The Positive Sum Strategy Harnessing Technology for Economic Growth (1986) / Chapter Skim
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Capital Formation in the United States and apan
Capital Formation in the United States and apan
Pages 583-606
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From page 583... ...
The United States, which dominated these world markets after World War it, has seen its market share eroded in product after product as over countnes recovered from the war, invested in new and modern facilities, and employed the latest technology. The countries of the Common Market and those of the Pacific Rim, led by Japan, now compete vigorously and often very successfully inside the United States and in world markets generally.
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From page 584... ...
So great is the power of compounding that this enabled the United States to develop from a largely rural economy into the world's greatest industrial power and increase the real per capita income at about 2 percent per year while absorbing a huge increase in population. In the process, this nation overtook the United Kingdom, the greatest power of 1850, which is now not even one of the richer members of the Common Market.
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From page 585... ...
In other words, real per capita income grows at the rate of technical change, and labor quality improvement at a given capital:labor ratio. If, somehow, more investment in "old" technology alone takes place, there is a spurt in the shorts n grown rate until the same long-term grown rate at He new ratio of capital to labor is achieved; this long-term rate must still reflect the underlying rate of technical change and change in human capital quality.
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From page 586... ...
The column in Table 1 entitled "Unit Labor Costs," which combines data in local currencies win rates of inflation relative to that of the United States, shows that the United States still lags West Germany and Japan somewhat. However, when these data are corrected for currency values, He picture changes drastically, and the hard dollar, which neither management nor labor can control, becomes the overriding factor in relative competitiveness.
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From page 587... ...
Competitiveness not only involves productivity growth, which is strongly related to the pace of technological change and investment rates, but also requires labor wage rates and overhead costs Hat are competitive. As shown above, the United States is a high-wage country, and Japan, which has actually been increasing its wage rates faster than He United States over the postwar era, is no longer low cost relative to its Asian competitors.
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From page 588... ...
In Home Currencies Corrected Unit for Relative Labor Inflation Costs % Change % Change 1984 as % 1980 1984 1980-1984 198~1984 of 1980 France 118.0 Productivity 112.4 135.2 20.3 Wage rates 148.1 247.5 67.1 Unit labor costs 131.7 183.1 39.0 Germany 117.7 Productivity 108.4 122.3 12.8 23.2 Wage rates 125.0 152.1 21.7 32.9 Unit labor costs 115.3 124.3 7.8 17.7 Italy 117.0 Productivity 116.9 134.4 15.0 - 19.1 Wage rates 160.2 306.0 91.0 34.5 Unit labor costs 137.0 227.7 66.2 17.0 United Kingdom 111.0 Productivity 99.9 123.0 23.1 17.4 Wage rates 162.8 233.4 43.4 36.7 Unit labor costs 163.0 189.8 16.4 11.0 Japan 109.6 Productivity 128.6 167.4 30.2 54.1 Wage rates 121.2 146.0 20.5 42.6 Unit labor CoStS 94.2 87.2 - 7.4 9.6 United States 112.3 Productivity 101.7 115.6 13.7 13.7 Wage rates 132.7 169.4 27.7 27.7 Unit labor costs 130.5 146.5 12.3 12.3 SOURQ: See note 1 in this chapter.
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From page 589... ...
CAPITAL FORMATION IN THE UNITED SIATES AND JAPAN 589 Combined Currency Effects Effects Unit Labor Cost Corrected Unit Cost at Actual for Relative Based on Exchange Actual Exchange Rates Inflation Currency Rates % Change % Change 1980 1984 1980-1984 198~1984 % Change 1984 as % 1980-1984 of 1980 France 0.237 0.114 - 51.9 -43.3 56.7 66.9 Germany 0.550 0.351 - 36.2 - 41.6 58.4 68.8 Itchy 0.00117 0.00060 -48.7 -27.1 72.9 85.2 United Kingdom 2.326 1.336 - 42.6 - 39.8 60.2 66.9 Japan 0.0044 0.0042 -4.5 - 19.4 80.6 88.4 United States 1.000 1.000 0.0 0.0 100.0 112.3 NOTE: Based on exchange-rate movements through Fall 1985, the unit-labor~ost differentials between the United States and other countries shown In the last column would still be significant although somewhat smaller.
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From page 590... ...
Thus, the manufacturing sector is a vital part of the productivity growth of the entire economy and is the most robust.2 The Japanese have done much better in their manufactunug sector than has the United States, due to factors beyond the favorable dollar:yen ratio and the government restrictions placed by the Japanese on imports or manufacture in Japan by foreigners. They have been investing in their manufacturing sector at rates that are between 2 and 2/ times the U.S.
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From page 591... ...
IN the United States, personal savings have averaged about 5 to ~ percent of disposable income over a long period of time, whereas 3apan's personal savings rate is in Me 17 to 18 percent range (having been above 22 percent before 1975~- almost Tree times as great. In the United States,
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From page 592... ...
While savings in the corporate and household sectors vary from one country to the other, the overall effect is clearly that the greater Japanese savings rate contributes to the greater availability of capital for private invesunent (both governments run roughly comparable deficits as a percentage of GNP)
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From page 593... ...
. does seem to imply Hat tax policy can be valuable in promoting a transition to a more capital intensive economy." (Masahiko Aoki, in this volume, deals win the economic policies of Japan and its enduring high savings rate in some detail.)
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From page 594... ...
The many small companies in Japan are basically "mom-and-pop" enterprises incorporated to take advantage of the very favorable tax policies afforded small corporations; Hey contribute very little to overall growth, productivity, or technology. Probably 1 percent of Japanese companies pay He bulk of the taxes and, since corporate tax is a larger proportion of total revenue in Japan Han in He United States (about 28 percent versus ~ percent)
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From page 595... ...
3. Stability of government economic policies, which has also led to a high, sustained growth rate.
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From page 596... ...
Perhaps only a few of the dozens of companies in any portfolio will hit big and most will be failures, but those few successful ones provide (at low capital-gains tax rates) a fine rate of return for He overall venture capital pool, He rewards thus justifying all He risks taken.
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From page 597... ...
Moreover, it is He nominal interest cost that is deductible, not the real cost (as the Treasury I tax proposal of November 1984 would have provided)
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From page 598... ...
It will be appreciably higher Can the pretax cost of debt (with prevailing corporate tax rates,
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From page 599... ...
Tables 2 and 3 show calculations of Me cost of funds for Me United States and Japan, respectively, in the three years 1975, 1981, and 1984. Notable conclusions from these data and the facts underlying them are highlighted below: · Japanese real costs have been and are much below American costs.
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From page 600... ...
52.0 50.3 50.3 Expected inflation 6.5 9.0 4.7 Interest-beanng debt Coupon rate (nominal pretax cost) 8.5 13.3 12.0 Real coupon rate 2.0 4.3 7.3 Nominal cost after taxes 4.1 6.6 5.9 Real cost after taxes - 2.4 - 2.4 1.2 Equity Nominal cost before taxes 33.7 38.8 25.4 Nominal cost after taxes 15.0 17.6 11.9 Real cost after taxes 8.5 8.6 7.1 Fundsa Nominal cost after taxes 11.0 13.1 9.1 Real cost after taxes 4.5 4.1 4.3 NOTE: All rates are instantaneous, except as noted.
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From page 601... ...
Only incentives such as accelerated depreciation and investment tax credits tend to offset this fact. Lowering the corporate statutory rate further would reduce the cost of equity somewhat for all corporations and reward capital investment already made, but it would also decrease the double taxation of corporate income and therefore tend to reduce expansion in favor of paying out dividends to investors who will be clamoring for them as Weir marginal rate goes down (a
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From page 602... ...
. It is the interplay of a high statutory corporate tax rate (higher for retained profits Han for dividends paid out)
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From page 603... ...
. Concept 10-year R&D Equipment Structures Ventures p After-tax cost of funds 0.091 0.091 0.091 ~ Expected inflation 0.047 0.047 0.047 ITC Investment tax credit 0.10 0 0.125a T Marginal corporate tax rate 0.503 0.503 0.503 ,B Portion of the ITC that reduces the basis of equipment for tax depreciation 0.5 0 0 Z Present value of depreciation allowance (under ACRS)
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From page 604... ...
As mentioned above, this is what attracts leveraged buyouts and acquisitions at seemingly much higher Han such market pnces. The rise in the market in the last several years suggests that increased corporate cash flow aided by the tax advantages of the 1981 act (Accelerated Cost Recovery System and
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From page 605... ...
in Be year in which Hey are incurred, and by permitting He issuance of qualified new preferred issues deductible to He issuing corporation Hat are limited to expansion. While an income tax system remains, He incentives for new investment like the Accelerated Cost Recovery System and He Investment Tax Credit are important.
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From page 606... ...
The United States has many inherent advantages if its economic policies can be harnessed in a benign way for innovation and investment, leading to a higher sustained grown rate. Americans are good at Ads, too, as their history proves.
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