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Technological, Economic, and Social Developmentfor the21st Century


early 1980s. Gross private domestic investment averaged16.1 percentof GNP of the period 1971-80. However, a third of this investment (32.9%) went toward residential investment (actually a consumption good) and inventory investment by businesses,leaving only 10.8 percent of GNP for investment in structure and equipment. Of this amount, almost three-fourths (72.2%) went toward replacing depreciated capital, leaving only 3.0 percent for investments in new structures and equipment (Economic Report o/the President, 1983,p. 76). Also, a growing segment of investment in capital goods has been dedicated to pollution abate- ment and safety.

In 1978, these expenditures amounted to $6.9 billion, more than 4.5 percent of the total in- vestment in the surveyed industries, with a projected increase to $7.3 billion for 1979. For certain industries the share in 1978 was higher: primary metals (12.6 percent); electric utilities (10.1 percent); petroleum (8.3 percent); and chemicals (7.8 percent). And these data omit the annual operating costs of complying with pollution abatement regulations. (U.S. Congress, Report No. 96-618, p. 70).

StanfordeconomistMichaelJ. Boskinwrites:

TheU.S. grossinvestmenratein physicaltangiblecapitalhasfallen. ...Of


of grossprivateinvestmen in 1979,thebulk wentinto housingandreplacemenof wornout capitalas well as into pollution abatemenandsafetyprograms;realnetadditionto plantand

equipmentwas about$40 billion,


percentof GNP. (Boskin, 1980,p.


While the proportion of investment in capital goods to GNP did not change much between 1950and 1980, the labor force grew, and thus the capital availa- ble per worker declined. The capital/labor ratio is considered a better measure than investment as a percentageof GNP, since it accounts tor growth in the labor force as well as the change in the capital stock. Over the period 1951-80, the growth rate of capital/worker averaged 2.6 percent. From 1976to 1980 it aver- aged 0.4 percent. While this is partly attributable to the low rates of investment in the late '70's, it is mostly due to the increase in the labor force. Investmenthas not matched the rapid growth of the labor force, and the growth rate has fallen. (Economic Report of the President, 1983, p. 78).

In the 1970s, high rates of inflation reduced the incentive to invest in new plant and equipment. Depreciation of plant and equipment for tax purposes is based on historic cost. As inflation pushes current replacement cost above his- toric cost, current depreciation allowances (and therefore current expenses)are understated, especially for long-lived investments, and current profits are over- stated. Thus the amount of tax paid is in effect increased, and dollars that would otherwise be available for investment are diverted into taxes. Indeed, between 1965and 1979, the averagereal economic rate of return on capital investment for nonfinancial corporations declined from 10 percent to about 5 percent. It in- creasedto 8% in 1984, with the dramatic declines in inflation and the initial re- covery from the recession. (U.S. Bureau of the Census, 1986, table 890).

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