in real final sales during the recent expansion has been the weakest of the postwar period. —72— -72- Without the strong "accelerator" “accelerator” ~0..~ CHART 5. Final Sales Growth (1972 $‘s) $'s) During Postwar Recoveries Recoveries ~N D aE x R A A ‘IT s B ~---------------~ - .. . 4t-------..,.,..----------; 1958-1959 \, ,_,.. . ," ", , ,....... ... .. 1961-1962 \ ....... 21--,,.--'-----:',......;:-.._."-;:,cc_._,.,.--'--...._,.,.._---; T R 0 D U u ot-+:------==..a..!..IC.--~....,,._'----1 ,. -... HH / -2t--4-,-,,-,--'--------"----=----'=---t a0 .. , : - . : . : ; . : : , ; . . . . . . . . - - - .... ~ Q 1954-1955.)' -- - • a 1.1 ..... .. .. / ~ . -. • .• ':f 1971-1972 -41---.\-----------------1 -tot--+--+--+---1---1---+---+---1 2 3 44 5 66 7 88 Quarters Quarters from from Trouqh Trouqto firms' products, effect from permanent large increases of demand for firms’ business spending on capital goods has been minimal. Second, the deep recession left the economy with aa considerable degree of underutilized physical capacity. At the trough of the recession in March 1975, the capacity utilization utilization rate for All Manufacturing was 69.6%. The peak of 88%, reached in July 1973, 1973, was associated with severe bottlenecks in production. The moderate expansion since 1975 1975 has produced aa a current rate for All Manufacturing of 80.7%, indicating the existence of considerable slack. Thus, replacement investment, which normally constitutes constitutes aa large proportion of all new plant and equipment spending, has remained quite low (equation 2). Third, the rental price of capital, especially for equipment, has remained quite high throughout the current expansion. expansion, —73— -73- Chart 6 shows that rises in rental price during similar stages of previous expansions have been smaller than in in this episode. The principle principle reasons CHART 6. Rental Price of Producers' Durable Equipment During Postwar Recoveries I !..05 N ll E X A T LOO .... - - 0 u .. . \ G ,. .95 • \ \ 1 . - \ ' / ''\·· \ ·.. ·.. ' T R H / 1 , '. ' l975-1976 ' ' _.,, 958-1959 . ' / J 1954-1955 ... . 1961-1962 ·- -. - /' ..- . . . J / 1971-1972 ,115f---t--+--+---+-~-"--I--+----~ 22 3 44 55 6 Quarters TruuQh Quarters freon from Trough 7 8 for this high rental price are 1) increases in the supply price of capital goods that have ranged between 33 and 25.9%; 2) a high average cost of financial capital due to 88 and 9% nominal long-term long—term bond yields and aa relatively relatively weak stock market; and 3) the failure to implement 22 Changes in business taxation, business.22 in business taxation, major new tax incentives for business, including higher tax allowable depreciation rates, shorter lifetimes for capital goods, the investment tax credit, an.d and a lower corporate profits tax rate can have a major effect on rental price. But the only measure 22 22Significant was enacted enacted in in 1954, 1954, 1962, 1962, Significant business tax legislation was 1965, and 1971. 1971, -74- enacted so far in this episode has been an increase of the investment tax credit to 10% during 1975. 1975. Finally, there has been an unprecedented restructuring of corporate balance sheets since mid-1974, the the aftermath of the deteriorated financial 23 Given the huge financial position of business that had evolved.23 risk generated by balance sheets with top-heavy short-term debt relative to long-term long—term debt, high leverage, a dearth of financial assets relative to short-term liabilities liabilities and exceptionally large debt repayment burdens to cash flow, the threat of default and bankruptcy within the business great sector has been great. The potential variability variability in expected earnings u,nacceptable to business, causing created by this situation has proved unacceptable increased demands for financial assets, reductions in the desired acquisitions of physical assets, and aa decreased rate of debt accumulation. reliquification, has proceeded for a much longer This process, known as reliquification, period and in aa more intensified intensified manner than during any previous postwar expansion. In essence, the returns to business from restructuring balance sheets have exceeded the expected returns from physical asset acquisitions as reduction of financial risk through reliquification reliquification have reduced the potential variability variability of future earnings. As of 1976:4, 1976:4, the process was still still occurring, despite the fact that its duration had been twice as long as the typical experience. This desire by by business to use funds for purposes other than fixed investment has been a key distinguishing factor of this expansion compared with other postwar business recoveries. 23See see Sinai (17). —75— -75- Another factor affecting business capital formation has been the laws, regulations, and incentives for dealing with pollution control and new, less energy intensive production techniques. While no research how much business capital formation yet has been able to clearly identify how is being affected, to some extent productive capacity is being hampered by by the substitution of this “non-productive” "non-productive" investment for capacity creating capital spending. So far, however, the proportion of real business fixed investment devoted to pollution abatement equipment has only been near 5%, too small aa figure to bear aa major responsibility responsibility for the overall weakness in capital spending. Potential new programs for energy independence may increase spending for less energy intensive capital goods rather than for new capacity, thus hampering the rate of productive capital formation. Simulation Results This section examines the effects on capital formation and U.S. economic performance of several policies that could be used to accelerate the rate of capital formation. The simulations were performed with the Data Resources model of the U.S. economy, beginning in the first quarter of 1977 and ending In in the fourth quarter of 1980. The baseline forecast described in Tables 22 and 33 was subjected to various policy shocks, with subsequent solutions of the model producing new time series for the major variables of Interest. interest. The amounts of stimulus for the permit illustration illustration of the effects, rather policies were chosen to permit than as aa matter of realism. Comparisons between the alternative policy and baseline solutions provide the differences from which can be determined —76— the policy impacts. Appendix Tables 8 to 14 contain the details of these simulations, simulations. In what follows, the simulations are described, some of the more interesting results are presented, and supporting evidence for appropriate for stimulating some conclusions about the policies most appropriate presented, capital formation are presented. The policy simulations included: 1. Personal Tax Reductions Reductions A A billion reduction in personal income taxes permanent $5 billion was assumed for 1977:2. There was $20 billion of additional tax reductions in 1978 and $25 billion in 1979. In effect, this simulation assumed that permanent tax reductions are legislegislated each year to eliminate an "inflation drag" on on consumers’ consumers' “inflation drag” purchasing power because of the "bracket" “bracket” effect on taxes from higher inflation. inflation. 8% 8% Ml growth was 7.2% in 1977, 1977, 8.2% in 1978, 1978, 1980, The baseline had corresponding in 1979, 1979, and 6.7% in 1980. growth rates of 7%, 7%, 6.8%, and 6.8%. 2. Reductions and Accommodating Money Personal Tax Reductions AA permanent $5 billion billion reduction in personal income taxes was assumed for 1977:2. billion of additional There was $20 billion tax reductions in 1978 and $25 billion in 1979. The distinguishing feature of this simulation from the previous one was the accommoaccommodating money. Short-term interest rates were kept constant sufficient bank reserves by the central through the provision of sufficient bank. 7,3% in 1977, 1977, 8.5% in 1978, 8.8% in 1979, 1979, Ml growth was 7.3% and 7.4% 7 .4% in 1980. hasel inc had corresponding growth rates The baseline of 7%, 7%, 6.8%, and 6.8%. 6.8%, —77— -77- 3. 3. Money Easier Money AA 1% higher growth in Ml during 1977 and 1978 than in the baseline was assumed. The increased growth was achieved achieved through through central bank provision of nonborrowed reserves until the economy’s economy's performance generated the desired money growth. The result was Ml growth of 8% in 1977, 8% in 1978, 1978, and 7% in both 1979 and 1980, 1980. The baseline had corresponding growth rates of 7%, 7%, 7%, 6.8%, 6.8%, and 6.8%. Although this simuation is entitled easier money, the higher higher monetary growth rates were not so great as to destabilize the the economy. 4. Personal Tax Reductions and Easier Money A A permanent $5 billion in personal income taxes was assumed for 1977:2. billion of additional tax reductions There was $20 billion 1979. in 1978 and $25 billion in 1979. Ml growth was permitted to rise 1% above the monetary growth in the “Personal "Personal Tax Reductions” Reductions" 1978, 0.7% higher in 1979, and remained simulation during 1977 and 1978, the same in 1980. The Ml growth rates were 8.2%, 8,2%, 9.2%, 8.8%, and 6.7% from 1977 to 1980. The baseline had corresponding growth rates of 7%, 7%, 6.8%, and 6.8%. 5. Tight Fiscal and Easier Money A A $5 billion billion reduction in military spending was assumed $10 billion from 1978 for 1977, then aa sustained decrease of $10 to 1980. A reduction of personal income A permanent $5 billion reduction taxes occurred in 1977:2. There was $20 billion billion of additional tax reductions in 1978 and $25 billion billion in 1979. Ml growth was permitted to be 1% above the monetary growth in in “Personal "Persona 1 Tax Reductions" during 1977 and 1978, 0.7% higher in 1979, Reductions” 1978, 0,7% 1979, but remained in 1980. the same in The resulting Ml growth rates were 8.2%, -78— -78- 9.2%, 8.8%, and 6.7% from 1977 to 1980. The baseline had corresponding growth rates of 7%, 7%, 6.8%, and 6.8%. 6. Investment Tax Credit AA permanent permanent increase of 2%, from 10 to 12%, in the tax credit for producers' producers’ durable equipment, was assumed to begin in 1977:1. Monetary policy was not accorinodating; accommodating; other tax and spending parameters remained the same as in the the baseline, baseline. 7. Corporate Profits Tax Reductions A two-stage two—stage reduction in the statutory tax rate on corporate A profits was assumed. The rate was lowered from 48 to 45% in 1977 and then to 42% in 1978-80. Monetary policy was was not accommodating; other tax and spending parameters remained the same as in the base 1i ne. baseline. Table 4 summarizes the effects of the various policies on real 24 All changes are expressed GNP, inflation, and the unemployment rate. rate.24 relative to the baseline solution. The policies that most stimulated the economy involved either more rapid money growth or accommodative monetary policy. TABLE 4. Policies to Stimulate Capital Formation: Inflation, and Unemployment* Effects on Real GNP, Inflation, Inflation (% chg.) Inflation chy.) Real GNP (% chg.) chg.) No. Simulation No. Simulation 1l 22 33 44 55 6 77 77 78 79 80 0.2 0.2 0.5 0.7 0.4 0.1 0.1 1.22 l. l.3 1.3 0.9 2.1 1.99 l. 0.1 0.1 0.1 1.0 l.O l.5 1.5 0.5 0.9 1.1 l.l -0.6 -0. 3 -0.3 0.1 —0.7 -0.7 -0.5 -0.1 -0.11 -0. — 77 - 0.1 O.l 0.1 0.1 Unemployment Rate(%) Rate (%) 78 79 80 80 O. l 0.1 0.1 0.2 0.2 0.3 0.3 0.2 0.3 0.4 0.3 0.5 0.6 0.5 0.5 0.5 0.7 0.2 0.8 0.7 77 — - -0.1 -0.l -0.l -0.1 — — *Differences Relative to Baseline *Differences Relative to Baseline 24The rate of inflation inflation is for the Implicit Implicit GNP Deflator. Deflater. —79— -79- 78 79 80 -0. -0.33 -0.4 -0.4 -0.7 —0.7 -0.8 -0.5 -0.6 —0.9 -0.9 —0.3 -0.3 -1.0 —0.9 -0.9 -0.4 -0.7 —0.5 -0.6 -0. -0.1l -0.3 -1.0 —0.9 -0.9 -0. l —0.1 Money” simulation The “Personal "Personal Tax Reductions and Accommodating Money" (2) was characterized by aa sharp rise in real economic growth and sizeable declines in the unemployment unemplo3allent rate. inflation However, the inflation rate was accelerated, especially later, reaching a 1:1.3 1:1,3 tradeoff with the unemployment rate by 1980. inflation, its derivative The higher inflation, effects on purchasing power and interest rates, and the normal stock adjustment processes of the economy caused real GNP to drop below the baseline by 1980. Money" The "Personal “Personal Tax Reductions and Easier Money” scenario (4) had a powerful stimulative impact on economic growth, but also was associated with a large rise of the inflation inflation rate. The simulaeffect of the 11 to 2% additions in monetary growth relative to simulation (2) (2) was a much greater early impact on real economic growth and unemployment, with little extra inflation cost (0.1%) by 1980. 1980. The "Easier Money" scenario (3) produced produced steady rises in real economic “Easier Money” in unemployment than a worsening growth to 1980, with more improvement in inflation. of inflation. Maintaining the permanent tax cuts and the same monetary Money," but restricting restricting growth as in "Personal “Personal Tax Reductions and Easier Money,” government spending (the "Tight Money" solution 4) “Tight Fiscal and Easier Money” only reduced real growth slightly (from the 2.1% increase of 1978 to 1.9%). The gain was a more stretched out stimulation of the economy, lasting well into 1980. This occurred because the the tighter fiscal policy permitted the central bank to provide more reserves to maintain aa given rate of monetary growth. The simulations simulations highlight the important effects of monetary policy on economic performance. The provision of bank reserves lowers interest rates; raises the flows-of—funds flows-of-funds to housing markets; increases -80- stock prices and the real value of household financial assets to stimulate consumption; reduces the rental price of plant and equipment to stimulate business fixed investment; lowers the debt burdens of of households, business, and state and local government to stimulate sectoral spending; and reduces the financial risk of greater expenditures. The resulting spending increases are not accompanied by much additional borrowing by the private sector until some quarters later, when inflation and sustained expansion cause a deterioration of the internal financial position of households and firms. The “Easier "Easier Money” simulation demonstrates that the extra inflation from aa moderate Money" relaxation of Fed policy is not great. The greatest acceleration in prices occurs when tax reduction is combined with greater monetary growth than is necessary only for accommodation. Table 55 summarizes the the effects of the seven policy simulations simulations TABLE TABLE 5. 5. Policies to Stimulate Capital Formation: Effects on Capacity Utilization, Utilization, Federal Budget Deficit, Monetary Growth, and Interest Rates* Simulation No. 11 22 33 44 55 65 77 77 77 78 78 79 80 0.1 0.1 o.0.33 0.5 0.1 0.1 1.2 1.3 1.9 3.0 2.3 0.3 0.2 2.1 2.8 0.7 3.2 2.8 0.3 0.2 1.5 2.5 2.6 1.1 2.8 2. 2.77 0.1 - 77 11 22 33 4 55 66 77 78 .04 .52 .01 -.24 —.24 .14 -.57 —.57 .15 .06 .05 - -1.94 —1.94 -1.80 —2.23 -2.23 .02 -.01 (%) 79 80 1.13 1.13 -.01 -2.10 -1.93 —1.93 -2.22 .29 .23 1.22 .01 -.63 —.63 .76 .75 .05 -.05 25 .26 .30 *Djfference$ Relative to Baseline *Differences -81- 78 78 -15.3 —15.3 · —14.1 -14.1 11.8 - 3.3 1.9 —1.9 -1.9 - 1.3 -4,8 -10.1 -IO.I -4.8 -2.5 —2.4 -2.4 4.2 1.5 4.4 federal Funds funds Rate Federal 77 Ml Growth Federal Deficit, NIA NM ($Bils.) ($ Bils.) Capac. Ut i 1. capac. Util. (%, Mftg.) - 80 79 79 — -30.5 -24.1 9.9 -16.1 —16.1 -30.5 -18.8 12.9 12.9 -14.1 —14.1 -10.6 - 8.2 —10.6 - 1.3 - 2.1 -11.0 -12.5 - - — - (%) 77 77 78 79 80 0.2 0.2 0.2 1.0 1.0 1.2 1.2 1.4 1.0 2.2 2.2 0.1 0.1 0.1 0.1 I.I 1.1 1.9 0.2 2.0 2.0 -0.l —0.1 0.6 0.5 o. 2 0.2 -0.1 1. 2 1.2 0.1 - AAA-Corporate Bonds AAA-corporate (%) 77 78 79 -.01 —.01 -.01 -.17 —.17 -.17 -.17 —.24 -.24 .01 .01 .01 -.03 .12 .12 .09 —.07 -.07 .01 -.01 -.01 80 .37 .39 .15 .63 .15 .09 — .10 -.05 —.05 .03 -.03 .40 .04 -.03 .03 - - on capacity utilization utilization (All Manufacturing), the Federal budget deficit, deficit, monetary growth, the Federal funds rate, and a AAA—equivalent AAA-equivalent long— longterm corporate bond yield. "Personal Tax Reductions and Easier The “Personal Money” and "Tight “Tight Fiscal-Easier Money” Money" Money" solutions speed the economy most rapidly toward full capacity, with increases of the utilization rate for All Manufacturing ranging between 2.3 and 3.2% from 1978 to 1980. 1980. The cost to the Federal Government in lost tax revenues is less in the “Tight "Tight Fiscal—Easier Fiscal-Easier Money” Money" simulation, with actual declines of the deficit in 1977 and 1978. Only the “Easier "Easier Money” Money" solution is associated with continuous reductions in the deficit, as the strong economy and sharply rising inflation increase tax receipts. The extra Ml growth relative to the baseline is the same in both the simulations (4) and (5). Interest rates are lower in each of the simulations where easier monetary policy is implemented. Rates rise in the solutions where a fiscal stimulus is applied without offsetting monetary policy. Both the shortshort— and long-term long—term rates are lowest in the "Tight “Tight Fiscal-Easier Money" Money” solution, as Treasury financing is reduced at the same time the central bank is providing more bank reserves. The Federal funds rate is down an~herefrom anywhere from 55 to 225 basis points as aa result of the money growth targets selected in this simulation. The low interest rates have much to do with the strength of the real economy since the effects of of monetary monetary policy on expenditures are effects are so so wide ranging. The Federal funds rate is particularly volatile as the central central bank maneuvers to keep money growth constant at a higher rate. -82- Table 66 shows the effects of the various policies on capital formation; in particular, business fixed investment, the gross plant and equipment of the business sector, household physical assets, and housing starts. housing starts. Of Of "Tight Fiscal— Fiscalthe seven policy simulations, the “Tight ion: TABLE 6. Policies to Stimulate Capital Format Formation: Capita 1 Stocks Stocks Effects on Business Fixed Investment; Capital of Business of Business and Households; Housing* Gross Pl ant & Gross Plant & Equipment (72 5’s; $'s; Bus.) Bils.) Business Fixed Investment (72 (72 5’s; $'s; Bils.) Bils.) 77 77 Simulation simulation No. 77 78 79 80 80 1I 22 33 4 55 66 77 0.1 0.1 0.6 0.5 0.6 0.5 0.6 0.5 0.6 0.7 0.8 1.0 1.0 2.5 2.6 3.4 1.7 2.8 2.1 2.4 4.6 4.5 5.3 3.0 2.8 0.9 3.1 2.7 4.4 6.0 5.0 3.1 2. 7 2.7 3.5 1.9 J.9 2.1 - 0.3 0.3 0.3 0.3 0.4 79 80 0.6 0.7 2.4 2.8 2.9 1.9 2.1 2.1 2.1 2.9 4.7 7.0 7.5 7.6 4.5 4.7 3.3 6.1 77.0 .0 11.4 11.4 13.4 7.3 7.2 Housing Starts Housing (Mils. of Units) Household Physical Assets (5 ($ Bus.) Bils.) 11 22 33 44 55 66 77 78 . 77 77 78 79 79 80 80 77 78 79 -0.l —0.1 -1.0 -34.6 —34.5 -32.5 —32.5 —39.9 -39.9 0.3 -0.6 11.6 1.5 43.2 49.9 37.3 3.6 0.6 40.2 30.6 21.0 49.7 49. 7 48.6 6.1 4.0 70.6 70.5 .007 .023 .023 .004 92.5 74.6 189.4 171.6 3.9 3.9 4.1 .010 .156 15S .153 153 .191 .053 .063 .151 151 .179 .240 .008 -.008 .040 —.079 -.040 -.079 - - 80 .034 -.034 .133 .115 .133 .049 .155 .011 .251 .058 .058 .317 -.027 .028 -.027 -.028 .089 -.083 .083 -.089 - - - - *Dufferences to Baseline *Differences Relative Relative to Easier Money” Money" policy has the biggest impact on the capital formation of business business of and the second greatest effect on household physical assets. The rise in housing starts relative to the baseline is far above the other simulations. The reasons are straightforward. straightforward. First, First, rapid rapid real economic economic growth "accelerator" growth and sharp rises in capacity utilization utilization have aa major “accelerator” effect on business fixed investment. -83- Plant and equipment spending is $5.3 and $6 billion above the baseline for 1979 and 1980 in the "Tight Fiscal—Easier Fiscal-Easier Money" “Tight Money” solution. Second, the lower interest rates reduce debt service charges and the debt burden of corporations, reducing of physical the financial risk that is associated with the acquisition of Further, the rental price of capital is decreased because assets. the cost of financial capital drops, favoring the substitution of capital for labor. Third, cash flow is greater with the higher profits of a stronger economy, making purchases of plant and equipment easier. The resulting increases of business fixed investment are translated into a greater stock of gross plant and equipment, so that by 1980 the "Tight “Tight Fiscal-Easier Fiscal—Easier Money" Money” simulation gives a cumulated $24.2 in business capital formation. billion rise in The next largest increase “Personal Tax Reductions and Easier Money” is $21.5 billion under the "Personal Money" scenario. Fourth, the low profile profile of of short-term induces short—term interest rates induces flows-of-funds from households to the major mortgage lenders, as deposits remain an attractive investment compared with other alternatives. The financial intermediaries quickly lend out these funds, given aa wide spread between the returns on mortgages and other loans or investments. "Tight Fiscal-Easier Housing starts in the “Tight Fiscal—Easier Money" Money” simulation are 25 to 60% greater than in the baseline, far exceeding the differential impact arising from any of of the other other policies. costly is the capital capital formation under the "Tight How costly “Tight FiscalFiscal— Easier Money" Money” policy? Table 44 shows that the extra inflation that is generated ranges between 0.1 and 0.7%, so that Ml growth of between 88 and 9% does not reignite a runaway inflation. The gains include a near 1% reduction of unemployment by 1980, 1980, in addition to to the new -84- capital that is accumulated. An equivalent rise in national output that was not accompanied by as much capital formation would be be more inflationary, e.g., simulation (4) - the ''Personal “Personal Tax Reductions and inflationary, — Easier Money” Money" policy. Finally, Table 77 shows how the various policies affect productivity, the sectoral shares of GNP, and the capital-output ratio. TABLE 7. Policies to Stimulate Capital Formation: Formation: Effects on Productivity, Sector Shares of GNP, and the Capital Output Ratio* labor Productivity Federal Gov. share Labor Productivity (%chg.) (% chg.) Federal Gov. Share of GNP GNP (%) (%) of Simulation No. Simulation 77 78 79 80 11 22 0.2 0.2 0.2 0.5 0.5 0,5 0.6 0.2 0.2 0.1 1.4 1.4 1.5 2.0 3.3 3.3 3.0 3.0 0. 3 0.3 0.2 1.3 2.0 1.3 0.5 0.5 0.8 0.8 0.1 0.1 -0.7 -0.l -0.1 0.5 -0.2 33 44 55 66 77 - - - 77 - -0. I -0.1 -0.2 -0.2 -0.4 -0.l -0.1 -0.2 Investment Real Business Fixed Investment to Real Real GNP GNP (%) to l1 2 3 44 55 6 77 78 79 80 -0-. -0.33 -0.4 -0.4 -0.7 -0.7 -1.1 —1.1 -0.6 —0.6 -0.8 -0.3 —1.0 -1.0 -1.3 —1.3 -0.1 -0.5 -0.8 -0.4 -0.9 -1.3 —1.3 - - - - - - Capital Ratio (1) capital Output Ratio (%) 77 78 79 80 77 77 78 79 80 -.01 -.01 -.01 -.02 —.02 .01 .01 .04 .05 -.07 —.07 -.07 .05 —.02 -.02 .04 .12 .14 -. 10 —.10 -.09 .08 -.03 .06 .05 .19 .19 -.12 —.12 -.07 -.07 .08 -0.2 -1.0 —1.0 -1.1 -0.9 -1.9 -1.4 —1.4 -1.6 —1.6 -2.0 —2.0 —0.4 -0.4 -2.2 —2.2 —1.9 -1.9 a.I 0.1 0.3 -1.1 —1.1 -1. 7 -1.7 -0,3 -0.3 —1.5 -1.5 —1.2 -1.2 0.3 0.5 — .13 .19 .18 -0.2 -0.4 —0.5 -0.5 -0.3 -0,3 - — — 0.1 0.1 *Olfferences Relative to to Baseline Baseline *Differences Relative capital stock as a a proportion of real (1) net capltal real GrAP GNP contribute Again, the policies that involve accommodating or easier money contribute most to improvement in the variables of concern. Labor productivity is up sharply in the "Personal “Personal Tax Reductions and Easier Money" Money” and “Tight Money” solutions, although diminishing subsequent "Tight Fiscal-Easier Money" subsequent -85- Steady increases appear in the “Easier "Easier Money" Money” solution, the to 1978. result of aa sustained period of lower interest rates, higher capital formation, and increased output. The share of Federal government spending to GNP is lower lower in all the simulations, especially in the “Tight Fiscal—Easier Money” solutions. "Tight Fiscal-Easier Money" This declining share for the Federal government frees resources to the private sector, especially especially late in the decade. lower budget deficit. Also, Treasury financing is much less with the The result is significant increases in the ratio of business fixed investment to GNP. The greatest rises in this ratio occur in the business tax incentive solutions, however, induced by a shift in sectoral shares from housing to business capital formation. Which policies are most effective in promoting business capital formation? The simulations clearly indicate the program of permanent reductions in personal income taxes, slower growth in Federal Government spending, and easier money in terms of higher targeted rates of growth of Ml has the greatest impact, at least cost, in terms of the economy’s economy's goals. Over the four years of the simulation, the gross plant and equipment of business rises by $24.2 $24.2 billion in the “Tight "Tight Fiscal—Easier Fiscal-Easier Money" Money” scenario. The next largest increase occurs in the “Personal "Personal Reduction-Easier Money” Money" solution. Tax Reduction—Easier All of the other simulations show substantially lower rises rises in the capital stock of of business. In inthe “Tight Fiscal-Easier Fiscal—Easier addition, there is aa strong rise of housing in the "Tight Money” solution as well, with accumulated increases in housing starts Money" for the four years at 806,000 units, compared with the next largest increase of 594,000 units in the "Personal “Personal Tax Reductions and Easier Money” Money" scenario. Also household capital formation is much -86- "'· ¶ larger than in all of the other scenarios, scenarios. Thus, the “Tight "Tight Fiscal— Fiscal- Easier Money” Money" policy po 1icy has gains in aall 11 the forms of capita 1, with only capital, i at 1 on as the major cost. a moderate rise of of’ inf inflation The reasons for the stronger capital formation under under the “Tight "Tight Fiscal—Easier Money” Fiscal-Easier Money" policy include: 1) a sustained period of low interest rates which stimulates consumption, reduces the rental price of plant plant and equipment to w stinwiate st.in1Uiate business fixed investment, and reduces the costs of outstanding debt to minimize minimize financial risk and encourage spending by all sectors; 2) increased flows of funds from the household sector to financial intermediaries, intermediaries, who, in turn, make mortgage money available to stimulate stimulate housing; 3) a reduced share of total economic activity for the Federal Government sector due to the slowed growth in Federal spending. Financial market pressure is eased due to the resulting drop in Treasury financing and a response by the Federal Reserve of more bank reserves. The trading of an easier monetary policy for aa tighter fiscal policy thus appears to offer the greatest potential potential benefits for capital formation in the U.S. economy. The business tax incentives provide less aggregative stimulus, because of a much lower impact than accelerator and capacity utilization influences on fixed investment. The tax incentives incentives directly induce some spending on plant and equipment and ease the financial position -87- of corporations. same time, the revenue loss to the However, at the sane Federal government is equivalent to an easier fiscal policy; raising pressure on the financial markets, causing increases of interest rates, flows-of-funds into housing, and eventually, reducing diminishing the flows—of—funds housing starts. These last results appear clearly in Tables 66 and 7, where the share of business fixed investment to real GNP rises the most in the tax incentive simulations, but housing starts decline. Thus, the business tax incentives would probably be more appropriate to apply employment, shifting sectoral as the economy approached close to full emplo,~nent, shares but not exerting much demand pull pressure on the economy. With the considerable slack in the economy that exists at the start of the simulations, the increased national output from the stimulative macro—oriented macro-oriented policies have a major impact on business fixed investment through accelerator effects. Later in the expansion, when there is much less slack, the increased output would be translated into inflation, diminishing the purchasing power and spending of the private sector. Hence, the appropriateness of the permanent tax reductions, easier money, and slowed Federal government spending is particular to the Is considerable current stage of the business expansion, where there is "gap" to be eliminated before severe demand-side slack and a large “gap inflationary pressures are generated. Capital Formation, Productive Capacity, and Prices AA major element in the case for capital formation is the potential beneficial effect on inflation of an increased capital stock. -88- The mechanism by which capital formation can can affect inflation is twofold. First, the construction of badly needed capital would prevent bottlenecks from arising, as was the case in 1973-74. 1973—74. The bottlenecks and shortages in productive capacity for meeting demands was a prime cause of industrial inflation during that period. Second, increased capital formation raises the productivity of labor and increases the potential output of the U.S. economy. Through a reduction in unit labor costs costs and rise in potential real GNP, aggregate aggregate demand pressures on prices would be reduced. Most of the policies considered for stimulating capital formation have both demand and supply effects with the problem one of creating a balance between demand and supply so that inflation does not rise too rapidly. The aggregative policies in simulations (1) (2) and (5) cause inflation to rise because of a more rapid increase in demand than in supply. But the increase in productive capacity that occurs does serve to mitigate the inflationary pressures created by the macro macro policies. The business tax incentives do not raise inflation by as much as the general macroeconomic policies. However, the disadvantage is that the overall economic stimulus from these policies is minimal. Thus, the appropriate mix of the two kinds of policies, general macroeconomic stimulus and business tax incentives, depends on the position of the economy relative to full employment. The farther from full employment is the economy the more appropriate would be the macroeconomic policies to stimulate capital formation. But when the economy reaches full employment,, it would be more appropriate to rely heavily on the business employment,~itwould tax incentives to minimize the inflationary impact of rises in demand. -89- In all cases, the impact on inflation from increased capital formation is not not great because 1) the additional capital that is created is only a small portion of the existing capital stock, and 2) the impact on potential output from aa greater rate of capital formation is relatively small. Most production function studies indicate that increases in the quantity and quality of labor have the biggest impact on potential output. The role of increases in the capital capital stock, although not insignificant, is much less. Therefore, the capacity added through aggressive policies to stimulate capital formation would only bring small reductions in the inflation of wages wages and prices. To prevent a resurgence of inflation then, capital formation should not be the principal focus of policy. The best insurance against such a reacceleration reacceleration would be a gradual approach to full employment, with real GNP rising steadily by 55 to 6% for the next few years. Indeed, growth in real output must slow in later years to insure a "soft collision with the “soft landing" landing” at full employment rather than a collision capacity ceiling of the economy. inflation Major attempts to reduce inflation through the route of increased capital formation are doomed to failure, if only because the demand-side stimulus stimulus required for appreciable increases in capital formation would be too massive and the required size of business tax incentives too great to raise capital formation high enough for significant reductions in prices. Inflation must be attacked in another manner than through policies policies to raise capital formation. Increased capital formation can help fight inflation, at the margin, by raising productivity and potential output, but should not constitute the major bastion against the still high inflation that remains in the U.S. economy -go,. -90- Appendix: Simulation Results Description of of Simulations: A permanent $5 billion Personal Tax Reductions: A bi Ilion reduction in personal income taxes was assumed for 1977:2. There There was $20 billion 1979. In of additional tax reductions in 1978 and $25 billion in 1979. effect, this simulation assumed that permanent tax reductions are legislated each year to eliminate an “inflation consumers’ "inflation drag” drag" on on consumers' because of the the “bracket” "bracket" effect on on taxes taxes from from higher higher purchasing po,1er purchasing power because 7.2% in 1977, 8.2% in 1978, 8% in 1979, and inflation. Ml growth was 7,2% 6.7% in 1980. The baseline had corresponding growth rates of 7%, 7%, 6.7% 6.8% and 6.8%. i Mone•:: A Personal Tax Reductions and Accommodatino Mone’ A permanent $5 billion re uction uct1on in persona income taxes was assumed for 1977:2. There was $20 billion of additional tax reductions in 1978 and $25 $25 billion in 1979. The distinguishing feature of this simulation from billion the previous one was the accommodating money. money, Short—term Short-term interest rates were kept constant through the provision of sufficient bank reserves by the central bank. Ml growth was 7.3% in 1977, 8.5% in 1978, 8.8% in 1979, and 7.4% in 1980. 1980. The baseline had corresponding of 7%, 7%, 6,8%, 6.8%, and 6.8%. growth rates of Easier Money: AA 1% higher growth in Ml during 1977 and 1978 ~jjerMon,~~: than in the baseline was assumed. The increased growth was achieved through centra central1 bank provision of nonborrowed nonborro,;ed reserves until the economy’s economy's · performance generated the desired money growth. The result was Ml 8% in 1978, and 7% in both 1979 and 1980. The growth of 8% in 1977, 8% 5.8%. baseline had corresponding growth rates of 7%, 7%, 6.8%, and 6.8%. entjtled easier money, tne the higher monetary Although this tnis simu:ation simu.ation is entitled greaf'as ttoo destabi 1ize the economy. growth rates were not so great~’â~ destabilize Reductions and Easier bi 11 ion ~ AA permanent $5 billion in persohal personal income taxes was assumed for or 1977:2, There was $20 billion of additional additional tax reductions reductions in 1978 and $25 billion in in 1979. Ml 1979, Ml growth was permitted to rise 1% above the monetary growth in the "Personal “Personal Tax Reductions'' Reductions” simulation during 1977 and 1978, 0.7% higher in 1979, and remained the same in 1980. The Ml growth rates were 8.2%, 9.2%, 8.8%, and 6.7% from 1977 to 1980. 1980. The baseline had corresponding 6.8%. growth rates of 7%, 7%, 6.8%, and 6,8%. Tight Ti ht Fiscal and Easier Money: Mone : AA $5 billion reduction in military assumed for 1977, spending was assun~e i , then a sustained decrease of $10 billion from 1978 to 1980. AA permanent $5 billion reduction of of personal income taxes occurred in 1977:2. There was $20 billion of additional tax reductions in 1978 and $25 billion in 1979. 1979. Ml growth was permitted to be 1% above the monetary growth in "Personal “Personal Tax Reductions" Reductions” during 1980, 1977 and 1978, 0.7% higher in 1979, but remained the same in 1980. 8.2%, 9.2%, 8.8%, and 6.7% 6. 7% from The resulting Ml growth rates were 8.2%, -91-91~~~ 1977 to 1980. The baseline had corresponding growth rates of 7%, 7%, 6.8%, and 6.8%. Investment Tax Credit: AA permanent increase of 2%, from 10 to 12%, 12%, in the tax credit for producers' producers’ durable equipment, was assumed 1977:1, Monetary policy was not accommodating; other tax to begin in 1977:1. and spending parameters remained the same as in the baseline. Corporate Profits Tax Reductions: AA two-stage two—stage reduction in the statutory tax rate on corporate profits was assumed. The rate 1978—80. Monetary was lowered from 48 to 45% in 1977 and then to 42% in 1978-80. policy was not accommodating; other tax and spending parameters remained the same as in the baseline. —92— -92- Formation and U.S. Economic Economic Performance: Capital Formation and U.S. "Personal Tax Tax Reduction" "Baseline" “Baseline’ and ‘Personal Reduction” Solutions TABLE & 8. ,, 7U ECONOMY ICONOMY RF H 008 GNP (00t CMG,) 8180. COG,) BtSf.:LlNE 888(LONF L0'1H~ PERS, TAX£$ L0~0~P905, 164(5 OJH 05FF ., I, e ‘9.8 (NON~ACCO>IJ (NON.4C000M) 0 UN[!Wl.0YM€ NT 18419 RA TE I'> UNEMPI00 00I 0~) BASELINE 86591001 LOwfR PEPS, 'iJ.XfS lNON~tCCOMl LD’(~ POPS, 1*005 ONON’0C((M3 OJP05FF ,. 8,55 76 " " 6.1I b, '.' ,., ,., 7,3 7,3 7,7 1, 1 77 78 " " 79 80 LI,? ,, 0 4,0 5,1 5, I 9,00 I, 0,9 3.0 ‘0,6 .. 0,1> ..‘0,3 o, l 6,0 b, I 6,9 b, I 5.0 5,' .0,7 •O, 7 0,9 ‘0,6 5,2 5,? 0,0 ,., 5,3 5 ., 5.3 s ., 0,0 o, I 5.0I S, 5,3 5, l 0,3 o, l 5,0 5,0 ,., 5,3 4,8 5,0 5, 0 0.? 1.) ‘0,0 "'ll, 0 '. 1 5,9 5,' 0,2 I ,l 6,8 I>, II JNFLAY!nN ( X CHG,) INFLAtION (8 0MG,) GNP GOP Dfl'LAlQR 0FFL4000 fiAHl,INE 045(1099 LO’FP PERS, 0(05, ¶00(3 LOt<fll 00FF O!Fr ,, ' 9,2 uns 000N’000005 (NON~acCoM) no "' OASH ?NE O4BFLONE 10610 PERS, P005, ¶4201 L01sER HXES O!H 01FF ,.9,3 ) ONDN’ACCOR) (Nor. .. .1,cco1-1) cPI cm) I\ASfl,.JNE 0850LINE 0.0000 POPS. ¶4(95 t.Owf II P(RS, HXES DIFII' 01FF 0609.40(003 (NQN,.A(C0!1) AVG, 00(0017 MOl/l>L Y EHINJNG5 AVG. EARNINGS 8858(160 BASH H•E LOWlll PfRS, TAXES 10510 0898, ¶6006 OifF 01FF 6 CAPACTTY UTIL0ZLTION UTILIZATION 09) 94’4901v ILL 11ANUFACTURI'<G 411 MANOJF4CT00099 Sl~(L!Nf 880(109! LO~fll (NON"'.iCCOf-1) l.04F0 PERS, 8(00, Hx(S TAxES 0006.4(0018) OlFF 01FF "' PRlMAllY PPOCESSll<G P810400 FF00950105 aiSEL TNf OISFL0NF LO~EII 0,O’EN PEIIS, POPS, 740(5 TOES OIFf 01FF '., 4,3 ,,9,2' 5.77 5, ',, 7,2 1.' 8,9 (NON ACCOM) (‘0ON’4(COM) 9.4 5•I 68,7 1>8, 7 70.2 70 ,2 72.9 12, <; 76.8 H,,B (NON"'ACCO.,l 0696.40008) ,P FI3’”’i. f 1)1 ~ '!. l&~ Rt 00(EIPOS Cf Ie'TS ~ll S, l (9 ‘015,7 BASfl lf,£ lo O~f;; TAtES 0009.0(000,) !NON•ACCOl'I) 0800 PERS, P(03, 160(5 DifF 00FF 0 !FF 3 01FF ,.s,'' 5,0 5, 1 0,0 ,. 0 55,6 ,, 0,3l o, 28b,'i 286,5 li:'8, 9 320,9 ' ,. ' '., ,., 5,5 5,5 ,, ' •o,o ,., 5.3 £l,8 5, l 0.5 0, S ',, ,., ,., 9,9 5.6 0.7 5,2 ,.,.5.0'0 ,., ".'' ,., ,, 5." ,., O5,3 0.0 o,) 0, S •I 5.0 8,0 ',, ,,, ,., S, l 9,8 5,2 0,3 ,,, '., ,,, '., 7.2 6.8 6,7 ,. 1 6,8 0,9 O, I 75,3 75,3 75 ,ll 75,4 O, 0,4I 77,7 11,1 78,71 16, Hl,8 78,8 8,2 so, e 80.8 2.9I >, 1q, 79,71 0,8 o, I 79,6 79 1 b 00,3 fll, l 02,7 P.2, 7 1,3 I• l 82,6 82, ti 1111,q 88,9 2,4 86,7 %,1 0.7 I, 1 lb l, l'J 364,0 lS;,;, s SSp,5 P,55 •;>. —0.7 •0,7 '<OB, 408.0II 3ql, 7 397,7 ‘05.7 - IS, 7 •l, 8 —3,8 1155, 1 ‘59,7 11211,11 824,8 •lO, 9 ‘00,9 •0,8 ‘6,8 1182 ,b 482,6 •29 ,ti ‘29,6 ..‘5,8 ;,e ,,, 6,6 £1.9 5,0 0,5 6,8 0,0 '" " 5,9 5, I 5~0 0,77 0, " ,. 6,0 0,3) '.' 5.6 7., ,. s 0,5 79,5 1q •5 81, 0 81,0 1,5S I, 85,0 as ,o 512 ,,'! 552,2 SURP!,U& (618) (NU) '(Df flil 0u00v7 AUCGfl SuRPLUS •000P01 OILS.)l IS l'IJLS, flHIEll"lf 443(1091 Uh!P PfPS, TAiES 1fl’fO P905, 14415 OJ FF 01FF ‘70,3 •7 I, l ,.56, II ‘58,4 (NO"l•ACCOl'IJ (NON’4(000) .. ,, • s —7,5 "l, ‘3,99 ou, 0t DOFF ,.o,.~v MONFY !"TfR~ST "' .......... ,.11,.,-----AND /UH:$ INIFRYSO 081(5 l<H!IHh, 080000*9ONFVy - ~UPPL Y pq) 900PPIF 000) t,ni,fll uxe:s 060N.1C0003 (NONv!tCOl'I) 17*08 PU1S, P605. 140(5 ,,, ~,2 ;9.9 •I OIP' 00FF 50080 009(9 SUPPLYY 0020 (3 CMG,l (HG,) '41!QA!:l MO"fY l!Ul-'PL (M2) 0. IPSEl,P<f 845F0,0NF L(l>,fR PftlS, TOO lNON~•cCoH) L0’FO FF08, 0400) ONON.00000) Oil<F 00FF ,ro£'14l FUNl)S IHtE Ff00041 FUNDS 0400 (01 SA!Flt'<E 90581190 ( N0"1~ACCOM) Ll'lw[R Ll’ 0 PH<S, PPpS, n~ES ¶4010 1N00.400000 "' 1, 1 7,7 •• 1 0.7 J ..‘MONTH >IQNTi. 0004300181 fflfASUIIY 0BtLLS OILS (2 DI Fr 09FF Plf!5, P505. "' (NQN-,IICCQ/.1) I74105 AXES 0006.4(00(0) JS.SUES 01 Yf!Lt'.I 0" v01L0’ ON 60* 0551(05 07 HJ G><eGil ~Ol COOP, 0059.91801 CORP, 00900 80>105 "" 004 !'1-Sfl !NF 8080LINF v1 .. p> Pfl<S, ("QNeACCO"I) L1’(~ PbS, 10:rs 74fl5 (N0N’4000415 OIH DOFF YE00(SOP VElflC!TV 03 (HG,) CHG,) 949(1108 \HSEUNF. l n.,FII 8005. boOS TfttU L0,F0 Off~ 00FF "n~~. '" 5 ,82 5,82 S, 05 5,05 78 5.78 s. 5,01 5,00 9,09 '>,O I 6,318 "'· 3~ , .. ,,, 0,2 .. ''. 7 ,., ,., '., 0,0 6,8 8,0 6,8 6,7 1,1 •O, 1 ‘0,9 l l, 0 00,0 I07,2 1, 2 0,0 1 o, 8 05,8 11, 00.3J 0.; 0,5 100,0 I, 0 I 1• 3 00,3 0.) 0,3 •O, l ‘0.3 s,in 5,83 5 ,ll7 5.97 0, OIi 0,00 I,, 2il 4.22 h, i ,> 0,73 S, 51, 5,56 b ,bil 6,6~ 1, 13 9,0) 7 ,IIS 7,oos 0, 52 0,52 5,118 5,08 S,5l 5,52 (). 0~ 0,04 s,rti 5.76 Ii, I 8 0.00 o, ~2 0,02 S, :;u 5,30 b,20 6,20 0,81, 0,86 5,73 l'>,b2 6,62 o,sq 0,09 8, I I 8,09 8, Ol 0,03 a, 11 8,07 o, I 5 0.95 8, I~ 8,001 I!, SI 8,50 1, ,,i, 7,90 7,'H 7.97 3,) l, o 3, 0 3.0 0 ,, 0,0 —93— -93- ‘26.77 •21:i, •57, t ‘57,9 •lO, S —30.5 •lO, S ‘30.5 •1>7, 7 -llil,l ‘67,7 1148,3 7, 0 7,0 8.2 0,22 I• 7,0 7,2 0,2 ..‘0,59 p, 0 I 2.9 {>.GN~ACC()>!) (NON, 4((nM0 ',, 1.' 0.' ,, ' OJFF DOFF t,rh,HI 10860 •i.S, I ‘S~,7 •5'>, 7 ‘45,0 •75, 7 .75,7 •7 I, I ‘70,9 • ! ':>, l ‘053 •27, 5 —27,5 - (3 CJ; CH~,) CHO,) IUHLP.I( M8SFLTN( f!AiHL JllE 8ASOLON( ‘64,2 •bl.! ,2 •bl,, 1 ‘6~,7 11,12 6,02 ~, OI 0,00 ) •0 3,0 l,I 5,9 0.' 5,0 2, l 2,3 2,5 '. s 5.2 '.' 10, 00,6b Io,; 00,3 0 ,22 6,22 t,22 0,22 ~.n 0, 37 0,37 2.5 "· ct. 5s 2.5 0.' 0.0 TABLE 8. - . Continued ,, .................. OUTPUt .. ............... '"' ...................... ,. .... (l!JLS, '! " fJ;Vf!ITM(NT, C!Pf'rAI. FMIUT10N, 0H8V107M N7, 04P0741 F0004010N, ,, 75 " 76 11 77 1' 70 79 16, 't 38,7 18.t 30,0 11{1.i! 4042 40, i! 040,2 0,0 o, I 0,! II59,8 I,! 02,00 Iii:, 116,i! 08,2 46,6 8,4 81,6 83,6 03,6 81,6 o, I 8,0 O, I 0,0 .. ' .. '.' lll,ll 83,6 11q, I 00,0 0,5 8'1,5 89,5 90,5 <;I). 1 8,6 0,7 'IS,u 9544 101. 003,77 96,6 'H,,ll 0,8 I,> 0,3 I• l 504,! I 011,1 8,9 0,8 121, 023,8 023,0 I 2:\, 8 o, I 5,0 o, I 0.0 e 131 ,3 39,3 9)2,9 112.l 0,8 0,6 ,., ' .. 13'1,1 539,0 000,8 t 110 ,A , •1 0,7 0,2 I ,2 !089,9 Q'I, <; 050.8 l 50, 8 9,4 0,6 '115, U 935,4 '115, u 955,4 8,0 0.' 0,0 953,5 '<5), 1 953,7 0,2 0,0 11•n,s IIH,1 472,7 '., '113, l 973.3 0,6 8,5 O• I '1111, q 993,9 11'15, #45,00 0,0 O, I 0.0 8&9, 869,0II 9{111,8 900,8 905,2 '105,i 9,8 5,0 <;Iii), 0 983,0 #44,0 91111, U I 0,5 0,2 1,HS 0.195 t, '11 O 2,OS6 2,058 5,900 0,404 l, 'illl 2,020 2, O?li 0, 00(1 .0,830 •O ,Olil 0,000 "1, 5,4 ‘0.77 800 " ~ POTF!.tHL 01(19(50 POIFI,0081 PlJ-1,t PLAN, fyPf'Nn!'tU11£S l 1112 ‘‘5) 08015, OF 0572 5) 48591 I 00( !USHtN£ LOwr.11 />EIIS, (NON•ACCQMJ 1004(0 0(85, HXES t64(5 0006.09(00) t,tFt 07FF ,. ' ,' lO OffF 05FF [OU!PMfNf f¥P!NO!TUIIE$ tOUSPI400I 909(NOIIuRES Hit LS, OF 0972 I '11i I’S) S I SJ 08015, IUSfL JNE 4049156 " LOkf_ll PFRS, 1009~P 0140, 111,'t 79,7 THO 180(5 "1'1,'1 77,9 0NUN~A90gM) (NUN"'AtCO"I} 0088 010 l* 09FF OIH !HJSHIESS l'JHO 81(556(85 Fb5(O (RJLS, OF (8115, flAStl l 1-lE 8450106 " lf.!VESTMENt 001005101040 1 5} 1'112 !!‘S) l’72 LOwf.R HIIS, 140(5 1'1 x£S (NON"-'tCoi'I) 108(0 8005, ONON4A000H) 11 I, 4 000,8 IH,O 006,0 OtH' DOFF t3 01FF oxn °' GPOSS Pl ,HIT 00)15, i!HlS, 0~0972 1912 S!S} flOS$ FL 40! I’S) lUSfLINE 84501900 (NON,.ACCOM) LOWE:ll 1'(118, HHS LOWE’ POPS, ¶44(8 (NON’4((~~3 '-Ol, T 903,7 111 s.1 #08,7 01rr 09FF J; OiFF DOFF " (;11055 !8lLS, OF 0072 11112 S•S} GROSS El'lUtPMENT 101(008(61 0831$, 5,5) 881(10 ‘OF !USEU'<f Pfl!S1 U~ES !NO/.l~ACCM) L(H.-fl! 10000 P108, 54090 000N.0(tOMs l)JH 00FF '.' Sti!.l 852,3 83'1, t 839,4 OF M[lMf5 CH'Ir!l STOCll cAPItAL 510(8 OF M55895 {!,\JLLIO'iS OF 0601100’LS 00 UNITS) UNItS) RBflt'-'f_ 589 FL) NO t.O~fl! 1A¥ES 5n,00 Ptl<S, P005, 1408$ OHF DOFF blF F O 00FF • 0051518A3006 RfGl$t~AifON t,lbl 5.083 !0,503 , Sill l ,802 5.602 0,050 1 o "'' 0 0, 007 0,007 0,0 04 74,711 74,78 75,;,9 75,69 tNOl<"'AtCO~) 000N’000065 '. 0 .. u. •• ,,, ''., ,., 0.9 0,2 ,,, .. ,., , ,., '.' ., 1JA6, 964,77 988,9 986,'i ,., '., ,., ,. ' ,., ,.,,s 2,2 869,0 ei.,;.e ,, 0 0,0 8,8 Il 00FF OHf HOUSfNG 681(5995 Shl!'tS 55A015 (M0(1105045 1(9009) (MfLLJllfl!I OF OF UNl1$l fllSH TNE 4(501560 Ll'Jwfl! POPS, PfRS, 040(5 tA~ES 0Nn0’A000M) {NnN••cto~l 0.0810 D!H 00FF iO DOFF /'llFF 0,2 0,8 I0,808 ,81 8 0,023 4.023 I•' 0,5 1&, </0 76,40 71,, 'l I 78,90 0, oI 0.09 78, 1J 78,03 7.i, IS 70855 0,83 0 ,Ill 0,0 0,0 ,,, ,., 8.2 '.' 79 ,Ill 79,82 7,;, us 79,OS o, Oli 0,00 0,0 0.' 80,115 80.05 80 ,R& 80,86 0, \lt 0,00 0,0 118,6 008,6 ti <1, l 50~,) '4.7 .1 8,8 t 21,11 020,8 122,b 522,6 0,8 ,. 0,71 ,., or OF 0800 CiPS l"lll!O~S OF 0601(50’OS OF U~!TS) 1,880500 ffAS(LJf,f 00459100,0 1,-0wf II PfJl!I, rors 10’0~ POPS, 14805 OtFF DOFF I Ob, 'i 006,9 l505,2 I o,i! 11 i', 9 0I?,~ lli','l 107,9 ti 5,b 505,8 505,9 115,9 P~0 0,0 0,3 8,3 ,.,. '' ,,o,'' ' (Nl'.lN"A(CO>I) (‘O5~’~((0H) 6i OH'F 01FF C Al'Tf AL 8100 0/t HOUSEHOLDS HOUSEHOLDS 98Pfl01 570(0 00 IS I HIid, OF 50480 COILS, OF RASH JNt 845)1500 Ltll'[R Pf.PS, 14014 l AXES 000NA((o’) (04(0 P005, (NO!-l'"Atto><) OtFF 05FF Ot !llfli' O’IPF .. ,., 55)0.3 500'1, 7 5530,3 l'5lU,6 3868,2 38116,i! lli!UO, 4622,9 5009,7 3534,5 0250,88 111>22,'f 112«0, 1 llt>H,S 5011'1, 'I ~1,00, 02,4.) 4634,5 5)84,9 06)0,9'I aO, I uo,,2 70 ,b 50.6 ‘a,’? 11, !> ‘0.0 70.6 -o, .8,00 0.' 0.3 ,., ,., 0,8 0,3 !00, 6 000,6 I 00,11 000,8 0,? 0,2 t(li!,3 002,3 10i2 1 7 402,7 0 ., 0,9 0,0 LHIOr. 000(1 FOU.E 14808 (>ltlLfOt;S 1’OlLlO’AS 01' OF P[IISONS) 9(05005) fliSHti;f 5851.0,590 Lt'll<fll PtllS, 10000 0(05, HXES 14010 (N01'!•AcCoM) 00NO0’000000 - 'li!, 7 92,7 OIH DOFF Ot: D!H 05FF AV£11At.E 0000U(fl00rF l>IIODUCTIV!rY IX 490080 00 CHG,} (HG,) 6.iHLlNF $4091100 L01<fll run 10~F’ PERS, POPS, 140(8 !JIFF 09FF .. a. ‘8,71 (NON•ACCO>ll 0000—0(00(0) POTfNlPL OUT~Ut P07F0t(’l outPut (6015. OF 0972 CB!LS, 0, \'172 I’S)l fll.$fLINE 84S01001 0 LO~fll P[ll'S, TAXES TAXES L060 POPS, 07FF 0TH tO 01FF 01n s •s tflON.,!CCo>ll 005OH.49C060 q4, 8 90.8 97, ! #7,0 '11, 47,01 <1e, a ,;a, s ,,, 080 0,9 0.' 48,8 98,8 0,8 0,0 5,7 0,0 5,9 7,3 1.' 5,7 S, 5,0I 0,2 5,4 5,3 ‘8,71 ,., ,., '.' '.' ,. ' ,., ,. ' ,., ,. ' ,. ' ,, ' ,., ,,, I,, I, s .. o. 8,) 0,5 5,8 I Ull7, !I I9490,5 1536, q i5584,2 S!IU, i! U'II,) 0506.9 Ul!S,4 1110s, 0365,4 0405,9<i 0807.04 0407,8 1'1-117 ,8 I0449,4 «'I 1 ,u 5537,8 SAS, 2 1 S.H, II l95~5,2 I, o O, I 0, S 0,0 0,0 5,5 0,0 '. 0 0,0 0,0 o, 0,5I '0.0 .0 ,,o —94-94- '., TABLE TABLE 8. 8. - ‘ IUTIOS 001005 GOVEIINM[NT f~P("IOTTllkfl ,rnflUL GOVEQNP001 FF08080, 1P100711004 8 TO N0Ml>4AL G"-IP 10 606)981 098 0’) kASH ll<f 6880L06F L(lwflf a {NON•ltCO>!) 108F0 PfllS, 0045, tut 78508 (0081’0~(0M) OIF' DOFF '" ACTUAL GOP) Gt<P) LESS ACTUAL GOP (POTE'-TUL CPOI NII4L LESS (IIHS, (OILS. OF l'Hl 0972 I'S) 0’S) "' " fllSlLl"I! BASIL 901 L0,.£11 0005. PERS, L0’ER 01H DoFF TAXES 144(5 Continued Continued 75 " 76 " 77 77 78 " 79 ll,t, 23.6 11,9 77,9 ;,;, ,II 72,8 11,, 21,1 11.,l 22,3 U,l 22.3 in.a 173.8 (NON-•ctoMl 0900—4(006’) l Ill ,O 005.0 lO OlH 01FF 5P08$ EFFECTIVE (489140, GROS$ EFFECTIVE CU>!TAL TO PflL IIF. IL 598 05) STOCI( 10 STOCk SUE LINE 8841109 lN0N•AcC0M) LOwEII P908, PEIIS, 18015 Hi Ea 0000’OCEOH) 0,0w!) OtH DOFF llli!, 0 092.0 TOCI( ,0 Jiff CAPfTAL Slot c’POIAL S STOCk 10 i:t[AL GNP 6081 5840 (30 SASEL fNr 88590,00! (NON•lCCO~) l(7*19 n,.EII PEIIS, TAXES 0908.83(96’) 8985, 1400$ O!F' DOFF 811,11 80,8 '" "' "' tlo,8 038,8 81, 00.3l It( AL Ill.JS f"lf 05 IIS FTXE!'> 0180. 8u350 0)010 Glil> 13) 70 '-PL 89*5, 500 !O m tlJII! Lll<f 8885 10’8F LO><fl{ P905, POIS, 0,0,90 ,. 2,3! ••• 2.8 11, 11 70.~ i!l ,41 20,0 i!I, 1 25.7 •0,h ‘8,5’ IU,1 922,0 11 <i,11 009,8 ‘7,6 •? ,b I Ol, 7 903.7 fl!,, 0 85,0 •Is, 7 ‘00.7 'H,l 93,3 t,l'I, 0 65.0 •:B,l .33,3 10,b 78,6 !ii, 0 59,8 •l!,,ti ‘25.6 ..‘2,2 i!,2 -16,1 ‘08.0 ..‘35,7 35, 7 -11,11 ‘33,0 Ill, l 950,3 •O,S .0,5 IH,5 053.5 "0, l ‘0.3 12ci ,ti 029,6 I i!'i' ,II 029,8 1-?7, 027.00 •C,8 ‘2.8 1211,l 928,3 •I, 7 ‘0.7 7<i, l 79,3 11,1 77,7 70,7 78,7 ‘0,0 •I ,O H,9 76,9 75, l 75,3 •~O.6 I ,ti ?t,,l 76.2 75, l 75,1 ‘0.5 •t,I 113,ll )33,8 ,. ' .i!,8 7,8 2,0 ,. 3,5! ,. 3.5! li!b, 026.3l -2,0 ‘2,0 .. ,., ••• ,. ' , 3,8 3.3 .. (I, 0 ‘P,O ..‘0,5 o,o •O, I ‘0,0 <I', lit 9,38 .. ,Ji! 9,32 ‘0.00 "o, o I q, 116 4,88 <I', l<l' 9,39 •0,07 ‘0,07 •O, 10 —0,00 8, ''Ii 8,40 6, '10 8,90 •O, ot —0,05 8, qq 8,99 fl, Q) 0,43 •O. Ob ‘0.56 •O, I ti ‘5.08 3,8 5.6 •O, I .0,0 INVEBTI-IENl 1000SIMENT <I', 15 9,35 180(0 HHS <I', I1 4.07 (NQN .. l.tCOM} 0909’A(COH) OJH DOFF L£SS Rf IL O’US000S8 fllllll>lfS~ n,Eo 0980, UPOn !NV(S!MPH 58,O9S1HFNt 1(55 POOLLLOT)ON Pf!LltlTI'lN 40011889? AIHH"H-IY 8501903. lXPfNOS, 1) IH ll. 000 (tO 0080 fllHLlr-<F 80591099 HXES 0000.4(0005 (NQN.icCOI-I) t.OWfll L0Wf~ ni:is, FOPS, ¶8015 PIH 010F '"' '" 88 •O,J .0,3 90055 (40)145, $TQ(k GIIO~S (Ai:>ITAL STOC~ OF 01" ExPfNO, POLLU1lON HI.ITf.f'ft,f P011001009 488500091 EpPENO, TO PE AL GMP G"IP 0)) TO PE41 "' " •O • 0 ‘8,0) 11,1 22,7 7<1,1 79,0 ‘0.7 •O ,?. &UEUNE 8850106 l !XES 0009.03(00) (NON .. lCCOI-I) LO,,ER 5,0~(P PEJ,S, P905, 14505 DOFF OIH " " 8,<l'] 8.93 —95— -95- 5.75 "· 15 <I' ,til 4,63 q ,51 9,S3 <l',H, 9,06 (I, 07 9,0, Cl,<l'li 9,40 <l',lll 9,83 •O, l i! ‘0.02 <I', Iii! 9,48 Q, 31 6,37 •O, I I ‘0,00 rMu v. iApitap Formation 5506 U.s. tconumic rertormance: rA6Lt ':J, t.ap1ta! formation ano u. :::.. tconom1c t'errormance: Solutions Tax Reduction Reduction with with Accosiusodatloig Accommodating Money” Money" Soiutlons "Personal Tax "Baseline" and “Personal kuline’ end 75 7S [CONOJ.!Y 0609005 0109. 049 (S (HG.) (t CI-IG,) RrAl usn.ri.r 085 '"' 19081 L011f.R PfRS, (ACCOMJ 100406 P005, U:w.£S 580(8 (4(000) OtH 01FF UNfMPLOYMEIH UM9KPL0000I8T IUTE 0811 !1A$£L 1N( 88890,500 LOWEii P105, PEIIS, 0,0498 "' 09) U~Et 0*060040 UCCOM) booS •I ,8 ‘0.5 ,., 8,5 OJFf DOFF IN,LATION (l 00880,45008 (3 CHt,} COG.) GNP 58p 0£FLH0i:I D9PL4ID~ BAHL JNE 808110080 LOorER LOR 8 PERS, 0005. ,., 9,2 UX!I (ACCON) 74518 04(006’) DtFF DOFF HP! RJ.SEL 1NE 845(0,101 "' LO,.EII P105. P[IU, TAXES UCCOM) 0,004904 180(8 88(000) '., 9,3 DIFF OIFF CPI (PT IHSEUNE 80890,080 •cco•q LOllfll PERS, H-X(S < 9(85. 1406$ 06(00(05 L0800 O!FF ,. ' 9,7 DOFF 7* " ,., $8590, ONE 80f.LP•E 8,9 LDll(II PEIIS, TO!S 1O~ER 0(05. lAsts (ACCOM! (A((OH) 01,,. 6,0 1, 1 7,7 5,4 8,3 5,7 "' CAPACITY utIlIZATION UTILJZATION 00) 411 MlNUFACTURlNG &LL 9ASf'LPH 885 109F Ll'l!o~II PERS, 15000 8005. UXES 50003 (ACCO"') (96(58) 1 ., 7,3 b8, 68,77 Pl!JHA?T 005840! PIIOCESstNG P80(0559N0 TO,,? 70,2 ll!SfUt.iE 885110841 LOOl[II n11s, UxfS 10600 P805, 5*095 1 ., 7,2 Ti!,IJ 72,9 H,,e 78,8 (A((Olo!) 00(000) " 8) " 328.9 J,?8,9 oi,, *l OIF' 00FF , ' '·' '., ••• ,,., •O,) 8,7 6,0 I ,3 0.3 8,0 S,6 0,8 5,5 9,2 .0.5 s,s 5,$ 8,8 •O. 9 .0,9 6,0 b•I 6,0 5,2 •0, ‘8,88 5,2 5,3 s,) 5,0 8,8 5.2 0, 0 0,0 5,0 0,0 5,8 5,8 0,8 0,7 s ., 5,8 5,0 8,0 s5.3 ., 5,0 8,9 5,8 5,8 6,0 •• 0 0,9 8.0 0.3 4,9 s.' 5,0 5,2 8,8 ,. 0 ,. 0 5.3 o, I 5,3 5,8 0,5 0,8 0,7 6.8 8,7 8,6 6,8 6,8 6,8 8,9 1 ., 7,0 880 0,7 8,0 o, I 0,0 75,)l 75, ,s,11 75,4 o, I 0,0 77,7 77,7 711, 9 78,0 0,3 ?Cle, s 74,5 8.?, 82,2i! '. 3 18,1 78,7 81,5 80.5 2,0 7Clc, b 70,6 19, 1 79,7 81,l 80,3 82,8 82,8 8i?,b 82,6 85, 8 85,8 85,0 85,0 88.t 08,5 0.5 '. s ,. 3 3.3 3.2 5,0 01(90855 RECUPU 206.5 l!b,'5 79 b, I 6,0 •O, 4 ‘0,8 ,. ' OIFF DOFF 885(0,1880 fUSHJN[ 10880 10505 00cc000 L0Wfll P145, PERS, TAXES (ACCOM) 05FF 78 7,3J '. •O, ‘0,0o 5.0 OIH DOFF "' ••• 0.0 ,. 0 5~0 0.' 0,2 ,. 0 00FF ,, .... .. .., ,., ' .. ,., ,.,. '' ,., ,., ,,, , .. ,., ,•••.. ,. ' .., ,...,' ,,.,.. ,.' ..'.,'.,, ,., ,. ' ,., ,., ,., ,., ,., ,., ,.. ,., ,., .. ' ••• .., ,. ' ••• •,., •• .. , 8,0 40’G, HOURLY &VG, MOURL Y 9008)895 EUNI'<GS •108 045, 188 rtOHHl (1 !!!LS,) (0 0010.) 77 " 360,) lb!, o 358,5S 1511, .. ;,, !; ,2,5 488,0 408 ,4 3*3,9 J<ll, 9 •tU, 5 —50.5 ‘0,7 •0,7 —3,S -1, 5 ‘o8,2 •/IQ ,i! '"b/l,b ‘86,6 •l,11 ‘2,8 •3, 8 .3,8 ,. 1 ,., ••• 055,77 us5, 430,0 U 3 I ,O .. ,,.Q, 1 ‘2’,7 2.8 .. , 502,2 Sll,2 804,31 4911, .08,5l •18, ‘5.0 .. 5," —3.5 •3,5 •'!,5, 7 .55,7 •bll,8 ‘69,0 •14,t ‘84,5 ‘05,0 •115, 1 •119 ,l ‘69,3 •211, ‘28,0 I ‘28.7 •2b,7 •i!5,i! —25.2 ..—53,8 5J,11 •10, ‘70,55 ,rof IUL 0000840, HUOGET SURPLUS (NU) 8Iu0907 SURPlUS 00804) (3 8015,)l ($ fllLS, 8*511069 flA5EUNf LOWER Pf;!S, (ACCOM) UxES (4(000) 0,004(0 P985. 11)05 01n 01FF ... ................ ..... ‘TO,) •fl,l ‘50,0II •58, lO OIFF DOFF 0088 MONF. T! £‘lO 0951040SF 04005 INTEMESf RATES 80800’ >tONf.V 00087 SUPPL~ 5uFPLV (Ml) (Hi) 80 (880,) NAIIPOw (l CHG,) USEL Pl!!: 00501908! L0N€11 9105, PEl.S, TAxIS hJU (4(6000 (4CCOM) 10400 8,2 88040 lo!ONET 00015 SUPPL SUPPLYV 0882) (HG,)l 9P040 (Hi!J (0 Cl Cl-<G, lUSf'.L It.if 0*591500 1004(0 70393 (80(00) LOWEii 8(05, P[RS, TOES UCCOM) 00FF OIFF ,FOF/UL FF01940, FUND$ FUNDS RAT! 885! (00 lfAS!':L INE 945(1091 10490 9865. 1009$ LOio!f.U Plii:1$, TAXES (40(06’) (ACCOII) OIFF 01FF "' m 5,8087’ TRIASUPY BILLS 090,18 (0) J•MONTH HIUSUPY IU!lflINE 84510,096 15,10 PEPS, POPS. 78305 (A((QM0 UHS (ACCOM) LOWFII DIH 09FF '.' •• 1 4.7 S,8.? 5,82 s,os 5,05 7,7 •16,8 ‘08,0 .. , ..•••'·', ,•••.. ..' '.. ,., ,.5.0' '., DirF 01FF •45,5 ‘85,5 7,0 7,3 1.' 0 •• 5,2 1,0 7,8 0,5 0,0 I•' 6,8 8,0 0,9 6.8 17,0 •' 8,8 11 ,o 00,0 00.2 11,i! 0,0 IO ,II 00,8 10.6 11, b 0,8 0 •• 00,8 11 ,0 02.2 Ii!, 2 0,2 58,6 10,111 5, 6l 5.85 5,81 83 00 ‘5,00 t,, 22 6,22 8.22 b,22 0, Ot 0.03 5, Sb 5,56 5,58 5, SQ •0,0 ‘0.00 I 0,00 0,01 s. .. o, 55,3 11 ,l ,. 8,71 b,22 4,22 6.23 t.,2l 5, 7& 5,78 5, 01 5,00 S,QB 5,08 5,49 ij', o, o I 0,00 5,78 5,80 5, 81 0,05 0,05 s,n, 5, JU 5.34 5.80 5, II\ 0, 01 8,07 5, 7l 5.73 5.82 5,82 0,09 8,59 9,01 9,00 e,:u 8,38 1, QI\ 7,90 7, ~7 7.’87 01 ‘0,00 8, II 8,00 il,Oll 0,08 •O,Ol ‘0.03 8, Ol 8,)) 8, ! I 8,00 0 ,09 05,09 I!, Sl 8,53 0.19 0,39 ,. 3,00 3, 0 3.0 O, 0 0.0 ,. 3.80 l, O 3,0 0,0 l •l 2,S 2.3 '. 3 ,. 0 0,5 2,5 2,4 •O, I ‘0,0 s. Y1FLO ON NEW lSSUfS OF 00010 NOW 0531(15 01988.00801 COIIP, (009. ijQ'-05 000905 0)) l<IIGH-G.IHOf !U!IHINE 808(0,099 L1lWfij FF05, ~FR5, 5859$ roo 040(08) ( ACCO'!) 5,00418 l>!FF DOFF "' V[lOCfTV P90,0(07! 00 CMG, (HG.)l a•sFL T~E 845F1791 r~~Ell LO!tifR 0,008008 ~EIIS• 8085, 584(5 OJFF 05FF " .. o, '.' ,. ' 2,9 (ACCOM) (00(004) -96- 6.2 ,,, e, 111 8,04 .. ' ,. s TABLE 9. .............. . ............ fNVt'SfHfl,/f, CAPfT~L ,oR!<'ifION, 588V181’84081’, CAPITOL FORMAUON, l>OTrNTf.lL OUTPUT P01F,OTOAL 08J1P081 . - Continued ,, 75 78 " TT 77 16,1 58,7 18,1 18,0 AND "' " 70 59 " " 40, 2 45.2 111,11 05,8 il0,2 00.2 0,0 • '0 &l;t ,t 02,5 0,1 ,,, 11],I> 03,8 1111,11 04,0 9,8 506,2 110,z jjf ,o 07,0 0,0 • '1 0,7 I, 7 0,7 0,8 89,5 n,s 95,11 95,0 I 03, 1 00),) ,. 8 0.8 2,0 •2,0 •I 2.2 2,2 88 ••••••••• ••a••• 8(881 It! ANT fEoPrNnlt00005 xPfNOl TIIRUI I QU 505) {14tl5, SIS) (58)0,8, OF OF 0871 R•BfUN( 88160,0NE L0WfA Pf.Ill!,, 0,04108905, DOFF O!l'F 8 1, 18495 (*6500) HHS (iCCOH) 00FF O!ff o, I 0,0 [OUJPl<ENT DPFNOITURB Iou08889881 EOP(NOOTS)01S !Rlt.S, (OILS, OF /'Hl 5~72 I'S! ~‘5O !IAS(LJNl 045(1098. 0,0090 nAs, POPS, 145(0 LOl<£A l U(ll (81(080) P,CCOtl) DlFf 01FF " 1'11,1 10,7 11, 9 77~9 83, 83,6I> 63,6 83,t, o, I 0,5 o, I 0,0 iHFF 3t: 01FF 90.2 90 ,i 0, 1 0,7 IJV$1NfSS 81(510158 F!JfFt> F50F5’ 5079135’087 )l<i'tSt"FN1 (!\!LS, $IS) (OILS. OF !~12 ‘372 8’S) ff.lSfltNE 84511500 LOWfA PERS, h~ES 0,00800 0(08, l*sE5 l.ltC014) (19(00) °' llt,11 000.8 I U.,O 008,8 01FF D1FF 0t: tJIFF 05FF 1 S) (;AO!!!I Cf\CJLS, OF OF 0*72 1972 S5’S) G008S PLtN1 810841 100115. 8'-Sfl?t;E 8’591I~9 PEllS, 14095 LO•IFR 8005, lA~r& 00(008) ( •tt0>1) 100894 90],f 90),? 911,7 408,7 O!FF DOFF Olll'f 0lr: DOFF 90058 EQlJYPMENT )U)8M1845 (5005, 0~7l $5055 (;ll0$S CS It S, OF 1,;n 1 S) 88591 ) 809 8ASfLPiE LOMPI ThfS 0~cCO4) ln,94 P(RS, FIRS, 140(3 " ( •ceo011 802.3 in2,1 839,0I 839, O!H DOFF 3 OJH 00FF X ,‘1U50’]0. ~Tt~T, ~)T4kT~ "'"U~1•,t, (l"tll!ONS 50l50100043 OF OF U"ltTSJ UNITS) (USELINE 805811846 1004(0 0(05, hX[S 58015 LO~ER PFRS, 01C00840 (ACC011) 5,063 I, I bl 0,503 1, SIil DOFF DI~F 0X 0080 OJFF 75, &9 75,54 185,9 .,,. ,., 030,3 Ul,l 232,3 IJ.?, J 0,0 1,0 5,0 935,4 935,8 9]5, II o, 5,00 o,o 0,0 •ns,u 9'H,S 953,5 953,7 953,7 869,0 fib',, 8 904,8 QOU, 6 864,8 8b9, II 0,0 *55,2 90S, 2 ,. 0,55 9"1,0 #~5,0 9115, I 2,0I Z, 940.0 991, 0 08,0 o' ).OI 0,2 0,0’ \, 195 5,795 I, 857 5,057 \,91!1 0,900 i!, Olll 2.)03 5,033 0,IH 2,058 2,050 2,\7l 2,073 0,005 O,llS 1,0 7,0 5,6 o,os 0.05 o, I 0,0 79,112 79.02 79,511 79,58 08,56 0 lb 0,2 80,85 80,85 111.tl 85,03 0,28 0,28 0,3 J402,8 ll,'I 112, 9 00?,~ 115 ,6 185,6 111,,0 516,0 1509,0 \9,11 I080,6 !l!,6 llt,a 028.8 li'l,7 822.7 0,0 ,0.0 .0 0,) 0,3 0.6 0,8 0,1 ..',,' 1, ~02 0,802 I,-,\ 2 0,802 5,500 0 ,01 0 '' 5 711, 78 78,78 ,,, 1os,,;i ,., ,., ,n,11 97,0 ti!l ,8 523,8 223,8 JCJ, 8 o, I 0,0 o, I 0,) 0,5 CJ.PtTlL STOCO STOC~ ClF (APITOL (IF MO>ln $0095 l!-111.LftJNS ((051100’S 0~ OF UNITS) 00510,701 flASEltN[ 1008(0 ni:is, FF08. fAXE8 5009$ 06(000) LOWER (lCCOM} OtFF DOFF (HFF 3l 01FF ,., ''' ,,, Tb,90 78,40 1b, 91 16,90 0, 01 5,85 0,0 ••• ,., ,., •• 00,2 0,0 0,063 0,0bl l, S 5,5 78, I l 70,05 711, \II 78,50 03~,0 1n.1 ,, 109,9 1119,9 045,8 tilt,IJ 052.9 !SC,9 3,5I J, 972, 'I' 972,7 973,5 971, 5 0 ,, 5,04 99],Q 993,9 995,* 995,b ,5,7 •1 0 ., 0,2 2,0 2,0 0.0 O• I 943,0 2.5 986.7 911b, 7 . ''. '."'" 4.4 s .• ,,, ,., Q[GtsnUHON OF (185 016551001506 CARS (MlLLlON8 OF UNitSJ 0(0510,5088 OF UNITS) 08590,00! BAS(UNE LO~[R PERS, 1*015 Th ES (0((O$) ( lCCOM) 10000 P085. 018F OIFF !06,9 006.9 1008,2 to,z •t 0111' 05FF (*05045, sroo 810(0 OF c.u•tl4L OF 8801(89080105 H0USfH0LOS (00905, OF OF !PS} 5$) rnn.s, 84591)99 !l~Sflt"IE 10490 0(05, H~l!S bogS ((0(004) LO"[ll rtRS, AC COM) 0 [F~F O!FF O 05FF X OtFF - 0,8000 LABOR V00C9 f()RCE (MILL0001 OF 9905085) {MILLfQNS PE1180N8) 1usn. INE 885(0,509 10018 FIRS, 74013 U000FO) LO~fR PERS, UXES (ACCOMJ 00FF OJF"F .. ,., ,., '.' ,,. ,., ,, 0,71 35311 ,b 3868,2 1110,2 81)5,8 11?110 ,8 8622.9 llbi!.2, 9 S8b9,7 i:i'Ot19, 7 5530,3 S'BO, l 35)8,6 1121~. Q 0020,8 llb~U 0 11 5080,3 SOU0,3 5622,5 SbU,8 02508,9 92,5 I ,S 30,& "'\. ‘0,00 0.5 30,6 I, T ‘0,0 0.0 8,6 5,7 .. o.o .. , .. ',, ,., , 92 ,1 92.7 Qa.s 0488 91, I 97,0 9?, *7.0l 5,0 0.0 ...'. <18, 98,08 98, 90,8ll 0,0 0,0 •8, 1 ‘8,7 0,3 ,, 1 5,7 5,9 6.0 7,5 1,' 0,5 6,5 0.5 I, S 2,8 'I; tltf'F 01FF F0)0U(t59)tY (5(849,) ?l!OOUCTil/th' (X CHO,) 645(10846 !>~SELINE LO~E4 P[l!S, 998$, rors 1150$ (AC(QM) LO,;f1, fACCOM} , 0810810 IVEIHr';f 0 ,, 0,2 OIFF DOFF l 00 ,b 005,6 I 00, ll 000.8 0,2 0,2 , ,., ''' ,, ' ,. ' ' ''', ''. .. .. •n,s 102, l 002.3 002,0 IOZ,IJ 0,5 0.5 ,, ' ,., ,., ,., 5,8 5,0 0.OI •O, POH"Nf!iL ‘o5r~55’L OUTPUT 00)191(0 (8)5,3,01 00872 (!\IL s, 1'112 3’S) $ 1 s) °' B~HU'IE 80591188 LO"EI! PERS, 0,0614 P985, O!FF DOFF 'I; [)tF,.S 05FF (Acco.,, TUES 180(0 080(000 I IIOS, <i (‘47,8 I Q~1, A I0495,3 1191, 3 j536,O JSh,Q (580.2 I 51111,2 5365,8 0005,9 DbS,11 . 1ses.a l Q91, Q !5H,b \UU 1 ,II 0495,4 5407,8 0035,6 3585,8 1, T 0,0 0,5 0,7 5,7 0, I 0'' '0 '••1 ,. 0 C, I 0.00 0,0 0,0 0,0 '' -97- TABLE TABLE 9. - . A:.lTJO~ o4?I00 Continued Continued ,. " 15 78 " " " ll ,1> 23,6 ll,11 22,9 n,e 22,8 1;,,, 22,7 •0, ‘0,8 I ll, b 22,6 ll,l 22,2 i'l,l 22,3 11,S 20,5 ?.1,9 25,~ 11,1 25,8 •0,11 .0,0 •O, 8 ‘0,0 •O,A •0,A li'i!,l 022,0 119,il 009,8 •2, 7 ‘2,7 •i?, i' ‘2,2 1 Ol, 1 003,7 81, I 83,0 •20 ,b ‘28,6 •l 4,CI ‘59,9 50, Cl 55,9 •ll,?,11 .02,4 •IIS,11 ‘45,4 •llf ,b ‘39,6 •51, b ‘50,6 77 78 79 " 80 1 1 OPE NO I TUR fa F!'!'>f"IUt GOV(liNMPH ;;fl1080 GO896N04 08 90818000058010 TO t.n .. I>al. GOP GNP 00) 005 8’O’5’48L 881’LON SJSFl.t'-E 0,0,14 PERS, 0105, 540(5 LO,.fll fACCOM) TAxf:S (8(008) Ol Fr 05FF "' . , (POTENTTAL (04)5 l~SS 4058041 ACT!/.ll 9048) GNP) 088 (P07185)80, \CIH t' (IIH:S, 00 0972 ! ) (58)0,5, ‘‘1) fUS[LtNE 86561(89 L(li.EII P[RS, (ACCOM) TAXES (80(005 106104 8985. 18013 OIFF DOFF X 03FF O!FF " !U,fl 073,8 I lit, 0 005,0 * 41, l 93,3 '71,,b 76,8 37,0 37,8 0005) fHfCTlVE FF0905001 CAPJHL (0’1181 GR()!S STOCII: TO 100(8. 50 RPL 4(01 (;ND 08’ (3) 0U€LINE 00S81586 (JCCOM) LO•OI 8105, PERS, TAIES 10*104 54093 (4((QM) DtH DOFF 1112, 842.00 !H.8 538,0 lB,8 03),8 LB,<; 533,5 •I!• l ‘00,3 Ill, l 038.3 829,4 1 ;><i." •I ,9 “0,9 IH,B 029,8 !lb, 826,3l •l,b ‘3,6 128,l 528,3 525.3l 1:i!S, •l,O “3,8 N!T CAVJTJL ‘ott (480)141 sroc~ 550(8 TO TO #900, 1088 (3) RfAL B0’S(0,)’81 <ACCO!'\} LO•fR FFRS, Pfl!S, 10500 TAXES (4(6080) 10*6(0 D!FF DOFF 84,~ 08,8 !l,l 00,3 711, l 79.3 ?9, 1 79,0 71,? 77,1 lb, 16,6b •I, ‘0.8I 1t,, 16,44 •O, i? 'l't,,l ‘6,2 111,', 78.5 •!. 7 —5.7 .. ,.,' .. ..‘8,5 o. 0 3.5) 3,5) 3,0 ,. 3,33 3,6 3.6 .0,00 —8,0 •O, 1 ‘8.8 •0, 1 9, l4 9,34 4,32 9, li? •0, oI ‘8,08 4 0 41!1 9,86 9,34 4, 34 •O, 07 0,07 9,bl 4,83 9,54 4, 54 09 .0,09 -o, •0,07 .5,07 8, Cl I 8,98 I!8,90 ,90 “0,00 •O, Ol ‘0.06 •O,Ob Cl, ti> 9,06 q ,oa 9,00 .0,80 •O, 08 Cl,118 9,08 q ,ul 9,02 •0,06 •O,Ob "' '" "' a,snr,.r °' Stt'IC!I: 01 GAO!S CAP!Ul 510(0 0053 (880540, POl,.LUT JON AFOTF’19081’ U~UrM~NT (lCP(NO, FO10,081008 EXPEND. lO 10 RUL 41*1 GNP GOP ") (55 BASH l NE 8*58108! L0>1EI? PERS, 04008 10060 P103, uu:s 046(005 (ACCOMl PJFF 03FF ,., 2.3 AEJL IW~PffSS lNVESTM[NT 0140, 8U90’4055 FDEO F0090 104805109041 JL 0040 f,NI> 0500 TO Pf 50 ‘681 IIASfl,.TN~ 08)F15848 LO,.fll (ACCOM) lDwF0 PEIIS, 81045. TU(! 740(5 (45000) "' 11,lS 9,35 , 2,8 9, I7 ‘.87 OIH 00FF 2.8 2.0 ,.,. -o, fij, q 74,9 •i!,O —2,0 .. ,. ' ,., ' 9,41' 4,40’ 9,87 Cl,87 nno A£AL IIU~IN£SS JNvf.St>'ENT LE!ll 0(01 88850813$ 1588) 58,930,985 1955 POLLUTtnN P0111(150’o J~,TF><eNt 880T9’FNS €(PENOS, 90F1’815. SO 08945, 0088 (33 Rf .IL C:NP IHSHtNE 80S010~~ L01<f.R TA (ES f(A((o’) 106(8 PERS, 8(45, tools .ICCo>< l OHF 05FF '" " &,4l 0,93 -98- 8, 75 0.75 !l,'14 8,99 8,93 8 ,93 TABLE 10. Capital Formation and U.S. Capital Formation U.S. Economic Economic Performance: Performance: "Baseline" and ‘Easier “Baseline” Money” Solutions "Easier Money" " 75 " 16 7) ‘0,8 -1.11 '• l 6,0 ,.,. '' 8,0 5,3 8,5 0,71 •• 5S’s ., 0.9 0.' ,., 7,7 1 •1 7,3 1.' 7,2 1.' ‘5,8 •0.1 ..‘0,0 o. jj 9(0080M? [CONOMY RE AL PIP lt CMG,) 09~1r.’~P 03 (‘0,) RASfLPff 0485010086 (80094 fH.lf."1 (00010 1-!0NfY OJH DOFF m UNfl-!P\,{JYMFNT 0J88900F5 (0980005 IUT( 840( (3) fUSfl INF 8050100,0 PS!Ef< MONFV (85794 04Q497 D!H 000F 8,5 " INfLAT !O" (0 0886,) CHG,) 08191811008 GNP 09614008 DHLAlOR 6,40 0055,1)080 1US!:L!NE f145084 ASIPI 858090 MONEY OIH DOFF ,. ' ,., 9,2 5,0 " .. ' ,.,., ' 5,) 5,2 o. 5,8l "' 40080 FIHifL!NE 88S917049 (83514 1'\0NEY 0000091 fASHII OIFF 0060 ,. 9,3'.l "' '., (P0 f\AHL JNE FAS9L)’46 EASHR 980590 MQNf. 00008.0Y Olff 05FF 9,2 AV(,, EAIININGS 490,. t<OUIILY 8801(019 1,40450453 Bl5EL!f<F 8*S10,1F’F 64)1100 MQNt 80811Y OIH 0(90 ,., 8,9 osn~ ,. ' 4,3 ,. 1 5,7 7,2 1·' . ,.,.,' 55,0 •0 78 " 79 " ,.o '-' t8,8 4.5 00.0 •l " ••• 8,0 6,5 •• 0 4.0 4.S 0.5 0.5 6.0 '• l 5.8 ,. ' 0,31 .. o, 00 ••• o.s ,., 5,5 5.2 ~. i:! ‘5,3l •O, ,., ,. ' ,., 5.3 5,0 ,., 5.3 5,5 ,. 5 0,2 0.' ,., 5, l 5,3 5,2 5,2 6,0 0.71 0, ,5,0 .0 5.0l S, 0,0 O• 0 5 ., 5.2 , 5,0 4,8 '• l 0,3 0.' 0 ., 0,2 ,.,i' ,.'.'' 5,0l 5, 3,3 0,2 0 4.9 5.2 0,4 0 •• .. .. ' .. ' 5,4 ., 00.2 ..',,, .., 4,8 6,8 8,71 ,. 0,00 0, 0,8 O, l 75,3l 75, 15,b 75,6 8,8 4,9 0,2 0.' 0,2 o, 2 5,0l s, 5,8 S, l ••• .., ,., '., o,, 6,8 6,0 6,6 6.9 0.2 0.' 0,3 77,7 77, 7 79,5 79,'5 0,9 l ,o 78,7'1' 76, 79,4 79 ,II 0,7 •• 1 79,5 19,'5 00,6 80,b 8.0 79,6 19 ,b 60, 1 80,0 0. 'j 8,5 80,3 111.3 82,6 112,h 85,0 115,0 113, 8),77 c!,11 5,4 Ill, 5 83,5 l, 0 0,8 110, 86,8II 5,8 l •' lb I,~ 368,5 QnS, ij ~ i.1<1,1, 809.6 ti, 2 *0,2 11'55, 7 455’~ 11!>'.l-,8 865,0 Io, 00,0I 'Sll,2 582.2 8,9 , (888(510 U1515Z’~O0’~ (5) CAPACITY UilL!lAf!DN MJ .. U~A(Hlllf'i('; *11 (08001(04(000800006 •lL BAKh!l•f 885(0,5009 l.lSIHI 145158 (050094 OlFF DOFF 68,7 &6, 1 "0"E" 12,9 12,9 o,' 0,3 P008080 PIIJMAPY 94001)5080 PIIOC~SSlND 0*5610008 fUHL Hii 78.)l 10, 76,8 Ho,8 tASIPI ;<Q>10 185184 900000 11\f 0508~ 9105081 580 llf.C€lPTS 89(00005 ,lQfAAL ( 1 HJlS,) 70 0000,1,) ,., "' BA!HLJN~ 880F0,0089 261>,"i 288.5 328.9 3211,'l £411~11 HONEY 945084 6’0000Y )t,11,Q 304,9 '.' ,., !)2~.2 525.2 '., ,., 12 ,'i 02.9 ll0500 !Fl' 3,9 0l 0(80 O!FF 0,0 2,7 '. 1 2.2 6’,2 •bll ,2 ‘60,8 •bO, I 0.2 ..'·', ‘55,7 •55,7 .. 43, Q ‘43,0 55,8 11,8 •115, 85,01 ‘26,1 •2b, 7 ‘31,2 •l~ ,2 •‘53.1 tl, 7 9,9 8,5 21,l 28,2 2 t ,9 25,9 52,4 li!,9 ua,s 85,5 7,00 1, 7,0 ,. 0 8.0 8,0 l, 0 HnfllolL 041(0010 llUO(,fT SlJRPLU$ (NIA) FF09041 soiRolus (0008) 05 ls 8015.) ~!LS• l BA Sf LIN! 8459L(~9 £AS JEii (00865 HONEY 985090 OifF DOFF .75,3 •71,3 ..“58.04 55 •• l0 DOFF DTFf mo ... ···-·--· "IO'lf Y *000 ‘40490 ,., 2.5 1'1TFQfST 0”1F015T 44103 RH£$ 488800 000480 NARMO~ l'O'llY SUPPlY SU?f>LY RA!>ELJNE 8~0911~ £ASH!< HONEY (850(0 M0048Y DOFF DHF" 80080 ‘0861 ijQQAI') l"()NfY 80391589 !liSfLP•E 51(1018 SUPPLY 0000) (3 CHG,! (He,) 011) (,: '·' 5,0 5, l 7,7 1, 1 9,7 0,2 (0428 (1'12) 03 CMG, (009,3l Cl f_ASiER f'!ONE 181010 bOo V DOFF '. 1 oo·, '" l•tt()Nli3.040,814 TRfAS\!PV 10014SUPY9ft15 81LLS 6AHLPiE 8,360,1049 HON[V EJ.SlER M089y 185514 DOFF Ofn 5,82 5 ,82 5,55 S, OS 8,8 6,8 7,0 1,0 00,2 ., 00,0 10,8 12 ,0 02,0 8.2 30,0 1 \, 0 !00,7 I, 7 0,7 0,1 50.6 10 ,b 11,4 00,4 00,0 ., I>, 22 6,22 '5,'HI 5,98 •O ,24 .0.28 5,5& 5.56 l ,U& 3,48 •l, I0 “2,00 -o ,bl .0,63 u,oe 5,7b 5.76 !:>, 7t 5,7* ‘8,05 '"0 ,OS ‘5,49 •1. ~Q 0,37 -o. l1 7, <,8 7,90 7,88 •O, l 7 ‘0,37 68,23 ,23 6,03 8,03 8,03 6,03 o,oo 0,00 8, I a 8,84 6 ,2', 8,29 o, I 5 0,05 00,0o 11, ,., 02,8I 12, 5,8) 5,81 l, QO 3,90 •I• QU ‘0,98 (3) m s. 711 5,78 5, 0 I 5,00 ,,, ,., '., 0,2 0.0 rfOfRAL FF09841 FVNOS Fu4n3 1urr 00819 6*) lUSfLlNE 04)010009 P~!f.Q 04)094 HQN[Y ‘00467 O!fF 07FF ',o 7,00 1, 0,0 '. 0 8,0 l, O s. 1111 5,00 8,08 .5,48 •l,ijl '., s, 31. 5,30 l,85 3,05 b ,22 6,22 S, 59 5,59 s,n 5,73 !) ,l& 5,36 Y!FU') S.Sll[S OF 0090,0 O'004 NF-~ 0000 l55301(5 OF ‘)0;84.1t0000 M!t;H•f.llAO!' 0080, CORP, 4040) 1>0'105 AASEL!Nf 800010086 04SI0~ 0000015 E tSIHl HONEY DlH,. 0069 CMI'.';, l v01n0711 VflrlCJTY (0 0041,) 815fLll<E 88)60,081 ~ ASH~ 0400090 MONE V 6035800 1, 1 ~ ~ [‘OFF " U) "' 9 ,0 l 9,00 ,. ' 2,9 6, 3ll 0,38 ,. ' 6,2 1,rn 0, Ii! 0.02 ,. ' ,. ' '.' o• ,. 0 5,0 ,. ).00 2,3 2.5 2,6 l. l 3.0 0 ., 0.2 0,8 l •' •O • '5 ‘0,5 2.6 0.0l '.' •o,u ‘0,0 -99—99— 68,58 ,11 TABLE 10. TABLE ............. . ~ ~ Pl)Tf>l11 ~L 01(00100 OUTPUT P055’01001 .... 8 .. 8••DD ............ .,, CA Pl TAL 90904817000, FO!!MAT!i'JN, (405501 INVFS T1-<t f;T, (04095509001, 8040 ‘ Continued Continued 15 " " 18 " 71 70 18 79 " " ll>, 1 38,7 38,8 36,1 1.10, 2 400,2 111.8 15,5 40, 40,0ll O, 2 5,2 0, Ii 5,60 42,3 Ii~, 3 0,1S 0, 0,2 liJ, I, 83,6 II l, q 83,9 5,3 0.' 0, 0,77 08,2 Iii>, 2 08,6 lit, ,n 5,8 0." o, 6 0.8 83,9 BLI> 83, 83,9<l 89,3S 89, 91, 90,6t, ii, I 2,0 2, 3 2,3 95,0 95, <I 97,5 97,5 2,0 2 •l 2,2 503,7 l 01, 7 006,0 l Ob, I lJJ,} 030,3 ! 33 ,B S33,5 2,8 2 ·"' '2,5 .0 139, 539.0! 1540,’ <I l, <1 2,8 l, 7 5,7 I <19, 9 (59,9 1 S,2 ,e 052,b 2.7 5,0 953, 955,5S 912, 972,17 97 3, b 973,8 5,9 0.' 0.0 0, l 9QJ. Q 993,0 9q;,, I 905,8 5,2 0,5 o, l 983,0 '!Ql • n 91,t, ,il 9408,8 ,. s 3,8 5,8 908,7 <;181;, 7 992.5 9'1l. ':, 5,8 9,6 !5,000 ,'1\0 2, 01;5 2.585 0' ! ,,., 0,555 0,0 8• l C, ()58 2,055 2,008 2, I 08 O,Q49 0,549 8() ,85 80,85 81, l1.1 80,30 00,49 ,49 o,, 5,8 — ~•D•~· PL ANT Exf'f"f;DJ TU-'~~ 01040 9o00-o,nosupFs (0018, 06 790? (A IL ll, M' i<n.> 5’S) PS) l!~llrL!Nl 08510,089 f60)194 ASH R HONE 00985r oirr 0099 D If r 5 55FF ' £0U1P>HNT tiPt1rnlTi1llfS 951(00,080 1809000050009S j q72 i 'S) !flrlS, (0555,0959729’S) !UHLt1,i:; 0886150,5 EU!E!! 90)090 r<ONf. 0400090t DlfF 0009 OlH 5 0599 " 111,1 18,7 11,q 77,9 o,' 0,8 ' 0, S 0,3 11,vrsH1ic1n BV5lNfSS r PfO 50,0905046045 01(500095% 60060 <17;, 0’S) \' SJ 508515,00 l5~72 O!!LS. IJASlLlNf 5*05,0,5005 U$!tll f<{lt,fY 1030194000,27 0009 5 O!H 0099 " 111,,; 080.0 I l ti, O 058,0 onr ' " '.' 903,7 #03.7 <I! 8, 7 008,1 • frlUJl>r<f >;l (Ill GPN\~ 61)1070009801 LS, 09 08013 (950,5, RISf! l"-f 8400(5806 ..,o,,f v f ASHR 03595 400)55 Dl FF 05 99 Sl ['!~I-" 5’5F~ ><nu.~ 1 ,,r, 054000 ~ f 0'115 04010350o10 ("'Ill !U•15 06 UNITS) 0070,150’,) [580135 l'HSfllNf 84560,098 'f 853040 110NE ‘o~o9Y 011•• 5509 " nsnl? " SP,l 852,3 8,08) I•\ 1>3 8\Q. l 939,5 l, 5Q l 5,545 • 5 0)09 DTFI' ' 9}5, 935,4~ 93~,5 439,S O, l 0,0 0, 0 (,0 "' <;!,~. 954,50 '.' (.8 5,0l 0, '' " ll~r.!$TPHf0'1 09 (885 C~II$ 5905570450000 ('1!tl!0'J5 OF UNI rs) (‘455,L00’03 uoOr)3 84560,00,9 !l&SfLl"l". 040580 80009? HSH.I? 110NEV 0716 5 O!i<F 0099 1a, 111 70,74 15,69 75, bQ /q,q,fl 980,8 904, 958,911 810,0 870,0 Qoe. ':i 40s,5 O, 0,22 O, 0,00 0,8 0,2 5,9)2 i, sn2 !0,954 , '158 ()' ! ;,;, 5,556 ,. 0 9,8 l, ?41, 5,’048 O, I<, l 0,550 ,.' '., J,7Q5 0,793 ".' 0.4 I Ob, q 006,9 000,2 ! ! 0, 2 or~r • o, 000u508800,os (*80180, 3S~0(9 rnc~ OF CU>!HL HOUSEHOLOS (9015, 09 500) (IHL5, o, l '5 l 445015018 !\liS£LlrJf 943590 £ ASJPI ‘0917 MONE'/ O!>f 0509 0 0 0799 !FF ' LHIOR FDIIU 0,0908 909(9 (>l !LL l [!'<5 ([F 069)00050 PERSONS} (0451L50’o) 98)91 RASH 596 !NF fASH.? MONEY 943580 ‘00811 05 99F DJ~ 5 DtH 0099 " AVHHGf 8999410 PRODUCT!~lTY 00000[o(T59011 8ASfl 94SF 1 !Nf 0000 f hS !ER c<QNfY 993558 400051 r11;F 0509 00119001041 P11lf~IT•L 1)019101 r1nrur (‘oSLO, [‘05? 1' 0’S) f>JftS, ([9 1~7?. Sl 000,9 0, 0010 0400890 f 43509 ~Sl!!l ><()NfY 0o 1> 50:6r 8 05FF " n•-'>rur,, on, 2, 3 2,3 ,.' '.' 5,39 0, Oll ),S o, l 0,25 (). 21; 0.4 552,9 112, 9 002.4 l I 2, 9 0, 0.0l o, 0,0l 003.8 I! 5. b !008,7 ! S, 7 0, l 0.5 0, l 0,0 408,8 t 18, I> 508,8 118,~ ‘0,50 .. o, () ‘0,0 78,\l 79.03 78,q 10,85 '.' --o, s,' '., ' .. 2,’ 820,8 121,8 520,6 12 t ,ti .-o,o.' ‘0,2i! —0,2 l5H,1> 38/>tl, 2 8280,66 so 09, 7 5830.3 SSlO,l 3338,6 3080,2 60622,9 50)9,7 42"o, a 4b2i',9 4888,5! 5530,5 ~b04,9 50.Hl, 1 56508,9 4206,22 Qbbl>, "20b, •Jij ,;, 43,2 21, 0 711 ,b 03,2 78,6 34,6 28,0 0,9 0,0 .. 0, 8 0 •• l ,J ‘0,0 0,3 0.' "2, 1 ~2,7 (5 (SQ.) CHG, l " 2,0 '." ,., ,.' 7<;, a2 79,02 7'1,llO 79,85 0.38 0, 38 o, 5 0,S 71,,QO 78,40 11,,~<1 76,99 o,°' ' '., '.' 1qn 791? J's 0030l CAP!TAL srno (495(40, 300(8 OF !-l(lt.!£5 880893 ("!LUO•is UNITS} (‘01150481 0-F 09005) 98390,599 fl&SfL!"F 1"'0Nl".V 043589 ‘oNly OJFF 0)99 O OTFF DOFF osa11 1 23, a 021,4 1524,3 ?I.I,} 0,90 0, 5,9 Pi,,.A);T (RJ\_ S, 09 0972 00053 0850,0, SIIOSS FLINt 191,? )‘S $ 's) BAFLlNf 88581541 tASlfR 545004 ~(Jf;fy 800,50 fl! .... 5798 DUF 5 5090’ ' 85 ~8, 1 ‘8,7 q~. 8 481,5 ".' 000 97, l 47,5 9?, l 97,5 0.30 0, 0 ,o 0,5 9/\.8 99,8 'Ill, 99,99 0,5 o, l 0, l 0,0 500,9 \ 00 ·" \00,8 550,9 0,? 0, 2 0 ., 5,2 l002,3 02, l l052,5 02, ~ 5, 3,77 •• 8,22 0,85 O, ;, 'Q 60,5 4,0 '. 0 2,5 4, S 0,5 5.8 5.0 3,56 6,0 0, S 0,8 '. 0 LI \491,J 43)9,0 i 5 3t,, 9 1 H,S, o l54)5,9 4n5, </ 5807,4 14J7, I\ 540)3 5385,0 1 ~<, l ,0 , 8 5830,2 ! 441, ~ 51’ll )!>H,2 0445,0 1,·j 0,)0 0,1 0,3 0, 0.' o, l 0,00 0,5 0.0 ~. ". 0 -100- '., 0,2 0,2 . 0 ·' s, ,, ! 5114, 2 0599,2 ! 581>, 2 0588,2 2,0 < •l 0,3 ". 1 TABLE 10. Cont; nued Continued ,s 1unn, 485000 ~ Ff (H.kAL 60968080991 f.(hf•H-IHfNT l005”5000495 9851801 EXPl'IOITIJRES c;,,p fl) TO NOl'lNAL SO 0400000040, 086 <> l 8•HL!NE 88560,SNS OS!fH ~C,f.if y 680090 880490 OtH 0)66 {POlti<T! AL 1155 GaP (050(015550, 8(1001 6047) l.ES.'\ ACiUAL GNP) iqn 5' (8715,510 0972 3055 ffi fl S) IIASFL IN[ 90590,086 tASllH 043058 800910 "ONE V OIH 0009 0 OIH DOFF '" - s, "' 23.6 il,b (13,8 IB,~ " " 6? 78 '" 79 " " 72,9 1'2,9 27,8 U,8 27.6 l?,b "0 ,2 ‘0,2 22,6 i!i! ,II 22,5 Cl ,c 22,3 22, l 25,9 21,9 66 1003.0 IIJ ,0 022.0 122, \ 055,2 115, 2 ‘8,86 ‘5,6 •!'>, b •b, • •O, ‘8,44 I053,7 Ol, 1 88,0 811, I< "t89,3 <,, l ‘00,6 •18,ti 22,5 le, o •O,l ‘4,3 80 20,8 i!l •" -o .~ ,0,4 93,3 q l, 3 85,4 81, II ‘55,5 •11,'> ‘02.0 •12,11 78,6 7t>, t, 80,0 bll, 0 ‘82,6 • IC ,ti ‘06,0 • ! b, II I029,8 29, II 528,3 1?8, l 027,5 ion,!> GIIOS~ ITAL 90055 HHCf!V[ 888F(00v9 OP (880181 StOr.K on JO R( AL (;NP 00094 4(80, 090’ 980910019 llASfL!N~ ~00lFy [(8)594 .ISHR "0NFY OH~ 0000 "' '" '" 8085 CAPITAL (481500, 305(, S H1CK "' 53) 042.0o 1112, 038,8 lH,8 533,0 lll,1 ‘5,7 •O, 1 5)9,0 IH,!l 030,3 1 l l ,l 029,6 129, b ‘0.) •I, 1 19,) 79,l 7,9 H,,9 •0,0 •O, ~ 77,7 17,7 78,8 7&, 8 .5.9 •O,q 024,0o Ii.''<, ‘5,9 •O, II “5,08 .. o ,ti 74,9 76, q 76,8 76 ,b 76,2 7t, ,l 78,9 75, 9 —0,3 •O ,l 10 rn RUt 4100, 0000 53) 9*381(001 IUS~l !Nt 04,8 84, II EASIEH ><ONfY 185010 80859 OH~ 0*99 98535 1,11055 (0000180, CAP I~ ~L 0511(4 ~tnCK 09 J>OLI\JTlO'i 80079’450,1 800,55155080 hlATf'1f_'il 9(P(OoO, [~PCNO, TO RlAL (,1,P " ) 10 4141 0,0,0 030 08390,5080 lll.SFU"'f 9*5510 040994 llSlEII MOl;f'Y 0006 OHF 88,3 81, l °' 2,3 ••l ' .. ..,. '' 2,6 2.8 2,8 ‘(.5 •0,0 ll!&L fnEr> 090535001011 l>.iVF.STMENT 06*0, fHISf,;f<;S 8003500995 05510 50 0080, 0’081 (1) TO llf AL (;'H> m 84010,096 EIJ6fl !NE 9855(88 050095 f tSJPt M(HJfY 0095 OIH' 9,35 II, l5 •,07 II, 17 3.8 l, I .0,0II •O, .. ,.,. '' ' •o,o •0, 0 3,8 3,0 ‘5.0 •O, 0 —0,5 o,,u. 3,0 l, I ‘O,O 3,8 3.8 l ,b 9,38 II, lti 9,33 11,H ‘0,08 •O, OI 0,56 9.50 '1,51 5,05 o,os ~.83 'I ,O'.\ •,70 II, 71 5,008 9,90 11,114 00,01 IO, O! 0,08 8.90 6. <;I) 8,90 6,110 ‘9,00 "0, 00 8,99 8, 'Ill 9,55 ll, OS 9,56 11,l I, 9.28 II, 24 5.48 0, O!l 9,48 ll, 48 9,58 'l,50 0,09 0 • 09 0,011 0,08 ,, 8980, 15015 0969155’9006 fllt~J>,f!;~ FPfri IIHL 88130”FSo !NVE'Sl"f'Nt 0,953 LfSS 800,154 011’o 868568941 PrllLUTlfl-~ ~knf:Mf"IT 000100)5. ~.:PEi,DS, sO 8685 GU' 00.0’ 70) 11n1 It l IUHl.lM 6854100,1 f90309, l,51(11 005910 M!lt.EY 0396 PI ff 8,93 6, Ill —101— -101- 9,75 Jl • ?S 0,05 o,os Performance: s. Economic Economic Performance: TABLE 11. Capital CapItal Formation and u. U.S. Solutions Tax Cuts Cuts and 1er Money" "8ase11ne" ‘Baseline’ and "Personal ‘Personal Tax and Eas Easier Money’ Solutions " R(AL 590’ GNP 05 (000.0 Cill,. l 8580, ll~!;[l 1 Nt 86311055 [AS Y HON[ CUTS 085 (55)3 5 (451 840951Y U!I! 8980 " "' "' -1.11 ‘1,8 ,., "' ' 0.5 ((08145(05 (080,) I NFL AH ON 50 OH;.J G!H' OEfLAifJR (449 05914700 llASfl!Nf 8850,0,059 HONEY TH C:U!S 043 00805 5 EASY 1850 80091 Dlff 3580 " ' OF 4 tlASH!Nt 88310,001 EASY 00951 HONEY 245 CIJ1S 00050 5 (450 0005 [)!ff "' "' "' ' OIH 0(99 C UIS (5)05 ' '" "' ,. ' 5.0 ,. l 1.3 ,. ' 5.7 ,. 2 7.) "·' f>e. 69.91 2." r77.9 ' PRl1U,HY PIWC(SSIHG 90804680 P40(653040 llH[LIN[ 84SEL0~5 CU IS 0 5430 EASY l\[)Nf 045 (003 040875Y O!H 0067 '" " '.' 7,7 8.9 OSY 110N(Y 5 6850 000090 CAPA(;! TY Ut!l!TATION (*900,090 3001(7800008 (30 80,0. MH!UrACTUf!!NG 0400075(500090 IIASEL!Nl 83551040, tr EASY KON 0*5 tuts 0888$ 8 6050 880459 00095 l ff (5 ,. l 9.5 M0NfY 80953 AVG. Y 5400(0405 t~RN!'lGS 6F0- HOU\!L 8800011 88510,055 llAS(L!Nt ro. 70.22 a 76. 96.8 ' H[Cl!!'I~ 808 0050,108’L. 'I! L ~. 1 8011.) UAHLIN( 08590,791 (ASY 040961 145 1015 4 (850 MONEY 0 i ff 0089 01rr 0580 I(800,001 ! lil<!,\L 9.2 ,. 9.22 o.sr IS 4 9*00 981 CU 0073 Olff 0(99 "' ,. ' 6.8 '• I ' CPI (P8 84550,0085 llAS(L!Nt w 165 78, ' UN(HPLOH![!H f!A 1[ 85) 04890P10100550 08400, SA Sfl 11'( 04381(41 085 CUTS 18300 8 [~SY 6450 05,855 HONEY OH/ 0550 " " 95 [UHI/JM Y t0,8090~5 " 8109~7 HUN[T 443 ' 736.55 ?31,. 324.0 llll.? .. .. 4.7 6,9 4.5 4,0 0.0 2 •I 2.0 ,. ' "' 4.4 3.1 -o. .0.1r •O. ‘0.1l ,., '.' -o. ‘0,7t •‘0.0 1.0 5,5 4.5 -1-0 ‘5.0 5.2 3.2 5' l 5,5 0,0 5. 5.3l 0.' "' 5.0 5.7 0.6 ,.,. '' ,., '.' ,., ,., s.o ,., 0,3l S. 5.3 6• l 7.0 7.2 5.5 5,2 0-2 0.2 b, I 5.9 5.0 s.o 5,4 s.' ,. ' 5.7 5.6 0, l 0,3 ,.o.o' ,.,.o. s' ,. 5,00 5.0 ~ ,.'.'' 6.9 ,., '.' 4.0 5.8 0.8 ,., ,., '.' 5.0 I .o 5-.’ 0.0 5,0 5.t 6,) (.2 ,. 2 4.9 6.3 5,4 ,. s ,. o., ' ,. ' ,., ,., ,. ' o., ,. ' 4.8 55 0.6 l 0,) '.' ,.o 4.9 5.8’ 0,8 ,., ,.,.o' 6.6 6.6 7.0 0, 2 0,2 7.1 0,6 1.6 5.0 75,3 75.3 75.4 0, 5 0.5 n. 77,9r r r '.o a. 70,7 8 t.9 88.9 3.2 (?. 79.5'.', 3.0 79• 6 10,0 80. 50,22 3,5 ll I. 5 90.5 64. 9 91,9 33,4 .& 62,6 82,6 6~-~ 86.4 1.9 65 65.0 88. 05.5l 345.0 l& 1. o 380.2 3bl. l 0.2 I. 2 0.1 >' l 438.8 4 4 4)4.2 1, 0 4. 2 ‘1.2 - ~- 2 •‘5.4 t. 0 455,?7 455- 502,2 512 .2 409.3 499. 3 ‘ihO -1 3.0 ‘2.5 ~2. 5 n. a 6,1 ,. ' 6.0 0,0 0,0 ,.'. 's 4,5 '.? 058040 HON( Y SOFF1Y \lROAU 00951 SUPPLY 080) 012) 05 (40,) ChG,) U~~[L!NE 04151061 fAX cui: s OSY HON(Y 500 (003 0 1051 0(5(5 4511 i)Iff '.' " • " ' m 9506880, f(O(H~L 988005 fUNOS 9811 RA f( (5) 0881510005 ilA~(UNE CUTS 145 (U05 5 (850 800855 £ASY HONEY s. 3.0I ,., 7,7 5.82 S ,8 2 0099 J-MONTI! IR£ASUfH 5.004588 58545099 4(115 ll ILLS (30 !U~£LINE 084360,045 (8435 CUl -~ 0 1950 EASY 00963 HONEY '" "' ' UIH '7,0 .0 0.0 '.' I•? 0.7 9.9 5.70 s.' ~ 55.0 II .jj 58.2 12. 2 5.2 '.' 3.55 5 .o 5 ' "' D!ff /f·~ 03 ,., SO.f, 90.6 "' oa. 439.0 439-3 -p,,4 —06.4 —3.6 - J. 6 -, , • 3 ,75. 3’58,0’64.7’55.7’45.5’26.? -sa • ., •f,4. 2 • 55. 7 ·45. l ‘62.7 ‘33.( ‘60.3 •'j 9 .c •f, I. 3 ·6?-7 0,5 ‘3,3 ‘06,0 •! 6. I · Ll 2.4 ‘5.9 9 ‘35.77 •35. 548008 8(990 £1Jf'PL 505010Y (003 NAlll<tJW 'IO'IEY ( Hi l (0 (005.) CHG. l IH.)[l ! N( 884s50,046 740 cuts (005 0 6450 845(0 EASY 1-!0N(Y 8099 U!f'f '" 1 ,. , "' ' ' ,., 4.9 5,5 0.7 19 -s. 82. 02.44 2.8 "' .o ,. ' 0.4 •26.t ‘40.0 -40.a ‘84.0 -1 4 .1 ‘52.5 -52.9 000059550 RATES 84565 lNf[ll[<;t ... "' -------- (80 0018’ ~,: 01’ '." ,., ,., 0.' ' f[D(RAL 005059 l!UOHT SURPlUS SURPLUS (4(83 (NI.I.) 9551841 ! LS. l (0 !l 08015.3 u~S[Ll!iE 80510,085 TH CUTS MONO 140 00455 8 (AH (430 00055 oIls {} [ ff OIH 0(99 ' 70 '" '" curs ' "' " '" 77 5.05 S ,0 I 5.43 s. a3 4. QI, 4,04 -1. eo ‘0.00 5,044 '.>. 48 4.89 ~. l9 •‘0.29 1. 29 ,., ,., ,. ' '., 1.0 9.2 '. 2 2,2 ,. 2 6.8 9.4 0.0 2.0 ,. 0 6,0 6.1 “0.0 -0.1 00,0 IO. II 55.0 l!.Q 02,8 12.e 0.8 50,6 10.6 00,5 11.1 0.5 5.56 '5.56 5,65 l, 6 l -1.93 ‘0.93 6,90 6,96 0.14 t.i~ 5,76 5. ff, 5.91 5.94 0.08 O. I 6 5.34 5.34 4.04 4 .04 ‘0.50 •I.JO 3.73 S.71 6.48 6, 40 0,67 0.61 ,., 02,6 12 .6 '.' 5.8 6,22 f,.22 6,34 f.d6 o.s 6.22 6.22 0,76 0.76 - 1010,55 035055 OF N[\I ISSUES Y lf.LlJ 008 fl'I 4(8 Of !!f..,H•GilAlJE HOIIOS 8S,0v~04455 CORP. (089. 40400 84561095 1HSELIN[ 145 curs (083 Ofrf 0059 "' ' HUH.! TV (0 (HO.) CHG. l 86101(15 flA~UINE 04111086 540 cu;s (055 8 EASY 5850 80051 MONEY Ulff 0599 "' " m 00) 9.00I 9.0 a 8.30 .34 (,\SY M0Nf. T 6 5*50 80075 7.99 2- ' -102- 7.08 r. ?S r. st 1,80 17 ‘0.07 0.00 a. \1 fl. 20 9,20 0.09 0,09 0.5 2.7 2.' • }. 3 ‘3,3 0.0 0,2 ,. 2 C, (.3J -o. - ,. ' 6.2 "' 80,03 .o 3 !l .12 8.52 0. to 0.00 ,., ,., 7.3 0.9 ,. ' -0.4 ‘0,4 8.04 8.14 8.16 8.56 o.63 0.63 2, 2.55 ,. ' o., 2.7 0.2 TABLE 11. 11. --------- IHYr~l!'!(NI, 1011, 5480 (481510750. CAPITAL (61(840, (ORIIAT 9080*3000. AllO ---------- --------- ------ 1'1111!-ll!H nuTrUI (‘80(0 08040, oososruo Pl AN I I186(0000(88(5 XP[NOl11JI![\ P1*081 80015, 5912 1' I’S) HI it\, 09 l'H2 SJ IIA!'.f.l IN[ 445(1(05 CUTS 0 EASY (43 (8)13 5650 MON[ 040819Y Iliff 08811 01rr 0011 '" ' " Continued - Continued - 75 " 76 " 99 " '" H,. 1 54.1 38,0 38.t 40.2 40. 2 ' [OUll'IIUH 68P5N001U8fl (0000’18148 ((P(NOITURts f!Ht S, 06 0972 I ?1 Z ‘‘3) 00815. 5'SJ IUStllN[ 040515015 (00 CUTS (5005 6 1*09 800910 LASY l\flNfY D!Ff 0018’ 01 f I O 0095 "' "' ' rl ' '" ' ' GflOS ~ 80,400 l'LA'll (81 LS, 01 0912 08055 (3(10. l'Jll IU~EUNE 06351 INS [HY 8540,9 1-iON( T loX cuts (085 8 5400 uirr 8011 5 0051 fHfr '" ' ' "' ' " II(8,’ 1,4 97.9 "- 9 116.0 006.0 903. 1 903.? 908,1 91 8. l HOUSING AH r~ 8005890 sr 314803 (o88L515195 03015) PllLl 1 ON$ 810 l!f U~ IT\) 044055 7 94: llHfll"I[ curs USY 085 CUSS 5 1450 80910 MONfY o Irr O 91 OJI f 5 0581 I1,143 .1 €> l 0,043 I. Si. l ',‘,511C4 rn~,,; Of 558 •Hl"l) ‘00’0,1 f'!H.LION~ 85 050000) U!j I l S) 40484,11095 88551508 IIA~[L P,ff Sy 850915 C lJ IS 6 [A 1-!0Nf.Y 180 (005 5405’ 00019 I ff 16.18 H.78 "' ' ' 43.6 43,f, 65.6 4 4. & 0.0 2.) ,., ,. ' ‘1.0 4 1. I 0,9 2,0 85.6 63,f, 84.0 84.0 0.4 0.5 89.5 69.'j ,., 95,4 9S.4 92-1 92.0 2.6 2.9 99.0 99,0 09),? l? 3, l 009.5 ID 1. l 12l.8 025.0 124, \ 520.4 0.6 0.5 lll,3 558.3 IH,f, 834,5 5.4 ). 2.6 IH.t 039.0 10,6 043.6 905.44 955. 905.9 99 l. 9 o.o 955.5 951,5 954,2 954.2 0.1 0.' O. I 0.0 912.1r ?12. 935.5 935.5 o. I 0.0 0.0 9'4,3 974.3 0.6 I• e ,. 2 0,2 996,5 996.5 2.6 '-' 0.) 0.3 068.8 e1:.1. a e,o. o 010.0 0.2 0,0 954.0 9()4. 8 90€>. 9 906.9 2.0 0.2 963.3 94 3. D He.4 98.0,8, 5.4 0.6 786.1 ?R&, T 995,5 99'>.5 0.8 0.0 0.402 \. R,J2 0.795 l .195 1. 9 )6 5.056 5,913 I. 9ll 0.900 I. 910 2.000 2. 160 0.255 251 I03.) l. l 2,054 ;>. 058 2.070 2.on; 0.050 O. 0 I 1 0.6 , 46.2 4b, 2 o.' ,., ,., ' '., '.' '.' ,. ' ,. ,., 0., ,.,' 0992 ~3’S) 1912 •s J 839.0 83?. I 0 o0019 Irr .. ,. , 81 2. 3 832.3 ' 41.0 41. 6 ~2.5 4Z,5 0.8 I• e 5.8 3.6 3.8 ,., ,_) 4.4 3.3 3,’ 3.3) ). 009.9 14 9 • 9 154 .3 154,3 4.0 2.9 ,.,. '' I’S) J'!'d " GRUS~ 088353 [Ql)!l'flUIT (5507745001 18 8000,5. IL S. 01 (IA~rLINE 00355049 [A SY 00450 8*0 f.UTS (u75 & 50)0 MONEY 0085r Ill! 00 40 40.4 40.’. ,. 2 0.2 0,5 96.7 14,1 lt\151 Nf',I> 80080 Hll !NH", lllf'lf 800SIsç’.s 0908 SlobS CUil~. I <;f? t. ~) m (977 (0515. 08 0’80I 0(59 10 90~ IIAHLINf IS 8 9659 E ~Sy 't(lN(Y 065 CU (085 040455 D ! rr 008’S Olff 0 0559 94 " 70 . .. ,., , ,., ,. ' ,.,' o., o.o 0.553 o. 1 5 3 0.099 '.).1'9 ,.s o. ,., 8.5 07,0 l 1).0 ,,,. '10 14,90 14.03 P.IJ 10.45 n.41 o. 31 0,30 79,082 19.,2 0.4 o.' 79.90 19 .90 o.i. 0.49~ 0.6 ,. ' 40.85 8:) 61.U 00 .48~ 0.59 0.50 0,1 o.' 11',.€, 003.6 111',.t 006.0 0.6 116.f> 108.4 I059.3 I 9. l 0.? 121.a 025.8 122. 022.6lo 0.6 t;U'IIH (890895 "' 15.69 15.€>9 '"00FF ' '5 OIH or CARS 96.99 1€, • '19 0.08 0.) o.oe o.' .ss Jlf.f,IHH/ITlllN slr.) 0550405009 09 (*843 {MILL [ ll~', 09 UN I rs) (885481153 or 00055) dlllf.LINE 433518(06 CH IS 500 (8880 0 (51 10€>. 9 106.9 l I 0, 2 000.7 '" ' 1 00FF ' OEH or orrr 8 EA.SY 9452 Mil/I( 400851Y 1\2.',l 052.9 003.0 tll.0 0.5I o. ,. ' 0.0 .. o.' ,0.o ,., ,., 0.0 o., ,., 0-5 I; Af'I I(so ~I. 5895 S!OCK 01 04005(40105 370(0 HOIJSt.:IHlLOS rnu.s. 0) m I’S) l'Sl 40888,3. 836350,040, IIASlLPI( 080 cu 1US$ 5850 IIONE ‘408099 IS 1 EASY Y 0 !ff DOFF 5 Otff 0099 "' ' lSH.f, 3060.? 38€,A. ;> ‘240,4 4;!'40.fl 4€,22 .9 5009_I 50')9.1 5510.3 5510.l 5550.6 0622.9 ' .. i.2oe. f 2 • 6 5059.5 5 719. 7 5059. l 5109.7 4200.) l 4€> 6672.8 159. ,_ -12.s 49.9 49.7 ‘32.5 49.9 49,9 099.4 ,_ 0 ) -o.s ‘0.8 0.0 0.0 3.’. ,., t1*8004 4fl!Jll 188(5 flllH.:[ ((80110045 llllL I fJNS 05 9185095) PERSONS I 5845510041 UA'.;f,l!N( 744 10850 9*30 R589[9 CIJTS 1 EASY 1-!IJN[V our 0819 l)lf f 0 0011 " '" ' AVfl!Ar,( 88558410, l'~Ul)\,Cf!HTY 50001(0 08500 (2 CflG.) (95.) 4*358.055 IH~tl. !NE 060 CUTS (5855 0 lASY 5852 005450 MONf Y 8518 lllff "' " ' 905687840, 00409558 l'Ol(NIIH IJIJ !Pt/ I I 11 II.~. 07 l0012 (880,6. I’S) 'J/ 2 i• Sl UAS[L[N[ 840510(05 CU IS 6 (A Sy 058955’ 540 (005 (859 M•JNE Y ()!ff 580 19 2 0896 OIH "' ' '" 92.9 92. 7 94.8 9 ~- 6 99.0 97. I ,., 91.3 97-1 ' 0.0 0.0 o.o -i,.' ‘6.7 ,., 8.3 I H,5. 4 140 5. 9 (345.4 0405.9 ' 5.2 s.' '.) ,., 6.3 0.6 , . 4.5 '-0 9.3 '.J ,., 3.3 101.6 10c. 6 0)0.0 10 l .O 0.6 0,4 ,., ,., ,. 5 4,5 '.' ,. 5 4.7 0.5 002.33 102. 002.9 102. 9 0.6 0.6 '-' ,., ,., 5.8 ,., 5.6 “0.2 -o.i \ ~~ 7. 8 04’31,3 I~ 'JI• J 5536.9 1 SH. 9 1564.2 048.1,0 0586.2 5401.9 6900.0 9 l. e 0530.7 H4f.~ \I, 58 r. 5 ISH.7 l1501.5 0.0 (.4 0.0 3.3 o.o 0.0 8.0 0.0 0.2 o.o ,., -103-103- 08.86 ?6. 94.9 ~ll. 9 c. I 0.0 0.0 ,., ..,_,' ,., ,., TABLE 11. 11. RHIOS loss r,11vr1,1J>H NT r1r1.•11i11ur1i:s 15550,005, 7005.308000(0 ff llll!M 9,0419045.85 /11)11 l'Jf.j ,,NP 805 00505’450, 1,89 m (5) 53_SO 55_NO dA.",/ l !NJ. 505 CIJ 1075 6450 #000,0 l ~ 8 (HY IIUN( Y 8000 llllr "' • w 11'0 J f Nl I701 Al USS (;~Pl 065 (5054955 1(35 .\(IUM 418001 019) (!J IL S. 05 !'172 PSl (0810. 0072 (‘38 UAl,rt. TN[ 841,90.7001 0*1 (083 CU IS 0 [(#52 .\SY 91860 11()N( Y llllf 0086 0 lllrf 0058’ "' ‘ " 95 " 76 225,4 ;. f, 72,9 ? l. 9 91 " 70 77.8 ?,-.8 ‘0.2 •0.2 77.6 22. b 20.9 7 I• 9 ‘0.9 022.0 122.1 002.9 II 2-? ‘9,2 -9.2 06.0 66.0 - 01.7 37• 7 77.8 l,'.f, " •o.r 19 80 22.5 75.0 l I. '1 20.0 2 I• 0 ‘0,9 " 2?. I 28.5 21 • l ‘0.0 ·1.0 " -0.9 cc "' 'r r 09)—S 1'3.8 '" "' ' 065.5 I<,?. 0 94,4 84 • l! • (;ROS;. $ Tl1C!I 00 08535 CAl'lfAL 1410541 55516 90545558158 POLL\!l !ON 0945180,07 AIU!( ><L NI (55745. !.Xf>!"NO. TU RLAL 409 500 555 50161 880(1545 8ASELl!<E (ASV 05055 curs 0 9637 KCNO 865 10(5 8019 01 ff "' '" '" " 2,3l '• ' 8(Al ll\l';IN(SS f IXCO !NV[STli(hT 4604 05’ 89(05 10060 0001538615 In llfH (,NP (2) 83 0941 1010 4(051547 U~Stl!Nf r u Is 6 fA5Y 745 (075 1837 MfHlf 055071Y lllH 0050’ "' "' ' 9.55 9-35 "' '" 6. 9] 0,93 ‘55,1 -s 3. 1 033,5 1B.e 050.3 111.3 !854.0 28 ‘3,5 -3. 3 029,8 12 9. I\ 025,8 125. I\ ‘4.00 ·4. 028,3 12 l!. 3 875,44 125. ‘2.9 -2.? ‘0.5 -o.s 70.3 7 9. J 74,7 7 8. 7 11.? 15.0 75 •9 ‘5.9 -1. 9 16.0 r 6. 9 54,1 7 ~- 7 ‘2,2 -2. 2 76.2 lf,.2 54.5 H.B ‘8.5 ·I. 5 ,. ' ,., '.' -o.o 3,0 l. l J. 0 5.0 ‘0.8 I ·o. 5.4 l-' J. l 3.5 -O. I ‘0.0 -o. I ‘0.0 !036.4 l6. 8 I\50,3 l. 3 7.4 9.09 9.t7 2,8 1.9 ‘0.8 0.34 9. 34 9.H 0,32 a. r'i 4.93 6. 91 8.90 -0.02 ‘0.02 -104- .o u., 9.06 1. H, 9. ~ ~ 7.44 ·i.02 ‘3.07 8. 99 0,99 60.05 • 99 ·o. ot ‘0.00 ‘50.0 -5l'.1 16.6 T(,.I, 50.6 H,. 6 ‘04.4 -36." 8.69 8.60 ' 993.3 3. 3 43,2 4 3. 2 •7.5 ‘7.5 -o. 02 ‘0,0) ROL UUSll-l!SS !Xf.0 l~V! s f!'n 1 0,530 lES:i 86*1 580589855 f00193 0445300980 f'OLLlll JIIN 844710195 ~[UTL~[Nl !0 4O’9453. X!'f NOS. 755 90115404003 !!l. Al Ci;~ 8141 199 m SI) 554591815 HAO!' LI ra t ~s v KOl-tf 005 (003 859(0T Cl/IS 0 0,830 5019 DIH 803,1 IO 3. r ‘40.0 -40.0 ‘52.3l -sz. 042.9 132.9 ‘0,9 -0.9 AL 3083(0 NrT CA!' 8410 (58’l11041 80 Sf'lCK rn fl[ AL 1,NI' t J 4140, 5.50’ (03) !U5£ll!I[ 445(0 85s( 053 CO (003 .\SY 81090 f'l:;JN[ y IS 4 (9450 0 !ff 0099 "' 040.8 14 I. 0 ' 1955(5071 081 I re r 1 VE 1495 CH! !Al 50059 0(00, r-,t;P 858 sr ur ~- 55 rn 'l!: Al (.59 04051.SN( i!AS\l.lNf' USY #70(0 851 CUTS 15500 6 (430 110Nt Y Ill! f 0081 0483s~ GR05 Continued - Continued ,., 3,6 J.S 3.0 9 .r, l 9.65 9 .60 9.60 9.94 9.94 9. 95 9.95 o.oo 0.00 9. I 6 9.06 11.I~ 9,04 9.46 9.48 9.49 9,49 0.01 0.00 -o .o] ‘0.03 -0.02 ‘0,02 11. Capital Formation and TABLE 12. and U.S. U.S. Economic Economic Performance: Performance: "Baseline" and and “Tight "Tight Fi seal and and Easier Money" “Baseline” Fiscal Money” Solutions So 1ut ions 15 79, 77 " 70 " " ..‘8,4 I, 8 ,. 4,8 4,7 tl, 1 4.0 "· 5.50 0,8 0,4 I.~ ) 0,1 ‘0,5 7.3l 7, 7,3l 7, 6,4 5.9 .0,80~ " f.Cn1sn>1v 9.104040 " R! AL GN~ 4550, 540 9% CW';,) (03,) IIASfL!Nf 84591004? 1 !(;HT n;;"/,L 15045 70:V’01 0 0450 EASY #05090 "'D'•EY fl!F~ 0569 ' (INF,.PLfH>1t~f PHf 500’F”P10>~7k0P0 00 005 ( t) floSF LI •1t 450015’01 l!GMT 75:5001 fL;CAL 9 t5559409090 10340 ASY !-!()NF Y OJ,f 0007 ' " JNFLATION C"G.) 1010,45534 (5 (003,) G•iP Dff\t.MJ< 0’OP Os~so0’7~ FUSU !)1' 68510 591’ l Jr,1n ffS·~AL 155,~o1 0’SSCOL 6 nsv 9550 DJH 5077 8,5 ''' <I, 2~.2 ' "0Wr 00499 " 8,0) 7,1 7, 7 5.0) .,. '"" .. o. 0 FOSs f: s ~y 95097 MON~ l ' (PS '" 64595 50:5 !HSf\ !':E tJr;H1 nC>r.AL I 1457 USY "ON~ 905o01 907(31 ‘040 Y [l!Fr p001 • ‘oflQIs V 0 040454,35 "l'li)R\ f.l.lH,p,r;s 450. AVG, 8(3940901 A15fl !l"<f:. 9,3 o• l .., 9,7 6,0 ll(,en 950125. 000,41 r A ~y #0090 M(}>,f Y FJc:~n 6 1050 D!H' 53709 ' '.' 4,3 '• l 5,7 '. 7 7,7 ) •2 '"' 3,0 8.0 0') 5,2 2 ‘0,0 •O • q 5.5 8,4 ‘6,9 .. l),q '.' s. ''' .. ,. ' '.' ,,'.)' ,." ' ,. 5,22 5.2 o,) 0,0 5,3 S•l 5,5 0,2 0 -~ 5,1 S,5 0,5 0.' 4.0 0,5 0.7 0, 7 5,0 S• C 5,2 0,0I 5,3 S•l 6,7) 0,0 0 •• .. 5,5I s, 8,00 •• 0,9 4,0 4.8 I 8.3 I, l .,, ‘PS !II.Sf l \,c· 705305I so.~ T 1 GH1 rlSCAL 1035,91535:45. DlH 5591 85 " 5,2 ,., s.) "·' &,s '., ." ,., -o,,."'""s 0'" ‘0.00 -o, ,. )# ,.o, ' 5,0 '5.0 .0 '." e• 0.' .. 5,2 4,9 4,9 0,40 0, '5s .2 ~, G 0,22 0, 5,3 0,5 0.' 5,8 5,7 0.) 6,8 '., ••• 4,5 5,0 0, 0 6,9 9,2 0, 2 0,5 o,, 7,9 ) •0 6,4’ 5,54 0.4 0 ., 75,5 7~, l 15,4 75, ~ 0.0 77,7 11,1 00,3 80, ~ 7.0 78,7 78, 1 40,8 at.~ •• ?7,0 79,9 7'1,';t 02,? ~;>.? ‘,l 70,4 1'1' 1, *0.01 8Q, 01.3 8 I, J 054,6 ei., b 92,o 82, b 84,3 8b, 3 05.0 85, 0 58.4 88 ,14 0.5 0, 5 3.3 l •l 3,8 J •• ,. ) 8,7 ,. 7 ,, ' ,.'.'' ,'." ,., 6,8 '., '." ") 107041005 sJ(Os !l4Tl'1'-' 575100N (33 CAPACITY 0rr1 l '-'G •Ll ~~~U9’(•CT"~ 40,1 55’~5’J0 HASfl !~1 44501 Is, f J.-rAL I f9551 150905 EIC(0L TJr;HT A ~y 00’47 ~0',f1 s507 68,7 1,8, 7 9000005 Pl/(YhlY 041(950143 ~>1i'1Cf~~I>,G 000070,505 "Vifl l~f. 005>01 905000. TJl,•il nsc~L 4 6450 FHY 50004(7 '<O'lf Y 70,? 70. 2 ..,.,,vr 75,0 n,., ' onr • O!FF osoF ".) 70.48 7~, .., ?•' '.' ,., ~ 8~n,9,4 2 91(57703 Ff fl< '1 •L Pt (UP TS 5) 000,5,0 •l! L5: l " ~•~fl hH' 99900,5659 :AL T!PH 1509! F!S 9055:01 01> r 0009 ot~ F 0 35070 286,55 2At,. • 378,0 3c'~. q 0 0409 F 4~V 404(4 "0"'E V " 800090 "4DfifY ‘10,3 -1 \, 3 .55,0ij •',A• ' ... 4905 A'il) --~--~-- 094154(55 lNHRfST " • OJ FF 53069 ~Pl''llif\ 00000 >'ONtY “o~ty SUPPLY ~UPf'l Y (450150Sf Ha~~ l I'-( (><2) (025 ' '.' 4,2 95 143.7 CHG•) " 053k! 9049y1 1 lGH' 703001 ;· tSCAL 6 f9409 AS Y ><Q'lf Olff 5599 99535900, 9’00005 IIATf 9409 ((05 Ffnf.lHL ~'lf<ris i) floSU. JNf 0o5~5.j955 00001 9551 l 1 GH1 F9551310 E ~Sy ‘3307 lSCAL "'0"'~ y 0099 O!fF 7,1 7.) "' ' >If~ 0355590 JSS\lf~ 35 O< YIELD 154 959~ 40910 50 553,9,3905>; 75309, 40305 0~3 ;Ht;><~c;idt>c t ();>p. ""'<l)"i P) 090081541 •lASU. fNE 0 T !(;H' 0,135:510 F.iS':Al. 0109’ 9559 550EvY f A SY ~lllsf o!FI. 5497 °' " ' '.' 0,’ s.os 5)4 "i, 78 5,00 5 ,0 l 8,05 q, 01 4,34 a' 3ij ? •' -105-105- 6,2 '. 2 8, 7 -3, 7 ‘3,7 .45,o •QS, l —55.6 -ss, e —26,7 •?b, 1 ‘08.8 -3~ '(I 0,9 ) .' -a, 0,4 o,9 '.' l3.5 •S —05,8 •IO, b •2.l, S ‘23,5 ‘5.22 -30, 7 —30,7 7,0 7, 0 0,2 7,0 7, O 5? '.' 5,8 o. e 0,9 6,8 6,8 '' 2 8.2 7.2 2.9 2, O .0,0 .. o, o 00,0 1 \, C 02.4u 12, 00,0 ! 0 ,@ 02,0<, 12, 00,0 \ 1, O 05,3 e•• ..'.,, 0,9 2,0 2, o 7,3 '. 0 85.4 IO,(:, 11,4 l l ,4 0,4 0, 8 5,83 "i. F\3 3,800 1 • ~o ‘2,23 .... , 23 1,22 t,' ?2 5,65 ';, • h'> ‘0,52 •O, s 1 5,54 S,',I) 5,35 3,B ‘2.22 -2, 22 6,22 b,22 6.51 b, 17 .5,05 •O, OS ,., 5,49 5, t.8 3,04 }, /\b I 1, 0 s,n 5,78 S,H, S, 42 5,42 •‘0.62 l. ~2 -o, }4 ‘5,53 5,04 5,H 3,1'!, 3.06 • l. 4'l ‘0,40 5,75 5,82 5, 02 o ,O'l 0,09 700 7. '>I' 9,00 ~, 11 9,04 04 •O, O 1 ‘5,01 8.09 a, o3 1,07 •O, or; ‘5.05 9,04 R, \ 4 8, SU 4.5~ O, 40 0.45 2,3 2.' 0,0 2.5 2, S 2.6 5,2 0.' 7,70 I, 7 4 -o, 24 ‘0,24 7,0 ..j ‘55,1 •55., ‘53,08 •S3, ,. ' '.' 6,55 ' ~FL ()Cl rv 94 (HG,) 090,55(521 (HO,) 805r1199 ti~~•L:~r i; r;,.r ‘‘:1,00-. :.,:ct·. 00 9004 05(49 f A5Y '-'Of..Ey oOO,lo n ! FF ' 1091 5,0I S, 5,92 "i, 82 ' h"'Cl'ITH A$1Jllf flPOLLS 0,840450 T:l:! 108455537 1 LLS 005 FIASFL J>,f/' RoS~L549 F:.::iCAt, 9 F T lGH! 903001 ~o>,Fy .ISY ‘0417 00001 9897 D ! FF 0719 ...44,7 ,,,. '2 —59.9 •5<1,A '." 90053 RATES NAPPll~ 00’550 f'l}•;i y SIJPPL Y 0400 (f'I) (9 (‘90,3 049449 005070,0 C>1G.) HA~fl_p.;t 00091194 5739,5 Tl l,HT 7005000, H.·ont. 0 1530 MONf y f • SY 590397 552,2 512, 2 ij<n,s 490.0 *". ' 9409041 7 SIJ'1Pt..'1S SU’7L’sS 0404) Ff (JI 'IAL ~U00F H\)DGf T ( 'll 4) H !L ~, l 00 500183 1\ASfl tNf 90001t49 5 r503”~o’ioc0t l G"t flSCAL 0 5451 "i'1'Jf y U~Y 850090 [)Jf 5401r X O!H 5 5t89 360.0 490,04 455,1 <155,1 31> I, 0 l408, 040.5 394.2 1H.1 \qq' 2 433.5 <11' ·" •O • 9,8,2,20,0,18.7 q •21, e ~9, 2 . i j ,8 •0,2 -2, 2 ‘0,2 —2.2 —4,8 e, 0.3 0,00 J, 0 3, 7,3 2.9 2. q 2, l ‘>,7’0,5’0,4 -o, 1 -o, 0 1,,., '' ) .. o' ~ , .. TABLE 12. f>IVFHl<FNT, 0009FS5~9’5, rtPPAt 90700144 ................... ................. ........... FC~><~tlON, A>J(l 034550004, ~“0 .. .............. - ‘ Continued Continued " 75 74 " " 77 78 " 79 " 09 H,,1 06,7 31<, I 36,! 110, 45,72 110, 50,4II 5,2 o,' 0, 0.55 II\,~ 40,8 112. 5 42,5 0,7 o,' 0.8 ! '8 II~ ,b 45,6 1111, b 44,6 0.00 '. 2, l 2,3 UI,'? 46,2 f'Q. 09,55 Q':,' II 85,0 qq',. 09,8 0,3 • •l 4,6 IOL7 803.7 \ 08, 7 008,7 5, 0 5,0 0,9 ! ll'l • g 804,9 1055,0 s:,' q 4.0 '. 0 4,0 ". 0 " P0TH11JAL 0t1 TPJ7 70005945540, 05oTPuO l'LANT ftPi!vlllTUFll'S 90,480 0*998,95500093 Pl!LS, M 1•<1;, 0400,5, 159 4977 '6’55 ' s) IUSlL l!,f 40515.7650 MON( Y T !GH' 905140. flSCAL I 9059 €' ~y 83859 10041 {lJH' 5096 0 [)JrF 5757 ' ' (QUJPet~ •JT (XPfNDlT\•RFS 650074(85 580(857155595 (0 !LS, 34 I0977 g7z I’S)J (9719. l!AS[l \~~ 68091896 1 T FlSCAL TlGl 1 A SY ‘0890 "ONEY I 53H1 910151 1 0055 ppr pool ~' s " ' 111, 10,77 77, q 77,9 ' D!• F 8:;, b 83,8 811, 84,50 0,4 0, 5 9,5 0." ,. !laUS!NfSS >'Vf 51 ><f •1T 80508905 rpr~ 95o90 l58093048’55 ~ , s J l q7? 4’S) <All S, (870,0,30 00~ ~AS(t h,f 500(0 50,5 i1310 1!•"' ff~/;,\L 7515:31 & FASY 9490 57495y "'0"' ' (l]F"" 5l fl!< 0849I' 1 Q7 2 $X’S) 's) 5950,5, 09 0972 I" lL s, 0, BASfl l',f 84501 0’$ rr:;nL 6 9850 '<O~fy r!GHT f A SY 004(7 15005 550101 5009 oJFf 0 lilfi" 0539r 111,11 505,’ 1 ! ~. 0 006,0 A'"1 GROSS 00055 PL 00,5’’) '103. 900,17 Q 1 P, 7 958,7 ' 81?, 882,33 ~ 3'<, l 630,5 ' o' .. , ".' 030,5 ! >\ '3 l ]U, 8 034,8 3, 5 3,5 2.7 l'H,l 030,5 935,0 •n~," Q)j. 5 553,S 904.2 ""'~. 2 0.' 0,7 '112, 072,71 </111,3 074,9 !5,5 •b 0, 2 0,7 Q<;\' q 590,0 QQt, • ., 004,5 2.' 2,7 o, l 0,3 <lOU, P, 454,8 007,5 '?07. n </ijj. 943,00 040,0 </UQ, 0 98>,, 7 084,) 901.4 QQ7, u 2.' 2,? 0, 2 0,2 ,. 0 6,0 0.8 0.' \ 0, 7 50,7 8.0 0,91? 0,705 ! , TQS I, ~02 2.085 l0,504 , </<IG 2. n 35 o, 2ijn 0, l "l 0,500 3,240 105.0,03.4 ~." 5,900 I, q ! 0 2.050 2,477 2.a1 0, !d 1 0.307 ?,504 2, I! i, o, ns~ 0,008 2.9 '.' ,, G'IOS5 GROSS trrnH•<f>.iT 900590931 tB!lS, 48510. 0~ 1<,7? 097? 5,35 ' ' s) flHtl P•~ 4495154~ H/')~f Y 10301 1575’S] T!GMT Fl~CA!, 4 9505 f ViY 90409 {IJH 59578 fl!P" 050r '.' 2,7 l, l 5,0 ! 23,0 2 3. 5 !520,4 211, 4 0,4 0.' 0,0 '. 5 ',]';,,<, 035,5 0.0 0, 0 0,0 ' 'l?. 02,22 .z 111 47.2 '0,5 .0 2, 2 207 Sb'<, 8 860,9 870,0 870, O 0.' 0,? 0, 0.30 '.' O,! 0,0 .' \ ~ij. ~ 544,4 5,5 ; 3,8 l,' ,., sr,,~•s MOllS l 'If; 9119’) 8005781 fHJ 1. L 1 Df./S 709 M U"IP S l 9855,0,50045 1385133 !\ASH 11,f 04560, ~ , ... y ><O"lr Y Tit.>'' F !.~CAL 500001 753(01 I 0459 80499 n1f r 1.53$ t, su 3 ' • r,'•f (~P!l•L M Hrl~FS 1,90181 ~~re~ 9’0( 00 00010 ( "lLl lflN• (‘‘011 000’ t,~ 05 UNPS) 08053) (!~~fl !M 5,0890,50,0 T Jr,,n fl.)CAL 159,00 75,5(80, IJPr 00)0 ntn 5 589; ' 0,543 !,Jl,3 \ 3." 1«, 1Pa 74,19 1;. 1,Q 75,40 /</'JNFY E ~SY 800090 8 9859 ' ,, ~Ft,l~HHT!t,;, 0’ 9490 CHIS 4900970070000 {MI t L ( II N ~ M TS J 5550,10009 00 UNI 04015) ~lS,L !/./1 94591540 MONEY T lG,iT FISCAi, • 5Y 4Q89) 00040 700041 I E 9805 o7~1 0 of• 58’FF • oJfr l Ob, 9 806,9 1H,2 009.2 ' (490140, 010(0 8003100108 (APJT!l ~ Yoe~ 09 H0USfH0LD1 rn ll S, l' Sl 053019,0’ 8’S) fHSa TN~ 800815941 Hr) .. £ y Tl G><'t 955101 70005! 98)0 03899 F!.SC~I. 1 fl!¥ DI fr oo~~ 5899 ,. ' " ' otn LAfH}ll llilCE 0,44554 F05549 0, ~6050~5S (Kl LL!\"'!; PEPSONS) 5400,1 019’S 0~ l<A'\CL r1;F 9450,0,0949 T lG•<f HSCAL EASY 1 55,l( 750101 3 0459 oUf' 0095’ 5 o5.oF • ' nt• PllTf,NT!~I. ('IJTPIJT 9010.8(501 00j09’sSI (~IL~. 11• \0072 ' s) 0850,0,75’ 'l72 \‘‘35 H•SlL!NF 9 ‘ 30,1 8019 '1095,,’? l r;,n 0050135, FlSCM, 1 0055 ~ AS Y M'1~f 4830099Y !)!Fr oo~r 0 DHF 0890 .. 71:,' QQ 74,55 71, O1 70,04 0,05 0, 11 0,0l 0, 711,!l 70,00 7f!,',\ 10,50 0.08 D,38 0,5 0.; 8~, 0~ 50,00 ~, bl 9,62 0,8 0, 8 80, !IS 04,85 II I,~ 3 80,63 4,58 0, 711 0,8 l ,O 112. ~ 5S2.~ \Ii','< 0(7,9 9,5 o, l 5.5 0.' \ 1 ~, b 503,80 l lb, 0 056,0 9,4 0." 0,3 o, l I458,6 18 ,1, I058,2 1 ~, l 0,8 0.' 3,5 0.' I? I, 8 820,8 122,l 022,2 4,0 0.' 0,8 0." 0." Q;'!, 92.77 " ' 7q, <12 79.4? ' Ht>R,;> 4245.0 5530,l 3';,3a, ~,e"o. e «b?2, 5574,6t, 5868,2 3622,9~ 50~9, 5304,77 5550.3 ~t>t,O, 2 5058,3 I, 'l 4205,5 5055.3 570 5100,9 a;oo," 4695.7 .. y;,Q ~8 ,b I 71 , t, H,3 ‘35,0 57,3 45,4 070.6 l •I •◊. ‘0,0Q 5.8 0,0 3,8 '. 0 QU 'p. 54,0 Kl)>i(Y 40’417 PPun1Jt.YIV!TY 03 (~51,4 c><r.. J 0555i5(155510 iHSFl!~'r 04091 i4’~ T!G>H H:>CAL flSY "01-<fY 57380 615151 I 9455 03817 D l FF O0~9 AVf'HloF 4990559 ! i, • b 04,4 2,051' •8, ‘8,77 ".' 0,0 5365.4 4980 j 31;,;. Q 1 Q QC,." ' q7, \ 07,( 01,5l Q7, •O, ‘O,O0 -0. ('.) —0.03 5.' 5,1 S,0 5.' 0., 3,2 91\, 8 99,9 QI\.,. 94,4 0,0 0.' 0,3, o.; 1000,8 00, t, l500,9 DO, '1 0, 0.3l 0, 3,33 ! 02, l 002,3 002,0 ! 02, 8 0, 5 0,5 0, 5 0,5 '8,0 .0 9.0 ;3,5 '0 4,5 ". 5 5, 3 5.3 095 5, 8 5,8 5 ., 5,0 0, 0 0.0 '.' 5536•0 \5583,2 ~91., iSH,9 ':,8U ,2 15447,0 ~u 7, 8 1 0005,9 \SH,'< !5008,5 588, 0 15442.9 ~ij l. 8 l QQ \ •.0i>, 55)0,9 o~’~0 l, 8 n, o 1.0 0,4 0.0 3,8 0,0 0.00 0,0 3.22 0, 0, 0, 0 0.' 0.' ' -106- "' '.' TARLF. J.2. -- Continued TABLE 12. Continued 70> 74. 77 77 ff11~ilAL ~O0,’90’4o99.5 l;(\\/Fl./'1~f>.t 509904,010(15 t~pp-,r:,J10~l~ 0555040, Tn "Jn>ll •i/\L l:rvp ~) Sn 4s545’50,o, (500 (505 1,00595,0511 t 1_; r:r.fn rr:·1,,.~ 500441 15:11,,. 0 ,a~, 1509 ~o,,,~ 9059050 n!H 00~~ 73,8 22,0 75540 GH' (PflH•J•J~: Ll·S~ 5(0091 f.(7UIL s:,.-H5 O·P) 500 (EnS I’S’S’’, 110$ (Ill\ S, ~5’ .~• \•/1? 50000. (‘5’? >'S) 5~05 HAS'.L hJ~ 4,009.5,5910 T!t.!lT Fl rr/ 1. 000590309 'IN,FY 54194515::>,, 6 577,9 70 70 05 44855700 runns ~1, sr 0oor 2c,9 ‘0,55 500,5 ~.~T [)!fr X sO’, Oil F 0 002,> 038,0 0099 85,3 !)lH' 79,0 20,7 ‘5,3 !057,4 ! 7. u a 4 J ‘0,1 0 ‘3.0 :0' 8 1B,7 4 13,7 7 4 ,2 70542 c?'l o5 ‘25,5 ~;>fl, ‘20.55 q 5' ~ 00,5 U',, 08,71 .. q~. I, ‘54.6 ..‘41.0 ,q,/l 71,, b 76,1 3q. q 39,9 .. ,6, .35.58 .. ~ 0 ,o .00,5 \1\,/\ 030.0 ;n,3 70,,0 ~O,', ‘s,” D! ,3 300,3 \2R,7 070,7 ~?,b .2,6 520.0 525.5 ‘3,8 I 2~, 1 579,9 125, S 025.0 -;, • 5 —2,5 !072,0 ?? , 1 0 G!ln:,s urt~r1v< t•Pl!A• 3040:,! 9s79’(17v~ (05>0140 $TO~" fll <! 1,509 f."P 00) (X) SOn> ir' 1! 9555> 840’10055 !!~5' L l l;F-_ 1:r,,1, FF'/,' ~0 ~.s, 7601 90(101 9,5> M{)!.Jl" 055050 22,4 72.3 75,5 25,9 ‘l,5’5.9 NfT rAPliAL 550!’ srnc• Tr' 69) 9495791 15> 0900 !IF AL 9547 G'-1' (15 (7.) 0055505009 !H <,; l thf. 11G>\T fi~,·t.;. ~ fASY "i1NFY 151’S! 911101 4745y’O-’o95 n 1~1 p591 O () r;1wss CI-PfHt 'il'•n. "' 1915S0 cHotlo 55010(9700 flO!.L;iT!~!-1 1.•~u,,•P.T tr;,,o, 935,15055(90 555299,95.0 <5095’40, 1f, 10 fff/l ‘5905. f,•Y 1.’SO’ (%l 550 fl~~r, l-'H7909 71'-'1'! I 5’.’i )1::’.’:S’I. 0 5>0 7045’jO, fl~'- oosr’ '.' 2.1 54’) P:f•L ,ws:,,•ss 190151 ;n:' p,-• 0 01">',T 159,0, 451554,05 TO r,qL 000 0900, r,,,P 9511 (n 505 !q~f I.. ti,"f 9,019100.19 nr:H1 FCC:,,. f1'SY 93-91-90 r,1;,,r,, 105:597 95 0’- 0,I'. 9483 olH 0099 ll!AI. 9555054555.5500 f\1!q•(~5 ' D ' " 5’o,95’5~9.5 ·,•F',•,-,c,· 0,91) l'S3 0051 POLt•·T]Ok •·•17•~•• f•PI~~~. p5511S’00O949’’.55>”95~0 9.,P5-9O150. 05’ n1 ~L ~~;; f).J 0951 (>404 955 9445(559.05 t<A~r1 l'-'f 1•r,,H-'·'Vi·1.· r.P. 955 (‘(‘0 ~r,,,,, 149.01 (((‘‘(5 nlH 090) ,~sr 7<,,J 79,) 7q 70,0 ..‘‘9,5 n, ~ 0 2.8 2,0 71,1 77,7 74,9 71:,. 3 76,9 76,0 <>\ ,ll ‘5,4—0,0’S,? 74,2 7S.S ‘0,0 3,5 0,0 ‘5,8 5,0 9,3 ‘0,0 3,4 3,8 ‘3,7 2,” ,S’s 'l, l7 0,07 0,70 5,00 0,50 0.46 0,00 0,04 5.83 9,80 0.06 9,05 50,07 0.05 5.90 9,10 9,05 0,92 5,595 0,5’S 0,09, 0,10 0.54 0,23 0,07 9,00 0510 0,05 81581 “‘to)’, TABLE 13. Capital Formation and U.S. Economic Performance: TABLE 13. u. s. Capital Formation and Economic Performance: "Baseline" ‘Baseline” and “Investment Tax Credit” Solutions "Investment Ta, Credit" Solutions 95 " " -1. IJ ‘5.5 6.8 fC!HHJM 45:454558 1f 0141 189’ 00 1955..) nr AL (;;/f' Ctlf,.l IIA~U IH 55050,5(0,95 040,0040500 0N’09508140 INLIIIA~!II !N'lfilMLNl UI!! 0574 " 780 CH! 64(0(0 Ill I "' ,. , ,. 5 8.5 (‘.7 Cllf .Pl f 107000 '" 794 INILAl!ON 50 1001.) CIIG. J 141141008 G1iJ' 155’ lllfLAf[JI! 554719004 H~'>LL!iff 5(6111 059 !NCH! h',[!) PlV[SH!Oll 04(00519’:s 0409330951 o55091 irr " WO4 40090,549 ijA$fllNf JNLII( 4090 •sfll 58500 D!fr 000’I ,. ' "' 0549595000,545 4401 UNl '11'1.DYHL N 1 IIA I [ 6) llA~\L!Nl (‘0 055 0 50, !Ntfl[A',lll INfSlf'IUH 051018510 158395798987 !Jl! 5550 ! "'' 20 m 580 C Rf. OJ I 0,99057 ,.9.2' 5. I 3,! 01 I 543 CR[ (990(7 ,!~\! l ! •ff ‘‘8555509 I040,058190 N(!!f A ',fl) O.VLSJHI NI 0921008558 ll0 !fr 09 9 C l(f [)! 405 (05 5507! "' AVG. 005,. l'l(l'tAIIT !'1!1:r:1 5’9~593099 (‘‘94:5’’ •,-,1,,1; dA\I l ! N! 450355006 l5950,5(503>43 NLII( ~ '.,!_fl 4509379707 l ~n~!M,:,; I {) t! f" (0(79 f I IP •IM l!f(f[P!5 5505’485 740 09195100 11 ll ~. I 08 45010.0 ,!AS! .54074t 0/( 0059 040,055390 05095089005 INUHA',fll rnHSPff/H I) 11 f 5(047 f O OU 53549 ,. l 4.5 9.3 "' oe, CII "' .'.,.. ,.. ,. s., 5.6 9.5 ,. ' ,. 2 9.2 6~., 60.7 r l. 9 72.9 8,9 7(4 (99050 CRtOlT "' 590 C 799055 II( 01 l '" c,iron 0,49055 543 "' (9(054 CR(Otr I76.0 6. ii ... ,7.3 • l ,9.3 • l ‘0-0 6.4 6.4 ·O. ‘0,! I ' 6.0 6.0 -0.1 ‘0.0 5.5 5.5 5.5 5.5 ‘0.0 -o.o 5.' 5.7 5., 5.7 s., 5.1 s. 5.3l -o.o ‘0.0 5.0 5.' 5,0 5.' 4,8 '4.0 .0 0.0 0.0 s.o 5.0 5,0 5.' 5.3 5.' 5. l 5.3 o. 0.00 s.o 5.0 5. 5.00 0.0 0.0 5.7 5.' 5,2 5.2 .. ' ,., 4.9 4.0 o.o 0.5 '., ,. ' ,. ' ,., 0,0 o.o 4,4 8.3 '. l ·O. I —0,7 .. ' ,.,. '' ,., ,., o.o o.o 5,5 5,5 0.0 , 4.9 4.9 0.0 .. ,.,.. ' 8,0 4.9 o.o (.5 ,. ' 4.9 4.9 o. 0 0.0 ,. 6.1s ,. ' ,., 6.9 6,9 o.o 0.0 4.7 6.1 '-, o.o 0.5 ,.o.o' 6,6 0,0 6.6 6.1 0,0 o. 0 75,3 15.3 79.9r rr. 795,1 5• ~ r,.? 17.9 0. l 0.1 78.9 re. r 10.0 7 9.0 0.3 70.5 19. S 99.77 19. 0.5 3.0 ,.o Rt. l 45.3 87.5 8 1. 5 0.2 o.z Rl. f> 02,6 ll37.9 2. 7 0.22 ~5. 0 05.0 83.0 ‘0.0 36 l. 0 360.0 551. 1 557.8 -‘5.7 I. 1 ‘5,5 439.6 4 oe." ~o I. I 401.8 .5.1 - l. 3 •Q. —5,0:I 455. 7 455.9 454. 5 854.5 -‘0.3 l• 3 ‘0.5:I -o. su.2 005.2 51 354,84 ‘5.0 - 1. 9 ‘0,4 -6~.2 ‘04,2 -5':>. ‘55,7( •66. ‘64.8 l • t. 9 .5.9 ·Sf. ‘57.0O -‘(.1 !. 3 -2.3 ‘2.1 •4 5. l ‘45.0 -4 6. 4 ‘46,4 ·1.5 ‘5.3 -2. 9 ‘2.9 -~6. ‘.96.77 -28. ‘20.06 ·2. ‘2,0I -1.9 ‘7.9 7.0 7.5 5.! '.o ,., 1.0 '.o 7.5 O. l 0.0 '.' 8.9 6,9 0.0 o.o 6.0 '-' 6.0 ‘0,3 l50.3 l. 0 80.1 11.1 0. 0 0.0 00,’O IO•~ 155.8 0. ij 0.30 0. I45.0 I .O 00.99 IO. -o. I ‘0.5 00.6 IO. 6 00.5 10.s -0.1 ‘3.1 s.1n 5,05 &.n 6.27 ,;.H 4.31 0.05 0• l5 'j.% 5.56 00.29 .29 6.U 6.27 &. 48 6.50 0,26 0 .26 ,. ' 10. 2 /3.7 eo 50 4.0 ,.o 6.0 o.o 0,3 0.5 000 '" " 0.8 0.' ••• o.o 0.0 .. ' 79 70 79.h 90.6 70,4 f ,1. 6 ,. ' o. o.' s~.o -o.o "' " 28!;. 5 246.9 328- 9 375.9 -o.s ' f0855’ ! IH 0045 HAl 555950595 tll!llf,ff SIJ'<f>LUS 50539103 08040 CN ! Al 00 3500.) ll lt ~-) 953055759 l!A'.,i l l N[ ! N(lq_ A:,f_l) 040,090, 4:5650 0509000740 lNVE~I>!(N! 583 909050 CR[Off U II f 05(5 ! ff S O 0019 " !!ll'H 950501T .., 4.9 4.9 0.5 o.' -o.o ,., CU'At!lY 0505570(508 t/lll!lAf!rJ'l m 98180,575 005 IIAl,UfH!l)il!NI, 811 44400931559005 <IA ~I \5 !000 IH .5454 450,004040 7939409151 PH.JU ~ '>l ll lNH~fl![ rn 55755. arr! " -o.o ‘0.0 !NH,Sl!HNT 0809008985 11nu1,1. r 95(850513 f A'!Nl '!(;S SSnOSoll 0507 UA~! l0009 1 fl! PH:lq ASfl) !NV[SHH NI 700,8(4590 5409305587 Ol!f 0009 n 79 ' 4050 MW ... -f I. 3 ‘75.3 -5 8. 4 ‘54.4 '" -2.9 ‘2.0 o. -o.~ I NI! lq ~ f R 50570505 98565 ~ TE> -·------ ‘045>530 0’575~0,5 595’) 'lA ,ii/JW 400451 M!IN! Y ·,tH'l'L Y (M\ !IA:,f l ! M! 454:040,5905 040,094090 5846509(45 INCll!,A'.,fll t NH~ I"!( N f ,llff 4,599 (0 " '., (49 0,55,0,, rn1;. 1 0,99304 Cll( 0 IT IIHIIAU M1JN( Y 5400’0,1 SOl'l'L Y (HZ) 0(05543 450477 0925 (0 Cl!G. (9,1.4l U~)fll"lt 05 8 591 8 59 55(314390 l~f.HUSf_O 7510,4580,85 [N/lSIMtNl 145 0,093(0 rnron O!H 0091 " '" If ll! i!AL I! A1£ m 9 559 5501 flJMfJS 995505 45459 (53 Fl~ .,f,L [ N\: ‘53 -,5. 1549 050,958060 50795598(49 INC!/l ~\[IJ !NV[SP<[Nf 0514 O! fl 5*0 m '., /.7 s. 8? 5.42 ,. ' 9.7 53.55 .05 5 • A,; 5,06 0.02 0.02 '" '" 5050,0 490 ! ‘.5015 Y ! I LIJ 00 NfW ',)iJf s 01 111 :,>1· 1,!lls.ll[ l!O~OS (23 458,,’s’494 1559 (IJI'!'. (55050’. 550500 dt,_',! :54’,0 t.PH 1051 !NCl!f.A\[I) !NH~!MPlf 007094060 58095078930 535 tl!(Ol 0,09009T I)! If 5(409 "' 0.' 0,09300 CREDIT 1-Mq:,111 Jill 04837554 505 4590050 ~S•JilY 0500,10 II I I.LS 50) !I~ >l L ! Nf. 08,51580, (87355075 JNl:111 A '>f O I5450,559957 ,JV!. SI Hf 'II 540 0,00,5550 CRL 1)1 f tJ!ff 00 19 '" ,. 5.51 4.2 '. 2 "' s.' 5.79~ 0.00 ').01 55.07 .O I 8.34 8.H " ?.. 2.09 '" 1l ! T 503 CR( 0,49350 -108- 8.2 "-' 5. 84 5.84 ,. ' -o.o s.n 5./8 s. /f, 5. 8 f 5,07 0. 11 3.00 5.04 5. 34 5.73 O. 0l 0.03 5. 51 5,50 0 .19 0.09 5-?0 5.90 0.11 0.51 f7.39 • 98 7.90 r. 99 0.05 0. 0 l 0.00 ij. ! l 1.5? ~- ! ;, 0,0S 0, 0 ! 0.33 O .o 3 0.03 ~ .0 3 tl4.05 .05 8.54 8. I 4 9.58 B. I~ 0.04 'l.04 l. 1.00 .':-'l 3.0 0.) 0.' LO 3.0 LO 1.0 Q• C 0.0: 2.5 2.' 2.3 - c.o ‘0.0 ,. ' ?. • 5 2.5 2- ,, 2.0, ·O. l ‘0.0 5. 51 0.50 "' r.11,;.) VI I lier Jr (5 0,0545.5 051004571 09045,590, '!ls. ~f LIN[ !'lC!t! A '\[!l 0~54055S5(5S S!N'lr.~ll1(Nf 40,031(05 LJ{I"! 0001_I’ "i.,. 0.808 ,. " ,. ' TABLE 13. 13 • ............. .. .......... lkY[SIMtNT, CAPITAL C41'1Ul fORIU.f ION• IN*(Sl,4(415. 108865109, ourru1 ............. -----" f'Qt[N II AL P05(81041 ., AND . . continued Continued . "79 16 " 11 rr 78 ,, H,.1 34.1 38.8t 1a. 60.2 1.0.l 09.9 !9.9 88.1 H.e 41.5 H.'> -0.1 ‘0.3 ‘0.1 63.6 ,. 3.E, Ii63.4 l,.li 0.2 ‘0.6 IH.f, 86.4 89.5 llt.5 81.7 'H.1 98,1 0.9 I0.0 2.2 2.5 3.2 5.4 003.7 802.0 101 • 1 3.4 0.8 .. ,.,,.. ,.,,.. lt,9.11 849.9 l'>J.0 050.0 3.0 !. I 2.) " 19 *0 000905 l'LAIH urtNOlfURfl, PlANt FXI’94005081’5 011114. Cll llS• DI Ill? lH2: I’S! 5•Sl IIOUIN( 008415.NC INCM[AS[II INY£.UM[N1 INCIO6A0EII l0IV1.50196N5 OtlT DIII I OIH 5 0591 548 CM[Olf (8(018 IU •O.l ‘0.5 -o., -o., ‘0.7 -o.z -o.1i 46.2 H:,.2 ,i.o 46.0 •O.l ‘0.2 •0.5 ‘0.5 [OUffM[NT CO0hI’MENI [XPCNOITUM[S CzPC$0h8UI1~ CHIU,. (11116. 080’ 11112 0772 ,•s1 rSI ll.lS£LINC 8*5(1,191 " I NCR[ ,\SEO 1918(65(0 DIII 8l OIH DIII ntrr 11,,. 16.7I INVCSJM(NI 1996578(81 000 TU CR601! tRCOII BUSINESS Fll[D INVL5 h1(1H 805(0(55 10510 0N4185847(5 IIHU,. 0) 1111 P. •• SJ (1111$. 0819 ‘‘55 li6S(0,lN( UAS.[LINE INCll:[H[ll 18(00(45911 1400(5585:85 ln¥£SIM[Nf 545 fU (89005 Cll[Olf Otff DIII l 0511 OIH " ,,n GJttlS~ PLANt GROSS PLANS HIil$. 011015. 01 5872 •I’S) •s1 11, )tl 08 ottOftj( 50( INCft[H[O NYOfM(IH SAT INCRIASCO J04*9508(805 IU:: (8(02! tRCOII " 111 • .to 000.4 ,o s., 90!.? , ,. ' IF,9 111,. $16.0O e., ,1 908,? Ulff 0119 a*3.6 J. 6 121. a 020.8 12:4.' 124.1 8.6 0.5 tll.l 035.3 IB.l 133.2 6.9 8.5 139. 239.0I 935.6 'H'i,'- 955.5 95!.5 953.0 9'H,O, ‘0.5 912,? 97 2. P 917.0 91 l,O •I)., ‘0.7 •O. 1 ‘0.0 -0.1 ‘0.8 ,04.a 904.8 94 3.0 943.0 948.2 94 11.z , ,., us.z -o. 935.0 ‘0.2 2 •o.o ‘0.0 l 01ff 0099 C.AQH [OUIPM['tl 1 u. or l91l" l'SI 68054 L0511PIII’00 111. COILS. 01 5972 I’SI 0631108ff UA:.tLIHf HfCRt 4HO 18915014(97 IHVL:.TM(NT 18068145(0 urrr 08511 S,I; OtH 0141 IJl i'!, ! 819.8 t.U 080 Cll(Olf 6(11411 ,; ,\>H :, .05,90:, (MllllHN'i or UNlh) 011111050 OF UNITS) IIAS(LIN( 114561186 INCll[AS(O 19C78(8S60 lNV[!'irM[NI 099(518(9! 01rr 0019 11 01rr 0199 8J9. t 839.0 1169.ll *67.4 117(1. 810.0J 0.5 •• 5 0.0I o. -o.s 9)7.0t 107. 22.4 .4 0.5 o.' H!J!J',l', 9,5550’, 1:,,. CU'l 14l HOCK tlO'l[S CLI’ I SAL 001°C or 591 0(0865 IMlllltlNS or U'UISI 18511081505 00’ 01555) 031ST: LINt IJUHIH[ ltlCR(4S(O 14069145(0 I9I9(518695 lllfW(Sflt(NI 0.863 t.Hd 1.563 I, 54 3 14.n 14.7! 1'j,f,' 75,69 TH CR!:Otr 180 64608? III CREDO 69(0!! TU I0 Olfr 0011 11r1;1:.11utto1t or c,11s 8,141381145108 01 6855 (8160,1(150 01 UNI 41711 55) (Mill 111ris or IS) IIA~rLIN[ 1*3915(19 ltlr;!!(AS(O IN'f[ :I. Ill( Ht 0410,O5:ASC0 049(001685 D itr 14111 OIH OI 0(11 1. ai;z 8.802 t. 60 ! (.803 o. 000 0.000 0.0 •· e ll)f,,9 006.9 110,2 11 o. l 000 CR(Oll 651550 IU I• 2. l l~2.8 3.0 2.2 '• I 79!.9 993,9 99!,0 995.0 •0.9 ‘0.9 •0.1 ‘0.4 ..,. ,' ,.,.. ' 5,2 0.6 986. 7 986.? 994.9 994.9 8.2 0.8 I, 195 1.710 l,'110 Z.056 0.795 2.058 ,0,956 ., l\f, 1,661 2.030 5.880 (IJO —0.027 ‘0.028 ·0,0011 -o.ou •0-028 ‘0.308 •0,5 ‘0.5 ‘0.4 -t.4 -‘0.4 1.1,, z. 76.?'J 76.53 16.90 r&, ?I!! 0.00 0,0 o.oo ‘0.00 •o.oo 70.11 1 6. l J 78.82 1 ~. I l *0.85 80,115 80.80 110.110 •o.o ‘0.0 79.42 1'.1.42' ‘9.39 1? ,l'J •0,0 l ‘0,09 ‘0.0 -o.o •0.0'5 ‘0.05 -0.1 ‘0.6 11?..'1 112.9 112. 'J 812.9 t l s.r, 565.6 115 ,f, 085.6 0.0 0.9 1111., 0*8.6 868.? 0.8 0.0 Ul,11 026.8 ltl.9 520.9 0.8 0.0 ,., OIH DIII ,u., .. .. 85,8 95,.f, ,a.r ,. ' ,., •••.o ,., , ,,. ' .. ,., ,.,, 1u., ,., ,., ,., ••• ••• 0.0 0.0 SIIICK DI or 11005611010$ HOUS(HOL0$ C0I’ITAi. 51060 CU'IIAL tit ILS. 51 a•s, (OILS. I’S) ,u.SUIHE 508511186 ,2,?. ~ '622.9 J<;H,f> !!If, 8,2 4260.8 5'510,l 9534.6 8888,2 4622.9 5CQ9.7 5059.7 5530.3 04178(85(0 INVCSJM[Nf 018(018601 II) CR(Off 65(055 INCR[AS[O ui.1.1 U.2f,.5 5. 8 5536.2 4241.1 4626.5 S~I 5005.8 ll!H 01F1 0.3 3.6 6.! 3.9 0X 00FF OIH O. O. 0.0 0.8I 0.8I 0.0I " ... ,., ,., ,., o. ••• LAHOM 141401 ffJllC( 10866 058$0,1100I5 01 8405095) (MllL10ll5, or P(flSOffSf J.\HUNE 1831L18C lNCIIEASCll Ht( ,u 180 1914(05(0 rnvn 0101518685 JU C8~10I8 <:ttt:Dlf OIJ'f 0089 I DIII fllrf PROOIJC:, rv1 n n01 6)44.) cm;,, 080000500500 hA)[LIN( IIIOFLINC INCHCAS(O INV(SJM(Nt UX 0167064561 145(518(05 OAT CREDI 68(0!!I ltlH ‘0019 nrn,r,c 88905006 ou u•ur 0OSI’OO S-5,) Ill It!>, 01 Utl 18110, 09/2 I’S) ,U',ftlN( 14111116 1961018560 INCIII. .\S(O II 491,458745 tl\/1.Slllf.NJ 0111 UIH 0(91 l0 JJIH t2,, 99,? •9., ‘8.? 94, 8 94.8 .. ' 8,3 ' .. ..,.,, ,., .. ..,.,,.,, ,.,,.. 97.5 97.t ')1,1 97.5 0.0 0.0 'JII, R 98.8 98.8 9~ .11 0.0 0.0 201.6 IOC,6 000,6 100., 0.0 0.0 ,. 8.?1 5.9 0.!I .,., 6.5 1.6 0.0 ,. o. ' ••• ., 6.0 6.2 0.3 ,., ssu.2 lOZ,l 002.3 802.3 ,., lOZ,J, .., ••• 0.0 0.0 5.8 5.7 ‘0.8 -0.1 POTrHr1A1 808145801 "' TAT CH(Dlf 79(00? f.U .. I li.>';i • ~ l'.0';,\l IH7.~ t•dt,3 t 536. 9 t5,H.2 1365.410,000.91449.00406.30536.95544.2 1u,.~ 15H.l 5594.1 1556.l 1147.0 l~H.1 0478.5 0539.! 0.0 0.’. 5.2 2.) '• 0.0 0.0 0.6I 0.8II o.o '., , ••• -109- ,. ' o. o. TABLE 13. 13. TABLE Continued - Continued - 75 15 " 2 J. f, 29.6 22.9 2 ... 9 r rns RA 80 5388$ TUR(S HO(IIAL 0009871N680 cnvrmo1tNT (XP('lUI 1601081 (591100855J815 IO PiO'!INAL TO 40’40450, 687 (0) ilA!>[IJN! 04360 IN!’ l041894010 Ntnr AstU 049150)4900 I NV[STMUH 500 TAX Clll'Olf CRISIS ll05055 ltf "' "' 16 1? ,. (8 " 79 00 22,8 22.0 72.66 ?2, 22. 22.5S 27.3 z;,.l U,2 27.2 -0.1 ‘0.~ 20.9 21,9 l I, 9 28.9 ‘0.0 122,1 822.) 121, 521.00 IO 3. f 503.1 I ◊I ,2 000.2 -1, ‘0,0 I -0.9 ‘0.9 ‘2,8 -2, 4 ‘2.4 •n,3 93.3 \11-3 90.3 -2.0 ‘2.0 -2. 2 ‘2.2 76,6 16.6 76, 76.77 0.0 0.0 835.8 133,8 1:1?.,.7 883.7 -0. I ‘0.8 l‘50.3 H.3 838.2 131-2 •O, I ‘5.8 529.8 129,8 029.9 129, 9 0.0 ,., 528.66 128, 19.3 79,3 19.2 79.2 ‘5.0’ 11.9 rr. r n.r 11.1 —0.0 16.9 ' " · '1 17,0 ‘7.0 0.0 16.2 76,2 rr.. s 16.5 0.3l .. ,., ,., " 22.8 H.8 -o.o ‘0.0 -o.o ‘0.0 " -o.o (POT(NTJAL 0,655 USS ACT UH (;!,?) GAP (900(80880, 8600*1 619) s) 11\llS, 501 1972 (0015. 5972 t• I’S) "' '" llAS(ltNf 0*560,046 t840,8(45(0 N(.R( A 01rr DIII [lift I 0010’ srn t7 3, 6 073.0 U.V(STM(NT 140(510190 ' 48005 GRIJS S 1111(0006 trf(CllV( (680081 CAPlTAl R[U i;NP STUCK 510(0 10 50 6(60, 087 07) tlAS[LP.lf 04511581 INV(SfM[IH 0468(8S10 INCR!:ASto 099150)4140 01rr Doll "' STOCK 10 $18 CAl'ITU 6451541 95065’ I<( Al 049 (50 46*1 !l~S[l PH 00318155 INVESTMENT fNC!!(ASt.:D I006559180 04(39430,0 Ollf DIII "" "" "' 14 !. 0 040.0 "' 040 CRrDll 6810!! 842.0 lH.O 036.06 116. 148 10(050 TH CREO!T 84, 84.88 "' tRr on 88.3 81, 3 545 (01505 -o.o °' f,ROS S CAl'ITH $ TUC~ 01 5.0063 CoP! 051 5111CR AH~lt'!(NI [XP(NO, POLLUTION 808314651 7010,00056 (47145. G'IP 66) R(Al 509 10 50 6150, lUSll.lN( 984310.0 799 INCRtASf.D INHSTMtNT cur o Ir 14600,4515! 1441500941 560 6)550? nnr 0011 "' "' ,., , •o.o -2.s -o.o ,_' ,., ,. ' 028.3 128, l o.' 0.9 o. .. ,_. ,,., ,. ' 2.3 ,. 2.66 2.8 2.9 ‘0.0 3.8 3.0 ·O.O ‘0.0 5.6 3.’ ‘0.0 ,., 11.n 9.55 9.01 '1.17 9.98 9.H 9.31 9,31 0.04 0.04 0.45 9. 46 9.63 9.61 9. 62 9.82 0.08 0.19 10.u 10.64 9~1& 9.06 9.35 9.35 0.19 t9 'I. 46 9.5,8 9-61 9.60 0.59 0.19 ,., ~o.o 3.6 5.6 0.0 r R( Al !IUSIN! ~~ 150(054995574560 I X(O INVf.STMBT 0(81 710514755 rn 00 ROL 8(40, !,'jl' 0,99 55) iJASELINt 1085111409 INCRUSED C~( l)f I 046014S(0 INHSl~ENT 1991070680 5*4 10685?? 0 (‘1 o0 Irr "' '" (SS 80555(55 f(‘0510 8USIN('\S !HU 0401570(65 P•VfSTHE~T t1155 l'OLLUI U'Hl A!Ul(MENI 10 750,0,005000 095110101 Uf'[NOS. 1(9(005. 00 REAL 081’ (58 O> 0(81 llHF.ll~( 04551!9’1 8.93 9l INCREAS(O INHSlH(IH CRfOl f 046014560 540(3078541 58? 18(001 [)If 0)81f 9.56 9.55 0.52 0.12 4.96 9.U. 0.19 o.u lf(Al 4(00, "" . , a. -llO-110- .,s ft0.15 8.90 6 • '11 8,94 a.9~ 6.99 8.99 0.04 0.04 0.82 O.t 2 9. II 9.11 o. fABLE 14. Capital Formation TABLE Economic Performance: Perforroonce: Formation and U.S. u. ,. t.conomic "Baseline" and and ‘Corporate ‘Baseline” Tax Reduction” Solutions "Corporate Profits Tax Reduction" Solutions 75 " 76 " 77 H ‘348 "1,1! 6,5l e, 0,8 3,8 ECONO~Y ((04007 "' " 6180, A!'AL 440 05 696,) CHG, J flASfL !Nf 88390,509 CO!H>O!HH PR(W ! (08000071 P005015 OJ>I' 0511 rs '" 000 REOliCf!ON 4100,0~54004 UNfMPLOY~!'Nf U819194007’9000 RAH 0815 59) SHfLl"'f. 50s50,0~r t:nRMNAH ?llOr!tS 080 6505000470 7009573 O!FF 0097 "' ,,, • ' ,,, 0,0 8,5 ~. s 0500065004 in:ouc T ION '" . ,. ,,, ,, INl'LH!t\"< 5495,055074 50 CR(;,) (946.0 4959 OHLA10R 0090,8708 lHSFUNE 08090,040 (Qllp()~Aff CO’7’0(45( 7805015 P."IOF ! tS 102 41ou675090 ~fOUCT!OH {)!F,' 0891 " 7,7 '. 7 ,,~,2' "' "' 00850035L599( ,. 1 3,5 ,. ' 8~SfLlNE (069.05850 0005579 Too 9(oU(050N CMIF(JRHE l>"!'.WlYS Ho ?tovn Hn 0,3 a.] 9,3 OJl'i:' 5305 7,) 1•l "n4 •o " 75 1<01/RL V 60047843 AVG, ftRNJNGS 050, 955540,8 !!ASFL hf 5091457sf COl<PORJTE 606704476 p~oqrs P5050~9 lAs FIEDUCTlDN 9(00,0(1509, ,. ' 5,5 "' 0091 otH' 5,7 S, 7 0,2 '. 2 7,2 1'' '" ,., PJl:jl-lldH PPIJUSSl"H.;. 7604009 985560838740 !!~SEL !NE IIOS(5.OOsE cn~Pfl'HH 6095n’oalE PIIOFPS 7009550 780 DlH 0599 8500c0010 REouc q CN 1,e, r 60,7 72,9 12, 9 000ucIlo9o REDUCTION H,,8 78,0 " ,, ' '.' ..‘5,0 o, 0 8,81 •• ,. 1 6.5 5,5 5,5 '.i. 5 0,5 4,8 6,8 .. o, 0 ‘0,5 640* 448 .. o. 0 ‘5,0 ,. ' ,., s, 8,3 5,3l s,s ,., .. ,., ' 35,50 <>O, 3,0 '' 1 5,5 .,(I .o ‘0,0 5,0 5,0 ‘5,0 5,3 5,3 ‘0,55 5,5 5,9 !>,1 0.0 s.' ‘5,0 .. '). 0 5,2 ,. 2 6,0 s, a 0,5 0,8 0,9 5,0 6,8 4,9 mlj 0 ‘5,0 0 '.' ••• 6,7 '. 1 6,7 '. 1 0,0 79,3 7S,3 7157 71,7 1,;.:, 7~,3 16,7 1a.1 30,5 7q, 5 17, ;J 77,5 0., 5.2 76, '1 78,4 0 ., 4,2 7q I h 70,0, IH,l 85.) 82 ,b 52,6 52,4 62," 0, 0 4,4 85 ,o 85,0 1155, 355,77 502,2 Sl 2 ,2 800,7 11'1'1, 7 ‘S2,5 .. t2 ,5 .. 2,11 ‘2,4 s.2 5,5 ,;,o 9,0 ~. () 7'sl ,o 70,4 7q, 6 75,6 ,. ' o,o 3,0 AI, G 95,9 0,0 36 ! , I) 345,0 356,2 JS;,, 2 ‘0,8 mil' .. l ' l ‘5,3 43540 308,8 j</(l,ij .. IO, 1 ‘50,5 ‘2.55 .. 1,11, 2 ‘40,2 <>t,'l, 0 ‘68,5 ,.II, A ‘4,9 ‘7,6 .. 7, 'i .,~58,O ! 0, G ,.‘97,9 17, 9 0.' 261:o, 5 286,5 :ua,'l 325,9 e ' FfN:>HL lhJRP\.US (58050 Nt l) 11100840, t,IIDGET 8~50G60 31s)5,03 !LS,) 05 R 900,5,5 48320,045 JOSH !NE C0'1PO>liH 7901003 Pf:IOF !T5 040 (08779115 !" 01n 0501 0597 ' MO'<fV ... '"' 740819 .. 0.5 '• l '.' s.' '.' '.' ,., .. 4,9 '0,) ‘4,00 <>O, '.' .. o,,.,. '' ,.'.'' 4.0 4,9 ‘e,o0 .. ..'.,' '.' , ,., 6,6 6,6 0,5 6,6 6,6 ‘5,0 •O, o 0.' 5,0 80,0 ~II 08 •O ,2 ‘4,7 "' HrlflUl 7105400, 180 1'ECEl1lTS 9TC10~T3 !LS, J 05 fl050,0,3 fHS!'LlNf 66550,045 CGl<PQJ?&fi!: P~OF!iS 911’9’o401( 7805505 1'1 000 ~fQI.JCT!ON ~900,0(5S04 0591 DIFF 0 0097 D!If!' " ' 8,5 08.3 .. 0,1 ‘0,0 ,. ' 5,2 522 ,,b, ‘8,0o 0,0 1/J, 2 75,2 o,e 8,0 " .. o. 0 ‘5.0 ,. ' CAPlt!TY !ITILilHl/J>. (0806500 5555L575~50N (00 90,0, IIA"-\IF~CT\/ll!NG M’~5’10(55000N5 •LL !!ASFll><f 80590,05( (nopo080t UHIP0"1Ht 0839753 P>IO> l rs 504 DH~ 0081 ,., 6,7 4, 1 0,7 85 ,.0, '1 CP! (90 [;A Sf LT NI.': 01s50,S62 cn~PQIHH PRDFITS 74i (56754075 9409415 Ho 0150(010o innucno, Oll'F 0590’ 79 " 8900 ,.71, l ‘75,) .,58, II .50,8 f:lfoUCt!ON 950u6155599 ou·, .. z, ..‘55,7 55, 1 ,-1,s. ‘65,71 888,77 ll;ill, ‘50,0 "1 !,0 .. 2, Ii ‘2,4 .. 21,, 7 mi:S, l ‘78,7 ‘45,5 .. 11;, I, ‘S8~2 ‘59,6 •Sl>.i'.' ‘89,0 "11,! ‘25,9 .. zu ,s ,o\ 2. 9 .82,9 •118,11 08,0 RHE3 lNHR!:llT 519966031 90703 ~~u .. ~.,s~ >,J4!Hln., M(1>JF 410007;V !ltJPP(. 053995,9V (Ml) 5705) 90 4~0,) Cr<G, l fHSEL!NF. 108300,045 PROFITS 980 coi.PORHF. REOUCT!Clfl lH 8501(’55090 (0800(179 7009515 01n 00FF " ttONEy SUPPL 04035 50/PLY'f (H2J 5025 (5 c.ir..J (80,) 511010 9909090 88345, !!ASH 09’9 IN!' Ct!llPOQAH PRO~ !TS 508 90049(15010 PEOUC!l(JN (59900890 740/018 OIH 0091 " 8,2 Q' ~ 5,5I S, "' $UNO$ 4076 F(f)f'lllL /u405 l<H( 080 7101361, R4SEl,!H'. 84450,0995 t0RPGRAH P1'10F l TS 100 Rt 608700400 000/553 ~ DUCHON O!l'I' 0597 7,7 1, 1 09,7 •l s. 8,82 82 5,55 5,05 "' H!OSURY BIL.LS l~>IONHt 3.901019 1908000/ 851,0,8 (9) SASH PH:" p0300,5995 cn~P!JIUT( PQO/<!TS (04789809 #901813 0154(00,5(1509 lil[OllCi!ON (lJ Ff 0017 "' S,7a 5,75 S. {) I 5,05 "' VtfLO 5595 NfW 70515,0 5014 ISS\lfS 8300093 0, 09 >1!GM~r,1<~flE (0997, COl<P, 740”03 ~0"l05 (55 M564’09’~1 ~ 1<.El l >iS 90950,545 108100016 rrnnnr, 7451003 74i 400060008 rri~f'O~iH l"lfOUCTfON 0577 otn " . ,"' 1 C)aG, l vnoc ! rv v(0,0(8 7 40 69’S,) ~•SOL !Nf 88359,549 (n4038855 7039503 t,rl<ll'OIHTE PPOFl1'5 185 05’~ " '" 9,05 'I, 0 I 8,38 8, 'Jij .. ' ,., 2,0 (5095(9004 R~D!ICf!O'i 7,00 l, 7,0 1, D 6,2 ~~111~~ -11 ,., '.' '.' '., ,., 7.' 0•I 7,0 7,5 0,8 6,5 4,9 5,5 05,0 90,0 IO, 8 ll,◊ 1 o, a 55,5’,0,8 i!,\ 0, 0 4,0 '4,5 .0 ..‘5,4 o ,o sQ I 1 ‘5.5 5,56 5. Sta 78 5,78 4,23 0,21 b,22 6,22 t, ,53 6,53 o0,30 ,lo .. n, o ‘0,0 '" "'' ~ .ioe,11 5,31 5.83 ‘9,00 t,, 22 6.22 fl.23 0,25 0,06 ~, Ob 5508 11, () 10, ', 00,9 s. 3,0 6,0 ••• ..‘0,4 o. 0 55,5 l O,<' 80.5 10, S s,n 5,~6 5,08 5,55 Sil 0,02 (), 02 ;,aij 9,08 5,34 5,00 8,52 ',, 52 4,07 o •I7 5, 8498 9ll 0,09 7,99 1' 'I~ 7,99 7' 'l<;> 0,05 o, ~ l 4,55 e, !1 8,55l JI.,\ ‘0805 w-O ,o l 8,05 8, 01 9,00 il, 011 ‘0,03 mO, 03 8, I ij 8,09 8,08 8, II ‘5,43 ..o ,ol ,. 0 3,0 3, 0 3,0 ~ ,o 9540 , •0 5,0 '3,0 .0 0 ,o 0,8 2,3 3,2 ‘8,8 .. o 'i s, ~. 7t, 5,70 e,oe 5,7) 5,28 0 ,ll .. '.' ~o,'."' '., 2,5 7,8 ‘5,5I TABLE 14. TABLE .# .................. .. .............. "' ............................ INVt!l1<Et.1T, Ci Pf Tll. 100000009, 'ORMAlION, 4)00 910v000s 49, 0080140. Continued Continued ·~ 1~ 76 " " u,, 06,1 se,1 50,5 11(1 ,2 00,2 uo, 00,55 8.3 ,. 1 0,9 77 78 79 88 111,8 00.0 IIZ, l 02,5 49,6 Ill," 113, 'l 03,9 0,3l 0,7 111,,z 06,2 06,2 0.0 0,8I 95,0 1/15 0 II 9&,o 98,0 lOti,l 006.3 ,. 5 2,5 2.7 2.6 2.5 .. 852,6 15i!' 0 t> 2,0 0.0 I 'l<II, 'l 9q0,9 " " " Pnlf"ltUL P00147001 OUTl>lJT 09579080 Pl it.T 4yP1I8601lll fyPFNl'llll!FI£$ 88 841 5 IIHLS, n~ 50013. 44 101 5~72 l'SJ 6033 IUUl.llllE 00067,546 COlll'Ol!ATE (08708001 PllnFITS 9081375 Hi ‘504 R£oUcllON 910U(1804 01,, 0011 X O Or,, 5074 ,., ,., 8,5 I, 6,3l o, ,. ' ,., o, "",Z [OUIPM[NT 60° EiPENOtTURES (000481)05 4005010(S !'IU (05~s,o4 0912 55’5) lflJlS, 'SJ " 808(1090 fUS£LlN£ C0IIP0OT( Tlx (08800*0! PIIOFJU 4001758 180 OJH 0071 u:oucqo1,1 0~IJ(05Q4 14, 14,11 TT,'l 70,4 x3 on, 0084 81.lSlhlfSS 180(0 f!X[O 1901500645 INVf ST"f '-T 0U154788 IIHLS, 11171 5’5) 5'~) (800,8,045977 IHSfllN[ 80871566 ITS 045 REOIIC TI ON 600908006 PROF 8801005 060000004 " ' co11ro11•H OJH 0081 OIH 0X 0581 . . CRl'lS, [OVlPMINT 0008) (04)098047 t81LS, 0005,). 58 IUSfLl'•t. 006110900. ," 'lOJ, 903,11 t5~l25.53 <112' '•SJ &U.l 802.9 (009550431 PIIOftTS 8*04055 940 atoucr101-1 8000(0006 COIIPfllUtE 'll 8 1 1 900,9 s:n.1 839,) .. 503.9 103.1 , '.' ,., lll,Ji 123,5 llll,'.> 828,5 ,. 0.71 6,6 .. Ill, J 038.0 'll5, II 435,0 934,6 'l) .. ,t, 8,2 0.0 ,., ,., ,. ' o, q53,5 953,5 ~ c,~11,z 0.1 0.0I 012,11 lll?l, O• I 4.8 994,9 'l'lll,'l 8.8 1,1 0,0I Rll<J,8 860,8 '1011, 8 904,8 ~04.2 'Hl-,,l 8,0 I•' 0.2 '1111, 0 9,9,0 906,7 Qllt, 0 1 9,7 59,0 1Hl .. 0 7 40,,7 998,7 'l'li!' 7 6,8 0,) lll,11 833.0 z, I 2,0 1,6 I•• 014,5 l!ltl,I ,.'·'' , 01,2 0,0 0041 19 OIH .. ,,1,,,1,,\, ‘.54,5’, • l ~ ~ I "> t'11Ll,.!h'IS OF u”5051 u111fS1 (“00,1058501 fllSFLHIE 06510,041 rni.po,uu: PII0'1TS T•x 4100(0004 llfOUCfJON 606400001 #804(03 004 5,061 1,11,.\ I, $Ill 8.803 039,0 1n.1 , ,., 1111,'l 800,9 2,’ Ifl.4 111111:,• ,. 2,91 ,o 0 I 0144 01'1" Cil'JTAI,. STOCII 01 or 0401458 MOM£$ (*90701 350CR !Hill lfll!S OF 0910,1709005 01 UNITS) UNITS) !U~H !NE 50)11 INS cn1o•QPATE f'l<Ofl TS 055 flX 8600(0004 llfOUCTlON 6~~~0905(760151$ OIH' 0071 I 0117 OIF' 9 711,711 70,10 fl,44 TS,i'l l Oli ,'I 406,9 " 1,.,Rn11 007060 ,nuu 7,0800 (‘0115048 04 PfllSONt) 48)30)03) (.,ILLION\ OF 14571 IN£ 5)01 !\A5FL (55908001 PROFITS 4804055 Tot 01J50104 COIIPOIUTE Th )ll[QU(TJQN OIFF 0041 ,8 0041 OIH 0010001 •~FPAr.F 4600U10770570 l'POOUCTTVITY 10(~9,) (X CMG,) flU[L!N[ 0051150.0 l':OlfPOlU TE PPCIFffS 607190000( 4901505 Tu 000 R!OUcltOJi 8000c45084 tlJH 0077 .... ,,,. "' , , 1,ns lb, 110 76.90 HO,l 860,2 78.01 78,U 1A,Ol 10,03 •0 0 0'1 ‘0,09 •O I l ‘0.6 74.42 7'1, Ii! 19,20 7'1,i!I .,s 80 80,85 80,5'1 80,54 •0,2b •O,P .8,0? ‘0,24 •O,l -o.z ‘0.2 ‘0,9 IU,li 835,6 I005,4 15,11 0.0 0.0 '., ,., ,,, ,., 11',b 908,6 118,7 800.7 o, 0,5I O, 0,0I IU,'I 892,9 l1i!,'1 552,4 0,0 0,0 orn o, t ,1101 0.745 9.080 J,'IU 2,038 2 ,OS& 0,~02 1, 7H, 9,825 1,11>;> 8,196 0,16? 0,015 1,Ht 1,<17S •O, 01'1 .0,089 ‘0,500 •O, ~110 ‘0,079 •o,oel •Q,08' ‘00001 •l,i! •11,1 •11,0 ‘2,2 ‘,.40 ‘4,7 ‘0.0 h,87 16,47 •l'.I, Ol .4,49 •O ,0 ‘8,0 TAX IH.QUCTION 005 0F.o10~Tlo4 4 ('PIHi,. STOCII 07 o, 1 1-10UlfMl'JL0$ 6090164, 300CR 0U8 0401)$ !OILS, II Sf3) 5000,3, s 'SI 00871545 BUfltN,. cn~POIUT[ 4404503 (06408006 910060104 PWOFtTS 085 UX PF.oUCflON 0041 tO OtH 0541 .. 913,7 q11, 1 1,00 I ,o . , ... 01FF 0041 IIFGI\TlliT!ON c,11s 016160889(fl’O n, 01 60)8 (HILL IONS 01 n, U>ll rs, 0410,10043 058533 0485104 IUSf.L tJIE COl<f'OJU TE 4)07305 1>110, I U 606900400 011' 0181 I OIH 0547 a9~s 11,, 5 'II, l •1,5 1., 0.6 I6,8 ,8 s 1s1 " orn 11• 114,0 10 ,., ,., , 900865 (ilUISs 41045 l'l un 0650,8, tBll.5, 01 15412 <112 l’33 tUSHP.••· 00511 !4(’ COIIPOIUTl #00750! PRO,rn 900 (08900005 04006’ION 11 I Rr.tiuc TI 0'4 OTFF DIPS 01~ F 01: 0041 llt 060,00 1 11 53,6 !ll ,ti 811,0 80,0 8.00 0.s -0.1, *0,6 •0,0 ‘0,0 0,6 0,9 ' ,., .. ,,, 47,0 117,1 41,0 'lJ • I 04,0 5.0 48,8 '18,8 48,8 '1818 0,0 0,0 000,6 IOO,b 600.8 0,8 0,0 Ul,8 128.8 U.i,O 622.0 ,., ,., 0.2 0,2 . l'Ull,b J8U,l lli!QI) ,8 lilbi!l ,q 50011, 1 '!i5'.l0 1 ) ili!il0 1,4 sou.1 02,0,2 0621,4 5514.li 5053.1 5590,0 1 c' lilbi! 02,91 <ll, ...' •8,1 •u,a 94,4 4,0 0,8I o, 100.,. ,., ,., ,., ,., ,., ,., .. , 0,0 o, 0,8I 002.3 10i,l 802,3 IOi! 1 l •0 1 0 ‘0,0 ‘0,0 -o.o .. , , ,,, ,., ••• ••• ,. ' ,., .., ,., ,., .. o.z 9.2 0,0 ‘0,2 8,3 ,. 5,71 6,0 0,0 4,0 ~, I 0,8 4.5 3,0 8,7 Pl'IH>lT!AL *006400001 OUTPUT 0002 I’S) SIS) ((1141$, ll!l S, 01 1'112 IHSfLIN[ 1 ijUJ ,!\ 0~°0.3 \4<11,l 15:h,<J 00971041 9365,4 111os, 8005,9q 0087.4 j536,0 0588,2 tH~,11 t'.i!\4,i! (08404801 r.011pn1a TE 4904075 l'WOF ITS to~ 400U(0004 11.1u1 ,11 \"'11,1 56)4.3 W~oUcTION 'i!\b,l 0007.8 0~99.1 !')J!l,i! 0538.2 1 OIH 0501 l, I I, l 0,! 0.5 0,3 2,! O •I ‘ I3 OIFF 0511 o, I 4,0 0.4 0.8 00.0 •I °' ,., '., -112- ,., '.' • TABLE 14. 14. ‘ Continued Continued 15 ,. 7* " 10 78 74 " 80 ill,1> 23,4, n,'I 22,9 l? • A 27,8 i!?, fl 22,9 "0, !) ‘0.0 21, fl 22,6 22,0 22,6 -o,o ‘0,0 ..‘0,0 o,n li',J 22,3 U,l 22,1 ll,'1 20,4 ll ,'I 20.4 0.0 822,8 121,t tt?I ,A 028,4 •O,l ‘0,3 ~o,i1 ‘0,2 l063,7 Ol, 7 l802,4 \'Ii! ,8 ..‘0,4 o, 'I .. 0,8 ‘0,8 tll,11 493,6 339,0 tlJ,11 •o,o ‘0,0 095,3 llt,l " HttDS 4*0555 " " ,,~rA•L GOvfANM(NT 6004090640 F.tPfNOTTUA£s (fl0900010301$ Tt'l NOMPIAL (;'lP (5) 00 40854451 64p 8AS1'\1"f 00595 540( C.nkl'OIIATf PR0'1TS Ux 8100c Mf.DUCllQ!j 600.1570*01 8004058 000 05070 008~ OH" "' . ,., , ACTUAL G5P~ GNP) 9*4’ {POTHHH\,. 4P59°’8550~ LfSS 1535 0(00*1 (!f' !!HLS, 541 l'Hl (855,5, 8072 PSl 3’30 fUSHlt.f. 8087100.0 tl'l,8 813,8 Ct'l!H'O!Ull P8015037801500500. (091514075 PROfll5 TAr AEoueTJON 000,0 1111 .o 01rr 0014 r, If, 8 85574 • r.11on 0408) fFrfCTlVf. 7114(1595 6080701 CIPTUL STOCK H1 9001 PE 4L 4’o8 49) 9006, 95 '" '" ' 45597.50.1 84Shl'-f • . (001Q000( #0Q9575 (:Ollf'QIIATf PIIOF 11 S 1*5 65540(fl010 Rtouct1oi; OtfF' 0544’ 1u2,o 802,0 Nf't CAPIT Al, 570(0 811 c0PI14~ STOCII 00 fO fl[ &L 0.0,8 r,1,p (0) 8(01 9&lifl fNf 988(1 0701 cnllJ>('JIU,l[ 9001505 (774P54*96 tOo 0(00600090 PAOF!f~ Tlr Af.OUC'10N 0571 OtFr "' 84,~ 84,0 1 lt>, 8 896.8 ,.,,:s 05,3 '.' GAOU STOC~ 01 OF 9)0)) (APIUL 6°~5’°150064 POLLUT I n>i 0705(91507 A!Ul[>IFtfl [rP!'-0, 4011005774 (89(40, '"' (" TO Ill A\. 44P (4) 00 77401 ‘°5615”6 IUSfLf>,E (OOPOIUff 60’706001 7~97058 too 86506700’o l'~Ofits HX R[OU(. TION OJFF 0047 79,3 7'1,l 1'1, l 79.3 0,4 ,. 2,11 , .. 2,6 1030.3 l I, l ,'·' 0,0 0,9 1024,8 l'I ,/! 030.5 t)O,l 0,2 07,7 17,1 74,4 H,,'I '. 71,l 77,2 0.9 n,e 77,8 0,0 ( 11, lS ‘.35 1,0( 0,5 ‘6,2 Tt,, Z 16,1 76,7 4.5 .. '.'.. ,., ,., ,., ' l, 3.0( •0, 0 .0,0 3,00 3,0 0,0 3,6 3,6 8.0 o0,05 ,as 9, ]II 4,300 ll, ]9 0,39 ll,111, 4,06 ll,1>0 9,40 I" 0.000 o, 0,63 9, l>l 9, Ill 9,02 (I,\'< 0,99 55,82 lO, le! o, 111 0.00 8,98 &,'II 8,96 6,91> 0,0';i 0.05 0,44 &, 99 9,14 'I, 111 0,111 0.84 4,86 "1,11> 9,30 ... )<; 111 0,09 4,04 1,1, 116 4,66 lf,l>b 0,08 0, 18 ' 0,94 9,911 ,, 1H J.L P.1Jqt1fss 84*1 09)9040535 HYfn 10410 I’o’885’(0.1 1156 l'Hfl\f'4[NT lfl\1' 80110550595 00004 .. ~(k0 1,45905, ‘0 P()UllflO•; i'IHl' E~T frPf."1!'lS, 0(01 6909 00) llf ~I. G>.P 54051500.59 IUSft l'H 8,91 8,"11 tOIIPOIIUE 600#0040( 909155$ 0(09760504 PIIL1'1TS 565 llX ll[OUCTION (" "I, 17 9,87 524,3 128,J 825.5 lll'.,fl '.' '.' ,., 8(01 H\!Slt.ilH ~58504L83 F!X[O 705(0 560E5746440 IUl, JWEST'4[1U TO A\. G'IP 70 P!, ‘5,09, 448 (5) 80~415~5 IUSFLIN( cn11ro1uH PPOHTS 657’00403( ~009I 03 Th' 505 HFol/tfJON 81080(5008 onr 0591 76,6 ft, ,t, 7'1,2 19,2 2.6 3,50 '., '., '., 0,0 ,.',,' ,. 2,6 2,09 •0,0 ‘5,4 .. ,,.,.. 43~3 'IJ,l '0,1> 90,6 OIH 0544 -113—113— 8.75 !I, TS o, References 1. 1. Andersen, Leonal Leonalll C., “Is "Is There a Capital Shortage: Theory and Recent Evidence", Evidence”, Journal of Finance, 31 (May 1976), 257—68. 257-68. 2. Briminer, Andrew F. and Allen Sinai, “The Brimmer, "The Effects of Tax Policy on Capital Formation, Formation, Corporate Liquidity and the Availability of Investible Funds: AA Simulation Study", Study”, Journal of Finance, 287-308. 31 (May 1976), 287—308. — _______ 3. Bosworth, Barry, “Capacity "Capacity Creation in the Basic Materials Industries", Industries”, Brookings Papers on Economic Activity, 22 (1970), 197-341. 197—341. 4. S. and Andrew S. Carron, Bosworth, Barry, Duesenberry, James S. Capital Needs in the Seventies, Washington: Brookings, 1975. 5. Data Resources, Inc., The Data Resources National Economic Information System, Amsterd1111: North-Holland, 1978. Amsterdam: North—Holland, 6. Eckstein, Otto, Green Edward W. and Allen Sinai, "The “The Data Resources Model: Uses, Structure, and Analysis of the U.S. Economy,” Economy," InterInternational Economic Review, October 1974, pp. 595-615; reprinted in L. R. Klein and E. Burmeister, eds,, eds., Econometric Model Performance, University of Pennsylvania Press, 1975, 1976, 211-31. 211—31. 7. Eisner, Robert, "Capital “Capital Shortage: Myth and Reality”, Reality", American Economic Review, Proceedings, 67 (February 1977), 110-15. 110—15. 8. Fellner, William, Clarkson, Kenneth W. and John Moore, Correcting Correcting Taxes For Inflation, Washington, D.C.: D.C.: American Enterprise Institute for Pullie Pu’BTfc Policy Research, 1975. 9. Friedman, Benjamin M., "Financing “Financing the Next Five Years of Fixed Investment”, 51—74. Investment", Sloan Management Review, 17 (Spring 1975), 51-74. 10. Fromm, Gary, "Investment “Investment Requirements and Financing: 1975-1985", 1975—1985”, Washington, D.C.: National Bureau of Economic Research, October 1975 (mimeo.). (mimeo.). 11. Jones, Reginald H., “Why "Why Business Must Seek Tax Reform?" Reform?1* Harvard Business Review, September/October 1975, 49-55. Business 49—55. 12. Kendrick, John W., The Formation and Stocks of Total Capital, National Bureau of Economic Research, New York: Columbia Columbia University Press, 1976. -114- • 13. Minsky, Hyman P., John Maynard Keynes, New York: Press, 1975. -- Columbia University 14. New York Stock Exchange, The Capital Needs and Savings Potential of the U.S. Economy: Projections Through 1985°, l’gB’5’, September 1974. 15. Saving”, Simon, William F., “On "On a Tax Program for Increased National Saving", Statement before the House Ways and Means Committee, July 31, 1975. 16. “Financial Instability: A A Discussion,” Sinai, Allen, "Financial Discussion," in E. Altman and A. W. Sametz, Financial Crises: Institutions and Markets ma Fragile Environment, New York: Wiley, 1977. in~ 17. “Financial Shortages Shortages.. . .. Or Surplus?" Surplus?” in 0. Sinai, Allen, "Financial O. Eckstein, ed,, ed., Economic Issues and Parameters of the Next 44 Years, Lexington, Resource~Inc., 'So-89. - - Mass.: Data Resources, Inc., 1977, SE—~T’ 18. “The Integration of Financial Instability Large— Sinai, Allen, "The Instability in LargeScale Macroeconomic Models: Theory, Practice, and Problems,” Problems," paper presented at the Annual Meeting of the Midwest Economic Association, April 1975, Chicago, Illinois, Illinois. 19. Sinai, Allen and Roger E. Brinner, The Capital Shortage: NearNear— Term Outlook and Long-Term Prospect~Econom1c Long—Term Prospects, Economic Studies Series ~18, No. 18, Lexington, Mass., Data Resources, Inc., August 1975. 20. “The Tax Treatment Tideman, T. Nicolaus and Ronald P. Tucker, "The Conditions", in H. J. Aaron, of Business Profits Under Inflationary Conditions”, ed., Inflation and the Income Tax, Washington, D.C.: Brookings, 1976. - - . — ______ f~~1y 21. U.S. Department of Commerce, Bureau of Economic Analysis, Analysis, AA Study Economy-:- 1971—of Fixed Capital Requirements of the U.S. Business Economy, Ilsa, - -- - 18O, December 1975. 22. United States Senate, Committee of the Budget, “Long—Run "Long-Run Capital Needs of the Public and Private Sectors", Sectors”, Seminar on Effects of Fiscal and Monetary Policies on Capital Formation and Economic Economic Growth before Elore the Task Force on Capital Needs and Monetary Policy, 94th Congress, 1st Session, September 17, 1975. 1975. 23. Vaccara, Beatrice N. N.,, “Some "Some Reflections on Capital Capita 1 Requirements 1980”, American Economic Review, Proceedings, 67 (February for 1980", ( February 1977), 122-27. —115— 24. “Capital Shortages: Wachtel, Paul, Sametz, Arnold and Harry Shuford, "Capital Myth or Reality?” Reality?" Journal of Finance, 31 (May 1976), 269—86. 269-86. 25. Wallicti, Henry C., “Is Shortage?” Wallich, "Is There aa Capital Shortage?" September/October 1975, 30-43. 16- ‘01 Challenge, MONETARY POLICY AND CAPITAL FORMATION Jai-Hoon Yang* Jai—Hoon The year 1776 gave gave birth not only to aa great nation but also to aa great book which shaped our science. In his Wealth of Nations, Adam Smith made growth in income the central explanandum of his inquiry and identified capital formation as the prime prime mover of growth in income. It is most fitting, therefore, that the subject matter of this conconference in this bicentennial year of the Wealth of Nations is capital formation. II do not believe, however, that the theme of this conference was chosen merely, or even primarily, to commemorate the bicentennial of the locus classicus of our science. The choice of the theme reflects, II believe, the widely held concern about the adequacy of capital formaformation.’ The precise nature of the sources and significance for monetary tion.1 policy of such concern, however, does not appear to be well delineated. delineated, Accordingly, the purpose of this paper is to provide a diagnosis diagnosis of the sources of such concern and what such concern implies for the conduct of monetary policy. 1‘For For an expression of “official” "official" concern, see Economic Report of 34—47. For aa summary of diverse the President, January, 1976, pp. 34-47. views, see the Introduction by Eli Shapiro and William L. White to Capital Ca ital For Productivity Productivit and Jobs, edited by E. E. Shapiro and W. White (forthcoming, forthcoming, Prentice—Hall). Prentice-Ha 1 . *Dr. Yang an economist economist at The Federal Federal Reserve Bank of of St. St. Louis. *Dr. Yang is is an at The Reserve Bank Louis. The views expressed in this paper are those of Dr. Yang. 117 The first section of the paper identifies the three analytically separable separable sources of the widespread concern about the adequacy of capicapi- tal formation. The sources of concern are organized along the traditradi- tional dual roles that capital formation (or investment) play in augaugmenting productive capacity and generating income, income. The second section frames the issue associated with capital formation in an exexplicit intertemporal utility maximization paradigm. In such a parapara- digm, the issue of how, or even whether, to specify an aggregate utility functional looms paramount. The third section explores explores the possible role monetary policy may play in deepening the steady state capital intensity. This section draws liberally upon neoclassical monetary growth theory and the theory of money bearing on the technology of exchange. Monetary policy would serve the cause of capital formation best by being directed toward the attainment of full capacity output. The implications of such aa thrust of policy for the knowledge required to define an appropriate monetary policy will be considered later. A A catalogue of unresolved issues is provided whose resolution resolution is essenessen- tial for improving the quality of advice given to the monetary policy— policymakers. Much attention is devoted, in this section, to the different concepts of stabilization policy and the feasibility of discretionary stabilization policies. In the concluding section, the optimum monemone- tary policy, in a world of costly information and possible "coordina“coordina- tion failures," identified as one which is systematically free of failures,’ is identified 118 policy innovations.22 Such a “surprise—free” "surprise-free" policy regime would miniminipolicy-induced shocks on non—policy non-policy mize the risk of superimposing policy—induced reshocks and enable the homeostatic capacity of the price system to respond more effectively to the changes in the non-policy sources of shocks. A such A brief discussion of the appropriate empirical proxy for such an ideal monetary policy concludes the paper. Sources of Concern: AA Diagnosis The widespread concern with the recent and prospective pace pace of output growth and capital formation appears to have three analytically analytically separable sources. The first source of concern is the possibility possibility of not attaining capacity (full equilibrium) output. This failure may be attributable either to the emergence of a capital shortage—labor shortage-labor sursurPl us economy (to be defined) due to the "putty-clay" plus “putty—clay” nature of the capital stock, or to the emergence (and persistence) of an unemployment state due to the standard standard effective effective demand failure. Here the focus is on the income and employment generating function of investment, or with the role of capital formation in attaining the full employment objecobjec- tive. emerHow can the "putty-clay" “putty-clay” nature of capital stock induce the emergence of One can always gence of a a capital shortage-labor surplus economy? explain such a possibility by resorting to the Keynesian labor supply function. A A temporary excess supply of labor, or its dual, capital 2For the concept of “coordination "coordination failures,” failures," see Axel Leijonhufvud, Lei jonhufvud, "Effective Failures,'' Swedish Journal of Economics, Vol. 75 “Effective Demand Failures,” (1973). 119 shortage, would emerge in response to a reduction in the capital stock, 3 as such aa reduction decreases the demand for labor.3 Of course, such a phenomenon would not persist unless the price level and the relative rental prices of factors do not adjust to eliminate the implied nonotional, excess demand for commodities. commodities.4 However, in aa putty-clay world, one does not have to resort to this trivial Keynesian case. One gets the same theoretical result even with a classical labor supply function. The decline in the demand for labor (consequent to the rere- duction in the capital stock) in conjunction with fixed factor proporproportions in a Cobb-Douglas world would yield such a result. 55 The key point to remember is that in such a world, the marginal product of labor is a function only of factor proportions and, hence, even in the isafunction 3such stock may be induced by war or by Such a reduction in the capital stock an accelerated capital obsolescence or abandonment induced by unexpectunexpected changes in the relative prices of factor inputs, such as the energy input. In aa putty-putty could putty—putty world, capital obsolescence, of course, could not occur. 4For the concept of notional excess demand, see R. Clower, "The “The Appraisal," in The Theory Keynesian Counterrevolution: AA Theoretical Appraisal,” Theorx of Interest Rates, edited by F. Hahn and F. F. Brechling (London: Macmillan &&Co., Ltd., 1965). 5For theoretical discussions of the possible emergence of the ununemployment state due to a shortage of capital in a putty-clay world, "The Economic Implications of Learning by Doing,” Doing," see Kenneth J. Arrow, “The Economic Studies ((June June 1962) 1962) and Leif Johanson, "Substitution Review of Economic “Substitution versus Fixed Production Coefficients In the Theory of Economic Growth: A A Synthesis," Synthesis,” both reprinted in Readings in the Modern Theory of Economic Growth, edited by J. Stiglitz and H. Uzowa (M.I.T. Press, "The Factor Proportion Proportion Problems in UnderdevelopUnderdevelop1969); also R. Eckaus, “The ed Areas," American Economic Review ( September 1955). Areas,” (September 120 presence of an excess supply of labor, the real wage would not decline! The long-run capilong—run adjustment would entail augmenting or replacing the capistock with a capital stock embodying different technology. tal stock A A second source of concern with capital formation arises from its capacity—augmenting function. capacity-augmenting It derives from dissatisfaction with decentralthe full equilibrium capacity growth path generated by the decentralized market process. Here the actual (or prospective) capacity growth path is compared to some desired growth path. The determination of such aa desired growth path may be based on some implicit criteria or, more formally, on the solution values of aa full-blown multiperiod optimization problem involving the Ramsey-type functional, 66 f~ u~(c,t) dt = f~Ft(K~ k, t) dt. The market-determined growth path is often judged to be suboptimal or inconsistent with the target path, even when full employment is concon- tinuously maintained. tinuously Myopia, identified identified by by Pigou Pigou as “defective "defective teleteleMyopia, scopic faculty," marketfaculty,” is often singled out to explain why the market— intensity stops short of the desired determined equilibrium capital intensity (deeper) capital intensity. The capital intensity associated with the 6For Ramsey Economics concerned with optimal economic growth, see Capital Development S. Chakravarty, Ca ital and Develo ment Plannin~,especially Plannin , especially Chapters 1969 and the forward by Paul Samuelson; also M. I - IV (M.I.T. Press, 1969) Intrilligator, Mathematical Optimization O timization and Economic Economic Theory, Theor, Chapter 16 (Prentice-Hall, 1971 . For aa discussion of a functional, which dede(Prentice—Hall, 1971). fines a real number for any given function defined over aa domain, see Martin's R. G. D. Allen, Mathematical Analysis for Economists (St. Martin’s Press, 1934). - 121 golden rule of accumulation may be identified identified as the target intensity.77 “required” policy actions are envisioned as steerIn this paradigm, the "required" steering the economy toward aa higher growth path of consumption at a cost of reduced consumptions during the transition periods. Given the impossiimpossi- bility theorem of Arrow regarding the derivation of consistent aggreaggregate preference orderings, it is clear that the choice of the utility functional to be maximized poses aa fundamental challenge challenge to the solution of "inappropriate equilibrium capital intensity” intensity" problem. of this “inappropriate reThe re- “capital shortage" shortage” controversy may be interpreted in this context cent "capital as expressing the concern about the adequacy of saving to finance the “required” capital formation. "required" The primary concern is about the potenpoten- "intial "savings “savings gap" gap” as opposed to the (Keynesian) concern about the “investment gap" gap” touched upon earlier. earlier. 88 7Along the golden rule balanced growth path, consumption per capita is maximum. See E. Phelps, “The "The Golden Rule of Accumulation," Accumulation,” American Economic Review (September 1965) and J. Robinson, "A “A Neo—classical Neo-classical Theorem," Theorem,” Review of Economic Studies (June 1962). 8There are two diametrically opposed approaches to viewing aggreaggregate capital formation from a longer-run longer-run perspective. One is that of "optimization" "utility-maximization" approach. Under this approach, “optimization” or “utility—maximization” aggregate capital formation is viewed as endogenous, that is, as the outcome of deliberate deli berate life—cycle l ife-cyc 1e consumption decisions made by the inindi vi dual spending units in the economy, given their tastes and perperdividual ceived market and productive opportunities. In this approach, the choice of future consumption paths and the current investment decisions are jointly and simultaneously made. The other approach is the ''con“consistency” or "planning" “planning” approach. This approach underlies the recent sistency" “capital shortage.” concern for "capital shortage." Under Under this approach, the choice of a future consumption (and growth) path is made outside the market process, presumably by reference to some collective preference ordering. The "required" “required” capital formation is then computed to achieve such aa path. The concern for capital adequacy in this context is really really for the conconcern for the potential "saving “saving gap" gap” to achieve the "required" “required” capital formation and such a concern can arise only under the consistency consistency (continued) 122 The third source of the recent concern with capital formation apappears to be associated associated with the general realization that the size of current and prospective capacity output has fallen short short of what was expected. This shortfall is due partly to those measures, such as inin- creased regulatory regulatory constraints which tend to increase the capital capital-out-output ratio, and partly to those events, such as an increase in the relarela- tive price of energy, which accelerated obsolescence of existing capital stock. The problem posed by this discovery appears to be essentially the same as the one associated with the second source discussed above. In both cases, capital formation is viewed as aa problem involving interinter— temporal utility maximization by reshaping the time path of consumption. However, the urgency with which the problem is viewed may differ, Inasmuch as the growth path is perceived to be permanently lower than inasmuch that which was taken for granted earlier, in the absence of redoubled efforts at capital augmentation. Intertemporal Choice and Equilibrium Capital Intensity Intensjt1 The concern for capital formation is aa derived concern, that is, a concern derived from the desire to achieve aa fuller utilization of scarce resources over time and/or to alter the time-shape of consumption flows, given the full resource utilization rates. The mode of analysis 8 (continued) consistency approach. For the distinction between the optimization and consistency approach, see Chakravarty, QP_. 7-10; also K. Fox, J. Sengupta ~ cit., cit., pp. 7—10; Policy (North— (Northand E. Thorbecke, The Theory of Quantitative Economic Poijçy Holland, 1973), pp. 448-449 and 465-466. 123 implied by the latter concern is necessarily intertemporal in character and collectivist in orientation. One posits an existence of an instruinstru- mentality, such as the state, through which public choice regarding the desired capital intensity is to be implemented. The objects of choice in this intertemporal decision framework are different consumption paths over time associated with different transformations of dated consumption options 9 options. From the constraints in this multiperiod decision problem, e.g., the initial endowments of resources, the expected technology of producproduc- tion and exchange and other initial conditions, one can in principle derive the feasible objects of choice. inevitable unAbstracting from inevitable un- certainty, and possibly from the Strotz paradox as well, a choice which maximizes a utility functional may, in principle, be made.’° made. 10 At this level of abstraction, all of the information required to define aa set of technologically feasible consumption paths is assumed to be available without cost. Should aa well-defined utility functional be available, except for the purely computational costs involved, the decision problem becomes trivial. 9For a modern extension of Irving Fisher’s Fisher's seminal work on investinvestment viewed as a problem in intertemporal utility maximization, see J. Hirshlejfer, (Prentice—Hall, 1970). Hirshleifer, Investment, Interest, and Capital, (Prentice-Hall, 10The Strotz paradox or phenomenon refers to the possibility lOThe possibility that, even even with perfect foresight, time perspective at any point in time distorts the choice of a consumption path over aa time horizon in such a way that either the choice is revised or an occasion for regret arises subsequently. See R. Strotz, "Myopia “Myopia and Inconsistency in Dynamic Utility Economic Studies (Vol. XXIII, No. 62, 62, Utility Maximization," Maximization,” Review of Economic 1956); Chakravarty, Chakravarty, op. cit., pp. 41-45; also R. Pollak, "Consistent “Consistent Planning,” tEonöiiffc Studies (April 1968). Planning," Review of tconomfc 124 The principal policy problem in such aa full-information world is to define a collective preference ordering function over alternative full capacity consumption paths. event that the optimum consumption In the event path so chosen differs from the market-generated path (evolving (evolving along a capacity path), the intertemporal resource allocation decisions will be centrally directed. Since, by assumption, the only argument appearing in the preference functional is the alternative consumption paths, the conflict over centralized direction and decentralized market direction of resource use does not arise arise in this paradigm. However, a question regarding the appropriate time horizon remains even at this level of abstraction inasmuch as the choice of any particular consumption consumption path possibility paths paths over a given horizon restricts the set of consumption possibility beyond the chosen horizon. It does this by predetermining the initial conditions in the future. Underlying this view of optimal consumption choice over time are 11 nonmonetary (optimal) growth theories.11 various strands of nonmonetary(optimal) Different rates of capital accumulation are associated with different equilibrium capital intensities and growth paths of income and consumption. HowHow- ever, along the balanced growth paths where capital intensities remains constant, growth rates of income and consumption remain invariant to the rate of capital accumulation. In the study of such comparative dynamics, dynamics, it is generally assumed that full employment is obtained uniformly; the 11 For a survey of such theories, see F. Hahn and R. Matthews, "The ~For “The Theory of Economic Growth: AA Survey," Journa 1 , (December 1964); Survey,” Economic Journal, also H. Wan, Economic Growth (Harcourt Brace Jovanovich, Inc., Inc., 1971). 125 focus of analysis is on the consequences of different consumption—saving/ consumption-saving/ investment decisions on the steady state paths of levels in income and consumption. Although the focus is generally on the characteristics of the steady state paths, the explicitly intertemporal framework enables considerations of such questions as (1) the feasibility feasibility of attaining aa particular path such as the Golden Rule path via the competitive process and (2) the appropriateness of considering only the steady state values, but not the transient values, of consumption in devising growth polipolicies. For example, it is now well known that a competitive solution may yield inefficient steady state paths should the rate of interest fall 2 short of the rate of growth due to excessive capital deepening.’ deepening. 12 Policy in the LongLong-run The Nonneutrality of Money and Monetary Po1icy~in The preference for a market-determined solution to the intertempointertempo- ral resource allocation allocation problem is yet another strand characterizing (optimal) growth theories. Such a preference is based based on various effieffi- ciency and equity considerations. quesAccordingly, to deal with the ques- tion of whether the introduction of money money alters the market-determined balanced balanced growth path, money is introduced explicitly into growth 3 theories both as a medium of exchange and a store of value.’ value. 13 12 see, for example, P. Samuelson, “An "An Exact Consumption—Loan Consumption-Loan Model ‘2See, Money," Journal of Interest With or Without the Social Contrivance of Money,” of Political Economy (December 1958); P. Diamond, “National "National Debt in aa Model," Neoclassical Growth Model ,“ American Economic Review (December 1965) Accumuand D. Cass and M. Yaari, "Individual “Individual Saving, Aggregate Capital Accumulation, and Efficient Growth," Growth,” in Essays on the Theory of Optimal Economic Growth, edited by K. Shell (MIT Press, 1967). 1133see See Samuelson, gp. cit., pp. 481—482; “Money and EcoEco— Samuelson, QQ_. 481-482; J. Tobin, "Money Econometric~JOctober ~ nomic Growth,” Growth," Econometri caTOctober 1965); J. Stein, Money and Capacity Growth (Columbia University Press, 1971). 126 When the issue is joined in terms of comparative dynamics involving two economies, economies, identical in every aspect but for the use of money, there is not likely to be much dispute about the nonneutrality of money, even in the long run. For example, with the social contrivance of durable money, the real rate of interest cannot be driven below zero with stasta- tionary or growing population. This fact alone will help forestall the emergence of inefficient steady state path, which is a logical possipossibility in some intergenerational consumption-loan models. models.14 However, nonneuthere are likely to be as many different explanations for such nonneu— trality as there are different diagnoses of the essential differences between money and barter economies. The concept of the nonneutrality of money considered above is fundamentally different from that of the nonneutrality nonneutrality of monetary policy in the long run, given an on-going money economy. , Here, monetary policy is to be construed broadly as a vector of actions which results in the differential growth gro~thrates rates in the nominal money money stock. There is as yet no consensus in the answer given to the question of nonneutrality of monetary policy in the long run because the question regarding the effect of monetary policy on equilibrium capital intensity is unresolved. The much-debated classical dichotomy appears to rule in favor of neutrality of monetary policy in the long run. However, under the classical paradigm, the neutrality of monetary policy is obtained under a specialized monetary policy regime, which insures portfolio balance at a stable price level. To clarify this statement, statement, consider the usual 14 see, Q_P_. cit. See, for example, Samuelson, ~p. 127 comparative static analysis of the effect of a one-shot change in the quantity of the nominal money supply on real variables of the stationary economy. The steady state values of the real variables, variables, including the real balances per capita, remain invariant, invariant. At the new equilibrium, after the initial disturbance, the price level is higher but constant. The cost of holding real balances, therefore, remains unchanged and hence the equilibrium quantity of real balances held is unchanged. ConCon- sider now an alternative monetary policy which engineers aa maintained money supply at some constant rate. increase in the nominal money To the exex- tent such aa policy generates an expectation of inflation, the cost of holding real balances will rise and the initial portfolio portfolio balance will be disturbed. Whether this policy would equiwould induce a change in the equi- librium capital intensity is an open question. conThe same type of con- siderations are involved in the analysis of comparative dynamics of an economy growing steadily at the natural rate of growth. tentative answers may be given to the question of the nonneu— nonneuSome tentative trality of monetary policy in the long run. In the event that the rate of increase in the nominal money supply is greater than the natural rate of growth, neoclassical monetary growth theories (characterized by the absence of an independent investment function and the presence of real wealth effect in the saving function) obtain capital deepening. The mechanism by which this nonneutrality is obtained, for aa monetary policy which induces a non-zero rate of equilibrium inflation rate, is known as the inverse wealth-saving relationship. A A consensus appears to have emerged on the theoretical foundation of the wealth-saving wealth—saving relationship .tnduced by changes in monetary policy: 128 both the change in x, the rate of growth of the nominal money money supply, relative to the rate of growth in output and also the way such aa change in xxis is engineered are crucially 15 policy.15 important in determining the neutrality of monetary policy. In Metzler's Metzler’s exploration of the question, “heretical” question, he obtained aa "heretical" result of nonneutral monetary policy even in the context of fully emem16 The conclusion he drew from the analysis economy. 16 ployed stationary economy. one—shot open market operation altered (lowered) the equilibwas that a one-shot equilibrium interest rate, rate, even though the price level was unchanging in the new equilibrium, albeit at a higher level. Real balances in the new 17 This non— equilibrium.17 equilibrium were greater than in the initial equilibrium. non- classical result is due to the capital levy aspect of the operation (analogous to an increased budget surplus), rather than being due to operation.’188 For example, such pure monetary policy operation. such a pure monetary once—and—for—all money injection policy action as a once-and-for-all injection through government transfers is not expected to alter the solution values of real variables. variables. 15 ‘5For For a survey of extensive literature literature in this area, see A. Meltzer, “Money, Intermediation and Growth," Growth,” Journal of Economic Literature "Money, Literature (March 1969); also Stein, ,gj. Q.l)_. cit., pp. 21-22. 16 ‘6L. Metzler, “Wealth, Interest,” Journal of "Wea 1th, Saving and the Rate of Interest," Political Economy (April 1951). 17 This conclusion on the new equilibrium real balances is not the This conclusion on the new equilibrium real balances is not the one reached by Metzler himself. It is inferred from his conclusion about the lower equilibrium equilibrium (real) interest rate and his assumption of fully employed economy. An additional assumption that the demand for real balances is of private real balances is invariant invariant to to the the level level of private real real wealth wealth is is sine sine ~a non. 18see ~p. cit., p. 28. 5ee Meltzer, Q.l)_. 129 Such a policy would result in aa once-and-for-all once—and—for—all increase in the price level but would would affect neither the equilibrium real wealth, including including the real balances, nor the equilibrium equilibrium market and real interest rates. inIn contrast, a pure monetary policy designed to permanently in- crease the growth rate in nominal money relative to that of output has aa nonneutral, positive effect on the capital intensity in the Tobin-type 9 In such models, the deepening in Neoclassical monetary growth models.’ models. 19 the equilibrium capital intensity is obtained through the following mechanism: (1) an increase in the anticipated rate of inflation inflation engiengi- neered by a well-publicized permanent increase in the rate of monetary expansion increases, through the Fisher effect, the market interest rate; (2) the entailed increase in the cost of holding real balances reduces the equilibrium amount of real balances; (3) the fall in real wealth ocweal oc- casioned by the reduction in real balances increases the rate of saving and the rate of capital formation through the posited inverse wealthinsaving relationship. ···· .... ..The capital deepening and a lower real rate of interest are the results. ~ .-· The logic of this line of thought points to the implementation of an accelerated target rate of anticipated inflation if accelerated capital formation is desired. This intuitively anomalous result stems from the 19 The conclusion holds only for an on-going monetary economy. RelaRelaon-goingmonetary tive to a barter economy, aa monetary economy has a lower capital capital intensiintensiTobin-type Neoclassical monetary growth models. Such models models ty in the Tobin-type are characterized by the absence of an independent investment function and the presence of real balances in the saving function. See Tobin, QE_. flp,. Stein, QE_. 47-48; also M. Sidrauski, cit., and Stein, pp. cit., pp. 6-9, 33-34 33—34 and 47—48; "lnfl ati on and Economic Growth,” Growth," Journal of Political Economy (December “Inflation 1967). 130 130 invalid use of ceteris paribus. Systematic destruction of real money capital occasioned by the increased expected rate of inflation in the model merely shifts preferences regarding wealth portfolio composition, without affecting the attainable global production frontier. no real productive role in the model. Money plays Money is nonneutral only in the sense of altering the preferred asset compositions but very much neutral "effective" global production possipossiwith respect to the attainable or “effective” bility frontier. attainMoney, however, is a productive asset (i.e., it affects the attainable production frontier) fundamentally because, by reducing transactransactions cost, It it increases the scope for division of labor. Derived fifi- nancial innovations based on the existence of money, in the form of primary and indirect securities, further the extent of division of labor. Increased degree of specialization specialization moves outward the attainable producproduction frontier because the distribution of resource ownership and producproductive opportunities happen to be in general “non—coincident.” "non-coincident." From this perspective of the role of money in the technology of exchange, then, any attempt to promote capital deepening deepening by engineering aa programmed anticipated inflation must be judged quixotic. What would be the effect of the open market operations of the type the central bank engages in, whereby the non-interest bearing base money is exchanged for interest bearing government debt? Whether or not an open market operation has a nonneutral effect on the equilibrium capital intensity and growth path depends crucially on the extent of tax discounting (the capital levy aspect) and upon whether the operation is part of a plan to permanently change the growth rate in money relative 131 to the growth rate in output. With perfect discounting of future tax liabilities liabilities associated with interest bearing government debt, i.e., i.e. , government bond is not aa part of private net wealth, and a one-shot one—shot open market purchase, the effect on the equilibrium capital intensity would be as negligible as in the preprevious case where once—and-for-all once-and-for-all increase in the nominal money stock was brought about by pure government transfers. In the event event that tax one—shot open market purchase would be discounting is imperfect, a one-shot equivalent to the Metzler’s Metzler's capital levy case. In the event the open market purchase is part of a well—publicized well-publicized program to engineer aa change in the rate of anticipated inflation, such an attempt to induce capital deepening by monetary acceleration would again appear to be quixotic. The two analytically separable questions regarding nonneutrality may be restated as: (1) Does money matter in the long run? (2) Does monetary policy matter in the long run? The answers considered above in terms of the prevailing paradigms of comparative statics atemporal . comparative statics and comparative dynamics are atemporal. only with the steady state solutions. They deal Given that the objective of moneGiven mone- tary policy is the optimization of a given objective functional over the relevant policy horizon, there is no presumption that the choice among primarily, upon the various policy options can be based solely, or even primarily, the characteristics of the steady state solutions. Nor is there any presumption that the focus should be on the characteristics of transient response to the chosen monetary policy action. action, 132 The explicit interinter- temporal choice framework indicates that the policymaker must assess the characteristics of both the transient and steady state state responses of the economy to the chosen policy action. The above way of viewing the the elements of an optimum policy appears to make the requirements for such a policy stringent. However, such aa oversimplification in the following fundacharacterization is itself an oversimplification fundamental sense: impTicitly assumes that aa policymaker has reliable it implicitly information about the past evolution and current state of the economy. characteristics of the initial condicondi— That is, it is assumed that the characteristics 20 In tions are known and the requirements for observability are met. the absence of such assumptions, the recent history of shocks to the the economy has not yet fully adjusted, must be identiidentisystem to which the must be fied and allowed for in assessing the likely evolution of the economy, both with and without the contemplated policy action. In addition, the behavioral parameters of the model model are implicitly implicitly assumed to be timetime— and policy-invariant. policy—invariant. To the extent such assumptions do not hold, the efficacy of any pol icy action chosen on the basis of the projection of efficacy policy such aa model will be attenuated. 20In 1n control system theory, observability or or reconstructibility reconstructibility rerefers to the property of the model model which enables one to determine uniqueuniquely the past states of the system from a set of currently available obobservation data. See M. Aoki, O mal Control and SS stem Theor in 0 timal Dynamic Economic Analysis (North-Holland Publishing Company, 1976 ,, pp. 108-11. 133 Is There a Role for Monetary Policy In Promoting CCapital Formation? ital Formation? Perusal of the recent literature literature dealing with the capital formation problem indicates that the focus placed on monetary policy is primarily from the perspective of nonneutrality of monetary policy in achieving 21 The question the full capacity output.21 question regarding the nonneutrality of autonomous monetary policy on equilibrium capital intensity is seldom raised explicitly explicitly in aa policy context. The role designated for monetary accommopolicy, in achieving the full capacity output, is typically an accommodative one of keeping the market interest rate from rising, while while a stimulative fiscal policy, such as accelerated depreciation and investinvest22 ment tax credit, is undertaken to promote investment.22 The debate concerning the efficacy of such a policy revolves around assessments of its likely effects. different assessments In the first first instance, the condebate is an an empirical one arising from the absence of reliable or con- sensus scenarios for the evolution of the economy under alternative policy regimes. Also absent is a consensus reading of the true state of the economy. For example, is the underutilization of capital stock as 23 If widespread as the measured capacity utilization utilization rates indicate? indicate?23 If 21 See, see, for example, B. Bosworth, “The "The Issue of Capital Shortages,” Shortages," Needs," and R. Eisner, "The “The Corporate Role in Financing Future Investment Needs,” both in U.S. Economic Growth From 1976 to 1986: Prospects, Problems and Patterns, Vol. 33 - Capital, Studies prepared for the Joint Economic Economic ComCommittee, U.S. Congress, November 15, 1976, and the works cited therein. 22 See, see, for example, A. Brimmer and A. Sinai, "The “The Effects of Tax Policy on Capital Formation," Journal of Finance (May 1976). Formation,” 23 since this passage was written, the Federal Reserve Board pub23 pubSince lished aa substantially revised series on capacity utilization rates. The utilization rate for the third quarter 1976 was revised upward seven percentage points, from 74 to 80.9 percent. — 134 the numbers are to be believed, would not policies designed to increase utilization rates directly be more likely to be more effective capacity utilization in inducing investment than the policies designed to reduce the rental price of capital? If, on the other hand, the numbers are regarded as having substantial downward bias because of the underestimate of the extent of capital obsolescence (due to increases in relative price of energy, and more stringent regulatory requirements), would not policies 24 designed to stimulate investment be more effective than otherwise?24 on capital Related uncertainty about the extent of policy effects on formation emanates from our incomplete knowledge about the effect of exexpectations on the way market participants perceive and respond to aa policy measure. preThere appears to be an emerging consensus that the pre- vailing state of expectations plays an important role in shaping the reresponse to certain policy measures. However, aa successful modeling of the formation and revision of expectations (policy, price, income, etc.) has been elusive. Consider, for example, the problem of assessing the relative merits of interest rates and monetary aggregates as the the targets of monetary policy. Recent analysis by Sargent and Wallace shows that Poole’s apparently sensible results, that the choice depends on the Poole's structural parameters and the covariance structure of the disturbance terms, are conditional upon the implicit implicit acceptance of the adaptive 24 24For an analysis which adduces significant indirect evidence corroborating the view that there is such aa downward bias, see D. “The Link Between Karnosky, "The Bet1veen Money and Prices - 1971—1976,” 1971-1976," Review, Federal Reserve Bank of St. Louis (June 1976). — 135 25 Should expectations be generated rationally, hypothesis.25 expectation hypothesis. Poole's results no longer hold. Poole’s Even when it is granted that our reading of the current state of unthe economy is accurate, i.e., that there is widespread, persistent un- employment of both capital and labor, we cannot formulate an appropriate policy in the absence of a correct diagnosis of the causes of such perper- sistent unemployment. It would not be enough to single out deficient aggregate demand as the proximate proximate cause, even if it were true. true. What is required is an analysis of how such a deficiency emerged and why it perpersists. Keynes’ For example, consider Leijonhufvud’s Leijonhufvud's interpretation interpretation of Keynes' diagnosis of the root cause of the Great Depression. The persistent dede- ficiency in aggregate demand was diagnosed as reflecting reflecting the "co-ordina“co—ordinafailure” between the saver and the entrepreneur, due to a "low" ‘low” tion failure" 26 In the latter phase price of capital goods relative to money wages.26 “low” price was due to the pessimistic state of the Depression, this "low" state of entrepreneurial expectations. entrepreneurial expectations. An implied policy prescription was fiscal ' policy a outrance, with an accommodative accomodative monetary policy, desiqned to policy!!_ 25 w. Poole, “Optimal Choice Choice of of Monetary Poole, "Optimal Monetary Policy Policy Instruments Instruments In In aa Simple Stochastic Macro Model ,“ Quarterly Journal of Economics Model," (May 1970); T. Sargent and N. Wallace, "Rational “Rational Expectations, the Optimal Monetary Instrument and the Optimal Money Supply Rule," Rule,” ,Journal Journal of Political Economy (April 1975). 26 A. Leijonhufvud, of Leijonhufvud, On On Keynesian Keynesian Economics Economics and and the the Economics Economics of Keynes (Oxford University Press, 1968), p. 409. 136 falsify the inappropriate entrepreneurial expectations. falsify In the earlier phase of the downturn, it it was based on a ''high'' “high” market interest rate, rate, is, a market rate higher than Wicksell's Wicksell’s natural rate, not the that is, state of entrepreneurial expectations. ' Monetary policy i outrance would policy~ have been the prescribed response to bring the market rate down to the rate. 27 natural rate. The following diagnosis of the causes of the current malaise is consistent with the relative price interpretation presented above. The initiating cause was the totally unforeseen reduction in the nation’s nation's wealth (productive capacity) occasioned by the rise in energy prices and various regulations. The implied reduction in capital intensity would cause a rise in the marginal productivity of capital and lower the real wage of the labor in aa world of malleable capital. However, in a world of putty—clay putty-clay capital, the downward adjustment of the real wage is dedeinvestment of vintage capital as well layed and follows the replacement investment inter-industry shifts in employment. as inter—industry Further, since the initial rere- duction in wealth and increased uncertainty regarding income and employemployment prospects induces increased rate of saving, aggregate demand is rereduced unless the implied increase in demand for future goods goods by savers is effectively effectively transmitted to the entrepreneurs. In the absence of an effective price signal to devote a greater proportion of current reresources for capital accumulation, the unemployment state emerges and persists. 27 27Ibid~p Ibid., pp. 409-416. 409-416. 137 Complicating the adjustment process are (1) widely held non-homonon-homogenous inflation inflatiQn expectations, (2) the overhang of the threat of yet putty—clay nature of capicapianother bout with an incomes policy, (3) the putty-clay tal which dampens the speed of adjustment toward new relative prices of capital and labor, and (4) an observed increase in the supply of labor induced by wealth and other effects. An additional factor which complicompli- cates and lengthens the adjustment in relative prices of capital and labor is the existence of indexed wage contracts, which became more prevalent as the legacy of previously unforeseen inflations. If labor bargained in terms of the real wage that prevailed in the wealthier period, the full equilibrium adjustment would not be obtained until the economy attains the previous wealth and capital intensity level via capital accumulation. Given the diagnosis of wealth loss due to capital obsolescence, the case for policy actions which accelerate the rate of capital acac- cumulation appears compelling. Unfortunately, Unfortunately, such permissive policies adjustm~ntprocess. may cause a delay in the market adjustm~nt process. Stimulative polipoli- cies might be interpreted as harbingers harbingers of either greater inflation, the imposition of an incomes policy, or both. would always exist in this uncertain world. But such possibilities So the central policy issue is, as always, a Bayesian one of constructing aa useful state—and—time state-and-time dependent decision matrix and assigning the best best state-of-the-arts probprob28 The task of assigning state-and-event—spaces.28 ability weights to state-and-event~spaces. 28For the Bayesian approach to decision-making under uncertainty, 5chlaiffer, Applied Statistical Decision Theory see H. Raiffa and R. Schlaiffer, (MIT Press, 1961); also Fox et al., ~ .QE_. cit., cit., Chapter 9. 138 utility weights to event-spaces would be that of the policymaker. utility The requirements for an effective policy sketched above appear to demand an impossible prescience of the economist-advisor. Since the Since source of difficulty is our ignorance of the precise nature of the state and structure of the economy (inclusive of the error structure), it may be inferred that there is little that the economist can can contricontribute. However, such an inference is unwarranted. unwarranted. Absence Absence of precise 29 does not entitle one to quantitative or even qualitative knowledge29 invoke the principle of insufficient insufficient reason. Rather, it it forces one to policies. recognize the limited scope for discretionary stabilization policies. As aa consequence, the focus is directed once again to the question fundamental to macroeconomic theory - namely, to what extent can the dede— centralized, real-world economy be regarded as aa self-adjusting self—adjusting system? This question was forcefully raised by Keynes in 1935, 1935, and reopened in 1969 by Leijonhufvud in his apt paraphrase of aa question posed by aa 30 microbiologist:30 microbiologist: 29We we have not yet resolved such fundamental qualitative issues as invariance of the parameters of the estimated the time- and/or policypolicy— invariance model. See, for example, R. Lucas, "Econometric “Econometric Policy Evaluation: AA Critique," Journal of Monetary Economics (Supplement 1976). Critique,” Mone~~~yjconomics 30 30J. J. Keynes, “A "A Self-Adjusting Economic System?" System?” The New Republic (February 20, 1935); A. Leijonhufvud, Keynes and the Classics: Two ~ nes' Contribution to Economic Thepa Theor (The Institute Institute of Lectures on Ke Keynes’ Economic Affairs, July 1969 1969).. 139 "An “An economy (organism) is an integrated unit of structure and functions. In an economy (organism), all transactors (molecules) have to work in harharmony. Each transactor (molecule) has to know what the other transactors (molecules) are doing. Each transactor (molecule) must be able to receive mestransactor messages and must be disciplined enough to obey orders. How has the economic system (organism) solved the problem of inter-transactor inter—transactor (molecular) communicacommunication?" tion?” The importance of price information and price incentives as signals and disciplines in the coordination of activities activities of decentralized transactors is clearly captured in this paraphrase. The significance of questioning the homeostatic capacity of the economy is that it it forces the analysis into an explicit general systems perspective, where time, history, and uncertainty play essential roles. It leads one to rere- examine the theoretical and empirical foundations underlying various apapproaches to stabilization policies. Such a reexamination reveals that different different approaches approaches are based on different diagnoses of: (1) the dydy- namic properties of aa particular economy, such as its stability, speed and amplitude of response, observability and controllability, controllability, and (2) the attained (or attainable) state of the arts in quantitative macromacro- economic policy. Consider the following alternative concepts of 31 policy:31 stabilization policy: 31 For a fuller 31 fuller discussion of the concept of stability economstability used in economics and the alternative concepts concepts of stabilization policy, see L. Andersen and J. Yang, 'The "In‘The Economy as a Control System: Implications for “Inherent" Model in} and Simulation, Volume 55 Part Part 22 herent” Stability Issue,' Issue,’ in Modeling 1974) and J. Yang, “The (Instrument Society of America, 1974 ''The Inherent (In) stability of the Economy: An Interpretation," Interpretation,” (unpublished paper, 1975). stability 140 1. The economy is unstable; hence, it it must be made stable. 1. Since stability is aa concept associated with the nature of response of a given dynamic system to aa given stimulus, the objective of the stabilization policy is to change the response characterischaracterissystem, tics of the system. so— Such aa policy would would be a subset of a so- called structural policy; 2. 2. The economy is inherently stable but its speed of adjustment is unsatisfactory. The aim of policy again is to change the nana- ture of the system's system’s response to aa given stimulus; 3. The nature of the response response of the system to a shock is satissatisfactory. The root cause cause of difficulty lies, lies, however, in the nature of disturbances impinging on the system. The thrust of disturbances. policy is to neutralize the effects of such disturbances, Such aa policy may be termed “purely "purely compensatory” compensatory" and its successful implementation limited only by our ability to forecast the ararrival of shocks, and to neutralize them; 4. 4. The quality of response of the economy econoffiY to different sources and/or magnitudes of shocks is not uniform. It It is useful to classify shocks along policy and non-policy non—policy origins and the former into monetary and non-monetary lines. The aim of monemone- tary stabilization stabilization policy is the avoidance of policy—induced policy-induced monetary shocks. Here, shocks are to be construed construed as "innova“innova- tions'' tions” in the given time series. These various concepts of stabilization policy provide aa framework to assess different approaches to stabilization stabilization policy. Such approaches range all the way from Simon's Simon’s constant money supply rule to the optimal 141 32 feedback control with stochastic time—varying time-varying coefficient coefficient model. mode1.32 The recent rediscovery of the optimal control framework (pioneered by Ramsey in the 192Os) 1920s) for stabilization policy has had the salutary effect of redirecting our attention to the fundamental normative and positive issues involved in policymaking. positive In this framework, policy decision problems are explicitly explicitly acknowledged as Bayesian and inter— intertemporal. explicitly chosen. The policy horizon must be explicitly Uncertainty about the model structure, observational errors, and nonpolicy shocks must also be confronted by the decision maker. Even the problem problem of stochastic preference could be dealt with, at least formally. The concon- trol approach also gives content to the short-run short—run and long-run long—run distincdistinctions, which are often left imprecise. distincOne may well argue that the control framework blurred the distinction between rule vs. authorities. Even the stochastic feedback concon- trol with filtering, which specifies a policy reaction function, may be construed as aa form of rule. But, such an interpretation misses the essential distinction that aa Rule is characterized by the absence of policy "innovations." “innovations.” In an uncertain world, even if if the agents were privy to the same information set and the control law guiding the monemonetary authority, authority, ex post evolution of policy will have “innovations” "innovations" rereflecting either the model or exogenous non-policy shocks. 32 32H. H. Simons, “Rules "Rules vs. Authorities in Monetary Policy,” Policy," Journal of Political Economy (February 1936); G. Chow, Analysis and Control of J. Kalchbienner Kalchbrenner Dynamic Economic System (John Wiley and Sons, 1975), also 3. "On the Use of Optimal Control in the Design of Monetary and P. Tinsley, “On Policy," Special Special Studies Paper, Federal Federal Reserve Reserve Board Policy,” Studies Paper, Board (July (July 1975), 1975),~ 142 It is the inevitable inevitable lot of a decision maker to act, even in the presence of uncertainty. Acquisition of knowledge helps us to reduce uncertainty, but the inadequacy in the current state state of our knowledge of both the model and error structure of the economy is considerable. considerable. The recent explorations into the potential role that modern optimal concontrol theory could play in the conduct of stabilization policy helped to redirect our attention toward many of the unresolved normative and posiposi- tive issues in policymaking. Aside from the fundamental problem of choosing the objective functional, the problems arising from delayed obobservations and the absence of a clearly dominant model have been thrust into the center stage where they properly belong. As aa consequence, we rehave richer and better defined substantive issues to guide further re- search and base policy deliberations. Unfortunately for policymakers, the clearest signal to be extractextract- ed from this exploration is that modeling the workings of the modern decentralized economy is more like modeling aa biological biological system than an engineering system. The problem of stochastic stochastic time-varying coefficients context. 33 In addition, it has been forceforcenaturally arises in such a context. fully impressed upon us that expectations must be modeled to understand and “control” forma"control" economic behavior but the processes determining the forma- tion and revision of expectations are only dimly understood. For 33The time-varying time—varying parameter models include random—coefficient random-coefficient models and systematically time-varying time—varying models, depicting, for example, the motion of guided missiles over space. For many important aspects of modeling and estimating time-varying parameter systems, see the report on a recent symposium on such systems in Annals of Economic and Social Measurement (October 1973). 143 example, a prominent explanation of the phenomenon of stagflation stagflation runs in terms of divergent price expectations between the consumer and the 34 producer.34 The problem is that we do not as yet know how to reliably model and influence these expectations. Outline of An Optimum Monetary Policy This diagnosis of the state of the arts, arts, in conjunction with the empirical judgments regarding the inherent stability stability of the economy, and the sources and effects of shocks, suggests an outline of the "optimum “optimum 35 Stabilization monetary policy" policy” for stabilization. stabilization.35 Stabilization must be construed as the effect of effect of policy which permits an approximation to a a fully cocoordinated solution characterized by the absence of excess demands and excess supplies in all markets. First, the optimum monetary policy must be an accomodative policy policy in the ultimate sense of permitting, more efficiently efficiently than any other feasible policy, a full coordination of temporal and intertemporal plans units. of decentralized transactor units, given the observations that Second, given 34K. 34 K. Brunner and A. Meltzer, Me 1tzer, "Introduction," Journa 1 of Monetary “Introduction,” Journal Economics (Supplement 1976). 35For a fuller discussion indiscussion of the competing competing diagnoses diagnoses of the inherent stability of private enterprise economies, see J. Yang, QP_. gp~. cit. and works cited therein; in particular, see L. Andersen, “The "The State of the Monetarist Debate” Debate" and accompanying "commentary" “commentary” by K. Brunner and L. Klein in Review, Federal Reserve Bank of St. Louis (October 1973) and K. Brunner’s Brunner's book review of Conference on Econometric Models of Cyclical K. Behavior, edited by B, B. Hickman, 1n in Journal of Economic Literature (September 1973), pp. 926-33. 144 the money economy is particularly vulnerable to shocks which attenuate “money conventions," conventions,” the pol policy icy must be one that maximizes the use of "money transacthe probability of preserving money conventions in all planned transac36 Third, the optimum policy must be "surprise-free," tions.36 “surprise-free,” in order tions. that monetary policy not constitute constitute an additional shock to which the economy must respond. Subsumed under this requirement is that monetary policy be credible in the sense that an announced change in policy (for whatever reason) is believed. Fourth, the indicator of monetary policy must be chosen such that it is as free of false signals as feasible. What would be the basis basis for identifying an empirical proxy for such a policy? The basis must be the accumulated understanding of the role which money and the price system play in coordinating the intertemporal consumption and production plans of decentralized decision units. The major elements of such understanding are: 1. Unanticipated inflations generate false trading and distribudistribution effects. Mill and Fisher understood this, whereas the in— innot. 37 flationists of the Birmingham School did not, 36 For the concept of money conventions, see A. Hart, Discussion in 36 money Proceedingssofa of a Sm Symposium osium on Inflation: Inflation: Its Causes, Consequences Conse uences and Proceedin Contra , edited by S. Rousseas New York University, 1968, Control, (New 1968), p. 56. 37For Mill’s Mill's surprisingly modern debunking of of the inflationist arguargument (advanced by the Birmingham currency school) essentially in terms of the distinction between anticipated and unanticipated inflation, inflation, see J. S. Mill, Principles of Political Economy (Reprints of Economic ClassEconomic Classics: Augustus M. Kelley, 1961), pp. 550—551; 550-551; for further references to je~J,Q,~hejj3eou,,,2f J. Viner, Studies in the Theory of the Birmingham school advocacy, see 3. & Brothers Brothers Publishers, 1937), p. 281 and International Trade (Harper & ThiTheory Lord Robbins, The Theory of Economic Development (MacMillan, 1968), p. 134. Fisher made a clear distinction between the effects of the antici— antici(continued) 145 2. Inflation expectations, when present, are most likely to be non-uniformly held. Such expectations inhibit the formation of futures contracts, in loan and employment, defined in fixed monetary units. The function of money as the standard of dede- ferred payments is attenuated and, as a consequence, the use of a money convention in evaluating futures contracts contracts is disdiscouraged. couraged. 3. Even the polar case of perfectly (uniformly and correctly) ananticipated inflation has undesirable consequences. While it is a useful concept for some theoretical inquiry, its occurrence is not likely to be significant empirically. 4. 4. Inflation expectations are not generated randomly, nor are they sustained in the absence of accommodating growth in the money supply. 5. Once inflation expectations are generated and incorporated in loan and wage contracts, vested interests would emerge to opoppose the subsequent monetary evolution which would falsify the embodied inflation expectations. The reason that inflation exex- inflations pectations appear to decay slowly is that actual inflations tend to keep pace to validate validate the prevailing expectations. 37 (contfh’ued) (continued) pated and unanticipated inflation, as illustrated in the following quoquothe real evils of changing price levels do not lie in these tation: '' ....the changes~~. changes p~~se, bbut ut in the fact that they usually take us unaware. It has been shown that to be forewarned is to be forearmed, and that a foreknown change in price levels might be so taken into account in the See I. Fisher, The Purrate of interest as to neutralize its evils,'' evils,” See Pur— chasm Classics: Augustus M. chasing Power of Money, (Reprints of Economic Classics: Kelley, 1963), 1963 , p. 321. “. . 146 • 6. Indexing of time contracts generates problems of its own, 38 especially with supply-induced shocks. 38 especially 7. The concept of the optimum supply of money, or optimum rate of • inflation, can only be defined relative to the attainable or inflation, effective global production possibility frontier. “noThe "no- tional” global production attaintional" production possibility frontier is not attainable in the presence of transactions costs, costs. The optimum money money supply enables the attainment of the outer—most outer-most frontier inside the the notional frontier, for any given financial technology. The reason is that, for aa given given financial technology, the optimum money maximizes the extent of specialization by minimizing the broadly—conceived broadly-conceived transactions costs. 39 8. 8. The distinctions between higher prices and rising prices on the one hand, and rising prices and aa rise in inflation expecexpectations on the other are seminal distinctions for understanding 38A problem of “over-exhaustion” "over-exhaustion" of the total product may emerge economy's productive capacity. with an unanticipated reduction in the economy’s For the problem associated with aa transition into aa regime of completecompletely indexed economy, see J. 3. Yang, "The “The Case for and Against Indexation: Perspective," Review, Federal Reserve Bank of St. Louis An Attempt at Perspective,” (October 1974), especially especially pp. 33 and 6; also M. Friedman, “Monetary "Monetary Correction," Correction,” in Essa Essayss on Inflation and Indexation (American Enterprise Institute for Public Policy Research, 197 1974),, especially p. 45. • 39 For a survey of the state state of the arts, including references, references, rerelated to "the mi crofoundati ons of money," “the new microfoundations money,” see R. Barro and S. Fischer, “Recent Developments in Monetary Theory," Theory,” Journal of Monetary Economics "Recent (Apri 1 1976). (April 147 147 monetary phenomena. phenomena. 40 Fisher, and Marshall before him, considered the property of an ideal monetary policy from the perspective of intertemporal coordination through the price system. Both prescribed a policy directed toward sese— 41’ curing both ex ante and ex post stability stability in the monetary yardstick. yardstick.4 Their prescription is consistent with the broad contours of the roles of money and the the price system summarized sumarized above. the adoption They proposed the stability goal. of indexation, the tabular standard, to achieve their stability goal. it would be difficult difficult to achieve Without the use of indexing, however, it ex post stability continuously. Since there are problems with indexing, and more fundamentally, bebecause achieving achieving ex ante stability would be sufficient to approximate “optimum” ideal policy, my suggestion for an empirical proxy to the "optimum" policy outlined above would have two elements: moneFirst, specify a mone- tary aggregate as the indicator of policy on the relative controllability basis; second, direct the policy consistently toward the prevention of the emergence of inflation expectations. For a growing economy on aa balanced growth path without technological progress, such aa policy would 40 The rhe various diagnoses of the causes of inflation in terms of the advariants of market power hypotheses (such as the union monopoly or administered pricing)often do not make the distinction between higher and rising prices. The second distinction between the unanticipated and ananticipated inflation is, of course, of pivotol pivotal importance. 41 See see A. Marshall, “Remedies "Remedies for Fluctuation of General Prices,” Prices," in Memorials of Alfred Marshall, edited by A. Pigou (New York: Kelly and Millman, Inc., 1956); I. Tfsher, Fisher, Stabilizing the Dollar (New York: MacMillan, MacMillan, 1920). 148 • 42 aim at providing nominal money stock growing at the natural rate.42 ~us ion Conclusions • This paper identifies the sources of the widespread concern about capital formation, primarily primarily to uncover those aspects which monetary policy may successfully address. It has been shown that the usual focus is on the nonneutral effect of monetary policy on on capacity output rather than the more intractable and speculative possibility possibility that monetary policy may be nonneutral with respect to equilibrium capital intensity. The proper framework in which to assess the impact of monetary policy on capital formation was judged to be intertemporal and, under uncertainty, Bayesian. Several concepts concepts of the role of stabilization policy were explored, and different different approaches to such aa policy, ranging from Simon's Simon’s constant money rule to the modern stochastic optimal optimal concon- trol, were considered. The problems of formulating aa policy were illuillu- strated for aa particular diagnosis of the genesis of the current ecoeconomic malaise. The outline of an optimum monetary policy was given given in terms of an an absence of policy innovations, for a world where uncertainties about oboberror structures dominate. servations, expectations, and model and error The intertem— perspective maintained throughout was that of coordinating intertem• • poral decisions through the market system. After briefly identifying the major elements of the accumulated evidence regarding the roles of 42To help implement such aa policy for a growing economy, where capital intensities, the rate of population growth and technologies change, poses a severe economist-advisor, severe challenge to the economist-advisor. 149 ‘1 money and the price system, an empirical proxy for the optimum monetary specified in terms of the money supply and directed toward policy was specified preventing the emergence of inflation expectations. • • 150