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The Playing Field Is Level So Play



Look closely, and you can see that the foundation of a more prosperous U. S. economy is being slowly built. Inflation is down, labor costs are the lowest in the industrialized world, manufacturing productivity is up, exports are strong, and the trade gap is narrowing. Perhaps most important, U. S. business no longer is hobbled by a steeper cost of capital than its foreign competitors. For the first time in recent memory, financing costs are getting cheaper in the U. S. and more expensive abroad.

Economists who have looked into capital costs agree that the U. S. no longer is handicapped. By one measure, capital costs averaged 7.5% in the U. S. compared with 5.4% in Japan in the second half of the 1980s. But by the first half of this year, capital costs in the U. S. had dropped to 5.9%, while Japan's had risen to 6.1%. Declining interest rates and a strong stock market at home in contrast with rising rates and a weak, scandal-ridden exchange in Tokyo have combined to give the U. S. a significant investment advantage.

One troubling recent economic trend has been America's anemic investment performance. U. S. business capital spending is just 12% of gross national product compared with about 22% of GNP for Japan. Much has been made of Japan's management savvy as it became the world's most feared competitor in the 1980s, but its low cost of capital also played a major role. Japan's willingness to invest for the long run and America's obsession with the short term may have largely reflected different capital costs rather than cultural preferences.

The decline of U. S. capital costs vis-a-vis those of its trading partners has removed one of the last and most significant constraints on U. S. capital spending. And the relief has come at a time when opportunities and competitive pressures in the global market and slow labor-force growth at home make increased investment essential. America's future prosperity rests on how forcefully U. S. business responds to this promising reversal of fortune.

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