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encouraging long-term equity holdings by top managers, directors, and employees. These actions should include increased use of restricted stock and/or restricted options to buy stock, with appropriate tax and valuation policies, to reward long-term executive and director performance.
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The board also supports capital market policies that encourage investors to hold assets longer term, including relaxing in appropriate ways regulations that require institutional investors to hold highly diversified portfolios. A capital gains tax incentive for long-term equity investments would also encourage a longer horizon while it mitigates double taxation of corporate-retained earnings. Other steps, such as incentives to encourage tax-deferred investors, including pension and mutual funds, to hold equities for longer periods, would also likely result in a better alignment of corporate goals and investor incentives.
TAKING THE LONG VIEW OF POLICY REFORM
Policymakers almost invariably respond to the most urgent problems. At a time when the Japanese economy is in recession and Europe is burdened by high unemployment and the cost of German reunification, it is tempting to think that the United States has no long-term structural problems. The board has concluded, however, that U.S. productivity, employment, and income growth are not satisfactory and will not be adequate without new policies being implemented to put the U.S. economy on a path of higher saving and investment over the longer run.
None of the policies described above will raise the U.S. investment rate immediately, but each will help to provide a foundation for shifting the capital allocation process in the United States toward a better balance in the value attached to short- and long-term earnings. The board has chosen not to recommend any number of short-term investment stimulus options in favor of a long-term strategy for improving the capital allocation process. The problems of suboptimal investment and slower productivity growth have small month-to-month effects but a large adverse effect on economic performance over several years. Policies to reverse these trends should similarly aim at long-term changes in behavior rather than short-term results. Our proposals represent significant steps toward developing a more productive capital accumulation system for the country in the next century.
The U.S. saving and investment rates, if they continue at present levels, will result in only modest productivity growth. American companies will lose competitiveness internationally. There will be sluggish
