CHEAP CAPITAL? DON'T COUNT ON IT
The articles "The playing field is level--so play" (Editorials, Aug. 5) and "The U. S. has a new weapon: Low-cost capital" (Economics, July 29) may be premature.
To be sure, interest rates have declined and stock/price earnings have increased, but these trends may be recession-induced and may disappear with recovery. The latter interpretation is bolstered by the fact that the fundamental causes of high long-run U. S. capital costs have not been corrected. These fundamental causes include our ultralow national saving rate and ultrahigh taxation of the income from productive investment.
Since the huge federal deficit is a major cause of the low national saving rate, a conceptually simple but politically difficult solution suggests itself. Enact a broad-based consumption tax (every other major industrialized nation already has one) and use part of the proceeds for deficit reduction and part to directly lower taxes on the income from productive investment.
Raising the saving rate would indirectly cut capital costs by lowering interest rates. Cutting the taxes on investment income would directly reduce capital costs.
Competitiveness considerations aside, the resulting stimulus to productive investment--so lagging in recent years--would help restore strong growth to what has been a very sluggish rise in U. S. living standards since the mid-1970s.
Charls E. Walker
Charls E. Walker Associates Inc.