Growth Means Capital

December 18, 1961

The chief slogan of the self-styled liberals, once Full Employment, is now Economic Growth. Yet it is precisely the people who are most insistent on “a higher rate of economic growth” who exhibit the least understanding of how to achieve it. Nearly always they favor more inflation and more socialism—spending, deficits, controls, hostility to profits, punitive taxation—in brief, all the things that discourage true economic growth.

The central requirement for a continuous improvement in economic conditions is a continuous increase in the amount of real capital per head of the population—in other words, a constant increase and improvement in the plants, equipment, machines that increase productivity. Economic growth is the growth of capital formation. It is because the American economy puts more and better tools behind each worker that American wages and living standards are the highest in the world.

Yet growth in capital formation does not occur automatically. In recent decades it has been slowing down. This is the conclusion of a monumental study carried on since 1950 under the direction of Simon Kuznets for the National Bureau of Economic Research. His Capital in the American Economy: Its Formation and Financing is the seventh and final volume of the study.

DECLINE IN SAVINGS

Here are some of the significant findings. There is no support whatever for the thesis, so popular in the 1930s, that the American economy faces economic stagnation—that investment opportunities are drying up. On the contrary, the outlets for capital use have multiplied faster than the rate at which current product is saved. In the decades ahead “the supply of voluntary savings may not be adequate.”

Gross capital formation (which includes what corporations set aside for depreciation and replacement) has been comparatively constant over 85 years as a percentage of gross national product. It has declined from 22.6 percent (at constant prices) in 1869–88 to 17.6 percent in 1946–55. Corporations supply about two-thirds of gross capital formation.

Net capital formation, however, or the amount of new additions to the capital stock, has shown a distinct downward trend as a percentage of national income. For volumes in constant prices, the share declined from 14.6 percent in 1869–88, to 11.2 percent in 1909–28, and to 7.0 percent in 1946–55. For these additions to the capital stock, the relationship between corporate and personal contributions is reversed. Personal savings account for more than two-thirds of net capital formation.

Now if, as Dr. Kuznets declares, “capital formation is . . . our primary interest because it is essential to economic productivity and economic growth,” and if, “on a countrywide scale it represents the real savings of the nation,” we come to the problem of why real savings, as a percentage of income, have been declining.

ROLE OF HIGH TAXES

Here, I think, two factors can be emphasized—inflation and taxation. In periods of inflation, saving is discouraged because of the declining value of money. But a more constant factor is taxation. When the government takes 52 percent of corporate income, and taxes higher personal incomes at rates up to 91 percent, it soaks up and uses for current consumption or dissaving (particularly with deficit financing) precisely the funds otherwise most likely to go into saving and new investment.

If we really want a high rate of capital formation and economic growth, therefore, we will completely reform our Federal spending and tax program. We will allow rapid depreciation allowances, knowing that these encourage investment (and in the long run even higher government revenues). We will reduce the corporate tax rate and the extent of double taxation of corporate dividends. And we will slash progressive income-tax rates—especially the confiscatory rates above 50 percent.

If our primary aim is not to improve the productivity and real wages of labor, however, but to continue a purely vindictive policy of “soaking the rich,” we will hold fast to our present confiscatory tax rates.