...And Put Your Money Into New Equipment

While low inflation provides an environment conducive to investment, perhaps DeLong and Summers' most startling finding was the "supernormal" positive effect of investment in equipment and machinery on long-term growth. Their research, covering a number of developing and industrial nations from 1960 to 1985, indicates that a country investing 5% rather than 2% of national product in machinery would boost its total annual output by about 20% after 25 years. Indeed, the authors attribute most of the difference between growth in the U.S. and Japan to Japan's far higher equipment investment level.

Why does equipment have such a huge growth payoff? Summers notes that new technologies get "embodied" in new types of machinery and equipment. So a country that spends more on new machinery, rather than office buildings and shopping malls, gets more of the benefits from technological advances. And the gains from equipment investment have huge spillover effects for the rest of the economy, as workers and companies acquire skills in handling and organizing the new technologies.

Because Summers and DeLong believe equipment investment drives long-term growth, they advocate a permanent tax credit specifically for equipment investment. And though they don't press the point, such a policy could also provide needed short-run fiscal stimulus to the lethargic U.S. economy.

With Seymour Zucker in Jackson Hole, Wyo.

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