Tools for American Workers: The Role of Machinery
and Equipment in Economic Growth
A monograph published December 1992 by the ACCF Center for Policy Research.
Introduction
What is the relationship between a nation's investment in machinery
and its economic growth? What has been the post-World War II productivity
growth of the United States? How does it compare to that of its international
competitors? What policy options do we have to promote saving, investment,
and growth in our economy?
These questions and others were explored at "Tools for American
Workers: The Role of Machinery and Equipment in Economic Growth,"
a symposium held on March 10, 1992, in Washington, D.C., by the American
Council for Capital Formation Center for Policy Research. Coming together
for he occasion were representatives of the nation's foremost academic
institutions, executive and legislative branches of the government, private
industry, the media, and public policy groups.
This book is a product of that symposium. In this book are the papers
presented as well as the comments offered by experts in pertinent fields.
This symposium and book are the seventh in a series "Tax and Environmental
Policies and U.S. Economic Growth," launched in 1990 by the American
Council for Capital Formation Center for Policy Research.
Participants in the first of three panels explored the relationship of
economic growth to investment in machinery and equipment. Harvard University
economics professor J. Bradford DeLong released the results of his work
in this area, reporting that such investment is by far the most important
determinant of economic growth. Examining economic growth in the post-World
War II period, Dr. DeLong found that each additional percentage point
of total output devoted to investment in machinery and equipment raised
growth of output per worker by one-third of a percentage point per year-an
implied real social rate of return on equipment investment of 30 percent
per year or more. Estimates for the entire past century, according to
Professor DeLong, suggest a slightly greater effect: Each additional one
percentage point of total output devoted to investment in machinery and
equipment raises the growth in output per worker by more than one-half
of a percentage point per year. These high rates of return, he concluded,
indicate that a nation's investments in machinery have a payback period
of five years or less.
He further observed that nations that do not achieve rates of machinery
investment and accumulation are unlikely to grow rapidly, and that national
saving rates are key determinants of such investment.
Mark W. Plant, acting undersecretary for economic affairs in the U.S.
Department of Commerce, and Charles Steindel, senior economist of the
Federal Reserve Bank of New York, served as respondents to Dr. De Long's
paper, adding their own insights and analyses to the results of his research.
Having explored the relationship between investment in machinery and
economic growth, the symposium participants turned their attention to
an examination of the performance of the U.S. economy in relation to that
of its main competitors. New York University economics professor Edward
N. Wolff presented his comparative study which documents the U.S. productivity
slowdown and explores the linkage between productivity growth and investment
in the U.S. and other Organization for Economic Cooperation and development
(OECD) nations.
Dr. Wolff found that the aggregate productivity growth of the OECD nations
outstripped that of the united States throughout the post-World War II
period. The U.S. economy remains the leading one in terms of overall labor
productivity, total factor productivity, and even capital intensity, but
its advantage has narrowed substantially.
Moreover, Dr. Wolff reported that the United States had the lowest rate
of capital-labor growth in this period; generally, this rate was less
than half that of the OECD average. He pointed out that the implications
of this decline are ominous. A slowdown in capital formation may hurt
labor productivity growth two ways: directly by reducing the rate of capital
deepening and indirectly by decreasing the rate of technical advance.
Dr. Wolff concluded that if the rate of U.S. capital formation, particularly
in machinery and equipment, does not increase, it is not clear whether
the United States can maintain its overall economic leadership.
Alan Murray, deputy bureau chief of The Wall Street Journal, and
Lawrence H. Summers, chief economist for the World Bank, were the respondents
to Dr. Wolff's presentation.
John C. Danforth, U.S. Senator from Missouri, provided a Congressional
perspective on the symposium's considerations. Pointing out that the United
States trails the industrialized world in savings and investment and is
lagging in economic growth, he called for reform measures to encourage
a more favorable climate for growth. These measures include restoring
the investment tax credit, making the research and development tax credit
larger and permanent, returning the capital gains differential, and relieving
the burden of the Federal Insurance Contributions Act (FICA) tax. To offset
the revenue loss, Senator Danforth endorsed the concept of a consumption
tax.
Senator Danforth's keynote address provided the transition for symposium
participants to the third panel, which considered policy incentives to
encourage the investment so essential to economic well-being. Patric H.
Hendershott, professor of finance and public policy at Ohio State University,
described ways in which various investment incentives affect the cost
of capital or investment-hurdle rates. His analysis included the impact
of a wide range of investment incentives, including elimination of the
double taxation of corporate income, reinstatement of an investment tax
credit, expensing of investment outlays, indexation of tax depreciation
allowances, and reduction in corporate and capital gains tax rates. He
concluded that incentives such as expensing, an investment tax credit,
and corporate integration can reduce the cost of capital or investment-hurdle
rates significantly.
Respondents to Dr. Hendershott's paper were: Alan J. Auerbach, deputy
chief of staff of the Joint Committee on Taxation; David F. Bradford,
member of the Council of Economic Advisers; Roger E. Brinner, executive
research director of DRI/McGraw-Hill; and John D. McCallum, assistant
comptroller of the Potomac Electric Power Company.
We are grateful to Senator Danforth and our presenters and respondents
for their contributions which made this symposium possible. We are also
grateful to the underwriters of our 1992 conference series and this book:
American Business Conference; American Insurance Association; American
Iron and Steel Institute; American Petroleum Institute; Association of
American Railroads; Baltimore Gas and Electric Company; Chemical Manufacturers
Association; Crum & Forster Insurance Companies; Edison Electric Institute;
Exxon Company USA; IBM Corporation; Illinois Power Company; LTV Steel
Company; National Coal Association; Nestle USA, Inc.; Potomac Electric
Power Company; Shell Oil Company; Synthetic Organic Chemical Manufacturers
Association; Starr Foundation; Texaco Philanthropic Foundation, Inc.;
Thermo Electron Corporation; and the Weyerhaeuser Company.
Throughout 1993, we will continue to focus our attention and resources
on salient points of tax and environmental policies and U.S. economic
growth. We look forward to sharing new information, analyses, and proposals
with you. We welcome your thoughts and inquiries about this and all other
American Council for Capital Formation Center for Policy Research programs.
Charls E. Walker, Chairman
Mark Bloomfield, President
Margo Thorning, Director of Research
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