Ask the Scholar
Document scope · 1 page
Scholar
Ask about this object, its catalog metadata, its source description, or the page inventory.
For page-specific OCR and visual context, open one of the page chats.
Scholar Source Context
Document identity
localId
323152405
label
American Business Conference (ABC) 4/4/89 [OA 6347]
core
doc
dtoType
document
citationUrl
pageCount
1
Source metadata
id
323152405
contentType
document
title
American Business Conference (ABC) 4/4/89 [OA 6347]
citationUrl
identifierLocal
13663-003
collections
Records of the White House Office of Speechwriting (George H. W. Bush Administration)
Speech Backup Chronological Files
imageCount
1
hasImages
yes
source
import
hasTranscription
no
Source extras
naId
323152405
levelOfDescription
fileUnit
recordType
description
ocrSource
nara-archive
Single page context
seq
1
pageIndex
0
type
document
mediaId
9b28c254451bc2da
ocrText
Originally Processed With FOIA(s):
FOIA Number:
S
S
FOIA
MARKER
This is not a textual record. This is used as an
administrative marker by the George Bush Presidential
Library Staff.
Record Group/Collection:
George H.W. Bush Presidential Records
Collection/Office of Origin:
Speechwriting, White House Office of
Series:
Speech File Backup Files
Subseries:
Chron File, 1989-1993
OA/ID Number:
13663
Folder ID Number:
13663-003
Folder Title:
American Business Conference (ABC) 4/4/89 [OA 6347]
Stack:
Row:
Section:
Shelf:
Position:
G
26
18
7
4
(Lange/Martin)
March 30, 1989
1:30 p.m.
PRESIDENTIAL REMARKS:
AMERICAN BUSINESS CONFERENCE
ROOM 450, OLD EXECUTIVE OFFICE BLDG.
TUESDAY, APRIL 4, 1989
2:00 P.M.
I've met with this group three times, over the last eight
years -- and every meeting has been a resounding success. So
I've got a mind to ask: Why can't we equal or exceed that kind
of contact over the next eight years?
Among the many close friends I have in the ABC, I'd like to
mention your former vice chairman, now Commerce Secretary, Bob
Mosbacher. Like all of you, he knows what it means to take
risks, to build a business, and to keep America first. He's
already doing a superb job.
To be sitting in this room today, as ABC members, you've had
to keep your earnings at three times the growth of the economy,
plus inflation. Now, if Bob can just make that happen for every
business in America
I'll make him the Business Czar and we can
all go fishing.
You run the kind of high-growth businesses that represent
the most dynamic, entrepreneurial segment of the American
economy. And this government knows better than to fix what's
already working.
CM-
I GAVE GARDNER
THE THREE COPIES FOR
SIGFAING -- - - HERE'S
THE REST.
Mark
2
So this afternoon I'm going to address two areas of concern
to you: the economics of enterprise -- and the imperative for
education reform.
For anyone running a business, sound investment and
flexibility in the marketplace are more important than ever.
Your concern about a lack of savings is clearly motivated by a
lack of domestic investment capital for American industry. Now,
the personal savings rate has hit 5.2 percent or better for the
past three months. That's good news. But we cannot relax.
The working paper you released last month on overconsumption
was another reminder that the deficit must be brought under
control. So let me reassure you -- this government will not
become the fiscal equivalent of Overeaters Anonymous.
Accountability in government demands that we put an end to this
spending spiral.
know, when George Kaufman -- that famous wit from the
Little The
Round Table -- was at a party, he heard a self-made
of
millionaire boasting to a circle of people, "I was born into the
world without a single penny." And Kaufman answered, "Oh really.
When I was born, I owed twelve dollars."
lifter Fadiman
Well, we don't have to let the deficit play a cruel joke on
3
future generations. Next year alone, federal tax revenues will
rise by more than $80 billion. And we're going to use those
funds to bring the deficit down below the Gramm-Rudman-Hollings
targets.
To spur greater investment in American business, we need to
bring our taxation of capital gains down -- in line with that of
our trading partners. In the budget we've proposed to Congress,
we want to restore the differential to 15 percent on long-held
assets.
How many of you, as you built your businesses, were able to
just walk up to a bank and get equity? Few, if any. Most of you
probably raised capital by offering people a share of the
business -- and a stake in the outcome.
Cutting the capital gains rate means more of that can
happen. It will give .businesses more of the capital they need to
grow. It will bring in $4.3 billion more in tax revenues,
according to the Treasury. And it will create more new jobs.
That's no tax break for the rich. That's a fair shake for
every American.
The budget consultations are being held behind closed doors;
so I can't tell you how they're going. But we're determined to
4
work with this Congress -- we're counting on their cooperation,
to find answers we can all live with.
We want to build on the energy and initiative of American
business -- and we're determined to avoid burdensome mandates
that only enforce solutions of uniform mediocrity. We don't want
to limit the flexibility of managers and workers, who are trying
to find their own best solutions. And you know, many are already
succeeding.
Chamber of Commerce estimates suggest that workers are
receiving more fringe benefits than ever before. Total benefits
in 1987 were up 163 percent in a decade. And it is the market --
not government -- that is responsible for this growth.
Nearly eighty percent of growth in the fringe share of
compensation is due to voluntary action by employers. Only 21
percent is due to government requirements. We want to keep it
that way.
A "mandated benefit" is a contradiction in terms. How would
you feel if your doctor said, "Well, nothing's broken
but
we're going to put you in a full-body cast anyway." No thanks.
A hallmark of this administration will be its focus on the
future -- and the importance we attach to making the right kinds
5
of investment. You don't make your money on short-term, day-to-
day trades -- you make it through sound long-term planning.
There can be no investment more urgent -- or more compelling
for the future of American business, and this country as a whole,
than education. In this, all of us have a stake in the outcome.
As labor markets get tighter in the coming years, many of
you are going to be facing shortages of skilled people. Some
managers are already worried about a scarcity of science and
engineering graduates. And you've all read the surveys that show
Pacific Rim students outperforming our own.
Our best students can compete with anyone in the world.
We're not on the verge of some intellectual brown-out. But in
order to give business more of the people it needs to compete --
to help build America's prosperity -- and to give more of our
young people the skills they need to share in that prosperity --
we have made education a national priority.
Tomorrow, I will send to the Congress an education package.
We want to reward merit schools that make progress in terms of
raising student achievement, and reducing drug use and drop-out
rates. We're promoting parental choice and educational quality,
through magnet schools of excellence.
6
We want to provide alternative certification of teachers and
principals, to broaden the pool of talent available; President's
Awards to outstanding teachers; Urban Emergency Grants to
provide comprehensive help in fighting drugs for school districts
under seige; a National Science Scholars program for high school
seniors; and additional endowment matching grants for
historically black colleges and universities, which occupy a
unique and vital position in American higher education.
We are committed to a program of education reform that will
give our young people a solid foundation for the future. But to
make lasting improvements in education, we'll need to get all of
the players -- superintendents and administrators, school boards,
local business leaders, teachers' unions -- around the table,
working together.
This will demand accountability from all of us. It will
require the best kind of collective effort, from all directions
-- but it holds the promise of real progress.
Many of you have been prime movers, spending a remarkable
amount of your own time making good on that promise. More than
a third of you serve on local school boards, public or private ---
or on the board of a local college or university.
7
Others among you have established a program with a local
community college, or "adopted" a school, or taught part-time, or
promoted science education across a school district. That's the
kind of involvement that, while it isn't always easy, leads to
the kind of educational reform that lasts. Consider yourself one
in a thousand -- you know, points of light.
By investing your time and talents toward the education of
our young people, you're helping to bring about something vital
-- a fundamental cultural shift, that reasserts the value of
learning in this country.
You're breathing new life into an idea that has always been
a testament to the American spirit: that doing well demands
doing good.
Nothing I might tell you would say it better than your own
mission statement, which says ABC executives "believe their own
business success carries with it a responsibility to help expand
economic opportunity throughout the economy."
As business leaders, you understand the power of interests
held in common. Education is the one investment that guarantees
economic opportunity -- for every individual, and every business
in America. Thank you. And God bless you.
(Lange/Martin)
March 29, 1989
4:15 p.m.
PRESIDENTIAL REMARKS:
AMERICAN BUSINESS CONFERENCE
[LOCATION] Room 450
TUESDAY, APRIL 4, 1989
[TIME] 2:00pm
Thank you,
.
Thank you all. It's a real pleasure to
be with you today.
to from Bobbie
March 81 ,83 iss
I've met with this group three times, over the last eight
Letter kiberg
years - and every meeting has been a great success. So I'm
inclined to ask, why can't we equal or exceed that kind of
Barryfad 3-24-89 ROS
contact over the next eight years?
Among the many close friends I have in the ABC, let me
mention your former vice chairman, now Commerce Secretary, Bob
Mosbacher. Like all of you, he knows what it means to take
risks, to build a business, and to keep America first. And he's
already doing a superb job.
To be sitting in this room today, as ABC members, you've had
to keep your earnings at three times the growth of the economy,
plus inflation. Now, if Bob can just make that happen for every
business in America
I'll make him the Business Czar and we can
all go fishing.
2
You run the kind of high-growth businesses that represent
the most dynamic, entrepreneurial segment of the American
economy. And this government knows better than to fix what's
already working.
afternoon
So this [morning] I want to talk to you about what we're
doing to encourage flexibility for the present, and investment
for the future.
For anyone running a business, flexibility and sound
investment are more important than ever. Your concern about a
lack of savings is clearly motivated by a lack of domestre investment
up estiment becaus
is
capital for American industry. Now, the personal savings rate
of inuest foreign
CEA
hit 5.9 percent 5.2% in months February -- nearly a seven-year high. That's
Boothce
good news.
for April 3 186
one horth 5.9 may's
x5042 + Londedield
But the working paper you released last month on
overconsumption was another reminder that the deficit must be
Juelcoms- tion.
brought under control. So let me reassure you -- this government
will not become the fiscal equivalent of Overeaters Anonymous.
challenge
Policy tothe The Themo not
Spending for all programs can't increase forever. We must
choose carefully where we devote our resources. Those words may
Electron Copy
be easy for some to hear. But accountability in government
march 'sa
demands that we put an end to the kind of ever-increasing
spending that puts the "deaf" in deficit.
3
Next year alone, federal tax revenues will rise by more than
BABA
$80 billion. And we're going to use those funds to bring the
D82 billion
deficit down below the Gramm-Rudman-Hollings targets.
piz
To spur greater investment in American industry, we need to
bring our taxation of capital gains in line with that of our
trading partners. In the budget we've proposed to Congress, we
want to restore the differential to 15 percent on long-held
BASheet Fact p.3
investments.
How many of you, as you built your businesses, were able to
just walk up to a bank and get equity? Few, if any. Most of you
probably raised capital by offering people a share of the
business.
Cutting the capital gains rate means more of that can
happen. It will give businesses more of the capital they need to
3ABA
grow. It will bring in $4.3 billion more in tax revenues,
P
according to the Treasury. And it will create more new jobs.
Department
That's no tax break for the rich. That's a fair shake for
America.
The budget consultations are being held behind closed doors;
so I can't tell you how they're going. Which may strike you like
4
one of those spy movies where somebody knows a secret, and says,
"You know, I'd tell you -- but then I'd have to kill you. But
we're determined to work with this Congress -- you know, live and
let live -- to find answers we can all live with.
We want to build on the energy and initiative of American
business -- and we're determined to avoid burdensome mandates
that only enforce solutions of uniform mediocrity. We don't want
to limit the flexibility of managers and workers, who are trying
to find their own best solutions. Many are already succeeding.
According to Chamber of Commerce estimates, workers are
receiving more fringe benefits than ever before. Total benefits
162.6
in 1987 were up 163 percent in a decade. And it is the market --
maths
not government -- that is responsible for this growth.
&
69-7001
BAREF
chamberce 659-6000
Nearly eighty percent of growth in the fringe share of
compensation is due to voluntary action by employers. Only 21
30%
Ted+State
percent is due to government requirements. We want to keep it
that way.
"Mandated benefits" are a contradiction in terms. How would
you feel if your doctor said, "Well, nothing's broken
but
we're going to put you in a full-body cast anyway." No thanks.
5
A hallmark of this administration will be its focus on the
future -- and the importance we attach to making the right kinds
of investment. You don't make your money on short-term, day-to-
day trades -- you make it through sound long-term planning.
There can be no investment more urgent -- or more compelling
for the future of American business -- than education.
As labor markets get tighter in the coming years, many of
you are going to be facing shortages of skilled people. Some
managers are already worried about a scarcity of science and
engineering graduates. And you've all read the surveys that show
Pacific rim students outperforming our own.
Our best students can compete with anyone in the world.
We're not on the verge of some intellectual brown-out. But in
order to give business more of the people it needs to compete --
and to give our young people the skills they need to help build
America's prosperity -- we've made education a national priority.
Next week I will be sending to Congress a package of
education legislation. We want to reward merit schools that make
progress in terms of raising student achievement, and reducing
drug use and drop-out rates. We're promoting parental choice and
educational quality, through magnet schools of excellence.
6
We want to provide alternative certification of teachers and
principals, to broaden the pool of talent available; President's
Awards to outstanding teachers; Urban Emergency Grants to
provide comprehensive help in fighting drugs for school districts
under seige; a National Science Scholars program for high school
seniors; and additional endowment matching grants for
historically black colleges and universities, which occupy a
unique and vital position in American higher education.
We are committed to a program of education reform that will
give our young people a solid foundation for the future. But to
make lasting improvements in education, we'll need to get all of
the players -- superintendents and adminstrators, school boards,
local business leaders, teachers' unions -- around the table.
This will demand accountability from all of us. It will
require the best kind of collective effort, from all directions
-- but it holds the promise of real progress.
Many of you have been prime movers, spending a remarkable
amount of your own time making good on that promise. More than
a third of you serve on either a local school board, public or
FAXED
for
private or on the board of a local college or university.
Endear
John
FAtiona
7
Others have established a program with a local community
college, or created Montessori schools, or taught part-time, or
promoted science education across an entire school district.
That's the kind of involvement that, while it isn't always easy,
PA can lead to the kind of educational reform that lasts. Consider
yourself one in a thousand -- you know, points of light.
By investing your time and talents toward the education of
our young people, you're helping to bring about something vital
-- a fundamental cultural shift, that reasserts the value of
learning in this country.
You're breathing new life into an idea that has always been
a testament to the American spirit: that doing well demands
doing good.
Nothing I might tell you would say it better than your own
mission statement: "ABC executives believe their own business
success carries with it a responsibility to help expand economic
letter adabiles
opportunity throughout the economy."
from Kilberg Bairy
Rogsod
You understand the power of interests held in common. And
education is the one investment that guarantees economic
opportunity, for every individual and every business in America.
Thank you. And God bless.
PRESIDENTIAL REMARKS: AMERICAN BUSINESS CONFERENCE
ROOM 450, OEOB
TUESDAY, APRIL 4, 1989
2:00 P.M.
I'VE MET WITH THIS GROUP THREE TIMES, OVER THE LAST
EIGHT YEARS -- AND EVERY MEETING, FOR ME AT LEAST,
HAS BEEN WORTHWHILE AND PRODUCTIVE. I AM GLAD To BE
BACK.
- 2 -
AMONG THE MANY CLOSE FRIENDS I HAVE IN THE ABC, I'D
LIKE TO MENTION YOUR FORMER VICE CHAIRMAN, NOW COMMERCE
SECRETARY, BoB MOSBACHER. LIKE ALL OF YOU, HE KNOWS
WHAT IT MEANS TO TAKE RISKS, TO START A BUSINESS, MAKE
IT GROW, AND KEEP IT COMPETITIVE. HERE IN WASHINGTON,
HE IS PUTTING HIS EXPERIENCE To WORK.
- 3 -
BoB IS ON THE CUTTING EDGE OF OUR NATIONAL EFFORT TO
BUILD A BETTER AMERICA.
To BE SITTING IN THIS ROOM TODAY, AS ABC MEMBERS,
YOU'VE HAD TO KEEP YOUR EARNINGS AT THREE TIMES THE
GROWTH OF THE ECONOMY, PLUS INFLATION.
- 4 -
Now, IF BoB CAN JUST MAKE THAT HAPPEN FOR EVERY
BUSINESS IN AMERICA... I'LL MAKE HIM THE BUSINESS CZAR
AND WE CAN ALL GO FISHING.
You RUN THE KIND OF HIGH-GROWTH BUSINESSES THAT
REPRESENT THE MOST DYNAMIC, ENTREPRENEURIAL SEGMENT OF
THE AMERICAN ECONOMY. AND THIS GOVERNMENT KNOWS BETTER
THAN TO FIX WHAT'S ALREADY WORKING.
- 5 -
So THIS AFTERNOON I'M GOING TO ADDRESS TWO AREAS OF
CONCERN TO YOU: THE ECONOMICS OF ENTERPRISE -- AND THE
IMPERATIVE FOR EDUCATION REFORM.
You FOLKS KNOW THE SAME LESSON THAT I LEARNED AS A
BUSINESSMAN. You NEED CAPITAL TO GROW.
- 6 -
WHAT YOU DON'T NEED IS HIGHER TAXES ON YOUR EARNINGS,
OR HIGHER TAXES ON YOUR WORKERS, OR HIGHER TAXES ON
THOSE WHO INVEST THEIR MONEY IN YOUR FIRM.
RIGHT NOW THE GOVERNMENT IS MAKING TOO BIG A CLAIM
ON AMERICA'S CAPITAL TO COVER OUR DEFICIT. THAT'S
CAPITAL THAT SHOULD BE INVESTED IN AMERICA'S
BUSINESSES.
- 7 -
THE BEST WAY TO CHANNEL MORE CAPITAL INTO PRODUCTIVE
INVESTMENT IS NOT HIGHER TAXES. It's SPENDING
RESTRAINT.
THE WORKING PAPER YOU RELEASED LAST MONTH WAS
ANOTHER REMINDER THAT THE DEFICIT MUST BE BROUGHT UNDER
- 8 -
CONTROL. ACCOUNTABILITY IN GOVERNMENT DEMANDS THAT WE
PUT AN END TO THIS SPENDING SPIRAL.
You KNOW, WHEN GEORGE KAUFMAN -- THAT FAMOUS WIT
FROM THE ALGONQUIN ROUND TABLE -- WAS AT A PARTY, HE
HEARD A SELF-MADE MILLIONAIRE BOASTING TO A CIRCLE OF
PEOPLE, "I WAS BORN INTO THE WORLD WITHOUT A SINGLE
- 9 -
PENNY." AND KAUFMAN ANSWERED, "OH REALLY. WHEN I WAS
BORN, I OWED TWELVE DOLLARS."
WELL, WE DON'T HAVE TO LET THE DEFICIT PLAY A CRUEL
JOKE ON FUTURE GENERATIONS. NEXT YEAR ALONE, FISCAL
YEAR 1990 FEDERAL REVENUES WILL RISE BY MORE THAN $80
BILLION -- WITH NO TAX INCREASE. AND WE'RE GOING TO
MEET OR BEAT THE GRAMM-RUDMAN-HOLLINGS TARGETS.
- 10 -
OUR BUDGET CONSULTATIONS WITH CONGRESS so FAR HAVE
BEEN GOING WELL. WE'RE DETERMINED TO WORK WITH THIS
CONGRESS -- WE'RE COUNTING ON THEIR COOPERATION, TO
FIND ANSWERS WE CAN ALL LIVE WITH.
To SPUR GREATER INVESTMENT IN AMERICAN BUSINESS, WE
NEED TO BRING OUR TAXATION OF CAPITAL GAINS DOWN -- IN
LINE WITH THAT OF OUR TRADING PARTNERS.
- 11 -
IN THE BUDGET WE'VE PROPOSED TO CONGRESS, WE WANT TO
RESTORE THE DIFFERENTIAL TO 15 PERCENT ON LONG-HELD
ASSETS.
How MANY OF YOU, AS YOU BUILT YOUR BUSINESSES, WERE
ABLE TO JUST WALK UP TO A BANK, AND GET A LOAN TO COVER
YOUR START-UP COSTS? FEW, IF ANY.
- 12 -
MOST OF YOU PROBABLY RAISED CAPITAL BY OFFERING PEOPLE
A SHARE OF THE BUSINESS -- AND A STAKE IN THE OUTCOME.
CUTTING THE CAPITAL GAINS RATE MEANS MORE OF THAT
CAN HAPPEN. IT WILL GIVE BUSINESSES MORE OF THE
CAPITAL THEY NEED TO GROW. IT WILL BRING IN $4.8
BILLION MORE IN TAX REVENUES IN 1990, ACCORDING TO THE
TREASURY. AND IT WILL CREATE MORE NEW JOBS.
- 13 -
THAT'S NO TAX BREAK FOR THE RICH. THAT'S A FAIR
SHAKE FOR EVERY AMERICAN.
WE WANT TO BUILD ON THE ENERGY AND INITIATIVE OF
AMERICAN BUSINESS -- WITHOUT BURDENSOME MANDATES THAT
ONLY ENFORCE SOLUTIONS OF UNIFORM MEDIOCRITY. WE DON'T
WANT TO LIMIT THE FLEXIBILITY OF MANAGERS AND WORKERS,
WHO ARE TRYING TO FIND THEIR OWN BEST SOLUTIONS.
- 14 -
AND YOU KNOW, MANY ARE ALREADY SUCCEEDING.
CHAMBER OF COMMERCE ESTIMATES SUGGEST THAT WORKERS
ARE RECEIVING MORE FRINGE BENEFITS THAN EVER BEFORE.
TOTAL BENEFITS IN 1987 WERE UP 163 PERCENT IN A DECADE.
AND IT IS THE MARKET --NOT GOVERNMENT -- THAT IS
RESPONSIBLE FOR THIS GROWTH.
- 15 -
NEARLY SEVENTY PERCENT OF GROWTH IN BENEFITS IS DUE
TO VOLUNTARY ACTION BY EMPLOYERS. ONLY THIRTY PERCENT
IS DUE TO GOVERNMENT REQUIREMENTS. WE WANT TO KEEP IT
THAT WAY.
OUR FRIENDS IN EUROPE HAVE TRIED MANDATED BENEFITS
-- AND THEY HAVEN'T HAD MUCH SUCCESS.
- 16 -
THEY'RE NOW LOOKING FOR WAYS TO FREE UP ENTERPRISE,
AMERICAN STYLE -- AND MAKE IT MORE FLEXIBLE, NOT
LESS. FOR US TO GO TOWARD MANDATED BENEFITS WOULD BE,
AS YoGI BERRA PUT IT, LIKE "DEJA VU ALL OVER AGAIN."
AMERICA WILL BE MORE COMPETITIVE IF WE CONTINUE
TO RESIST THE TEMPTATION TO HEAP BURDENSOME MANDATES ON
THE PRODUCTIVE PRIVATE SECTOR.
- 17 -
A HALLMARK OF THIS ADMINISTRATION WILL BE ITS FOCUS
ON THE FUTURE -- AND THE IMPORTANCE WE ATTACH TO MAKING
THE RIGHT KINDS OF INVESTMENT. THERE CAN BE NO
INVESTMENT MORE URGENT -- OR MORE COMPELLING FOR THE
FUTURE OF AMERICAN BUSINESS, AND THIS COUNTRY AS A
WHOLE, THAN EDUCATION. IN THIS, ALL OF US HAVE A STAKE
IN THE OUTCOME.
- 18 -
As LABOR MARKETS CONTINUE TO GET TIGHTER IN THE
COMING YEARS, MANY OF YOU ARE GOING TO BE FACING
SHORTAGES OF SKILLED PEOPLE. SOME MANAGERS ARE ALREADY
WORRIED ABOUT A SCARCITY OF SCIENCE AND ENGINEERING
GRADUATES. AND YOU'VE ALL READ THE SURVEYS THAT SHOW
MANY FOREIGN STUDENTS OUTPERFORMING OUR OWN.
- 19 -
ALTHOUGH OUR BEST STUDENTS CAN COMPETE WITH ANYONE
IN THE WORLD, THE CHALLENGE WE FACE IS TO ADAPT OUR
EDUCATIONAL SYSTEM so THAT ALL OF OUR STUDENTS RECEIVE
THE SKILLS THEY NEED TO SHARE IN THAT PROSPERITY -- MY
ADMINISTRATION HAS MADE EDUCATION A NATIONAL PRIORITY.
- 20 -
OUR PROGRAM IS BASED ON FOUR PRINCIPLES: IT REWARDS
EXCELLENCE, HELPS THOSE MOST IN NEED, DEMANDS
ACCOUNTABILITY, AND SUPPORTS GREATER FLEXIBILITY AND
CHOICE.
TOMORROW, I WILL SEND TO THE CONGRESS OUR EDUCATION
PACKAGE.
- 21 -
WE WANT TO REWARD MERIT SCHOOLS THAT MAKE PROGRESS IN
TERMS OF RAISING STUDENT ACHIEVEMENT, AND REDUCING DRUG
USE AND DROP-OUT RATES. WE'RE PROMOTING PARENTAL
CHOICE AND EDUCATIONAL QUALITY, THROUGH MAGNET SCHOOLS
OF EXCELLENCE.
- 22 -
WE WANT TO PROVIDE ALTERNATIVE CERTIFICATION OF
TEACHERS AND PRINCIPALS, TO BROADEN THE POOL OF TALENT
AVAILABLE; PRESIDENT'S AWARDS TO OUTSTANDING TEACHERS;
URBAN EMERGENCY GRANTS TO PROVIDE COMPREHENSIVE HELP IN
FIGHTING DRUGS FOR SCHOOL DISTRICTS UNDER SIEGE; A
NATIONAL SCIENCE SCHOLARS PROGRAM FOR HIGH SCHOOL
SENIORS;
- 23 -
AND ADDITIONAL ENDOWMENT MATCHING GRANTS FOR
HISTORICALLY BLACK COLLEGES AND UNIVERSITIES, WHICH
OCCUPY A UNIQUE AND VITAL POSITION IN AMERICAN HIGHER
EDUCATION.
WE ARE COMMITTED TO A PROGRAM OF EDUCATION REFORM
THAT WILL GIVE OUR YOUNG PEOPLE A SOLID FOUNDATION FOR
THE FUTURE.
- 24 -
BUT TO MAKE LASTING IMPROVEMENTS IN EDUCATION, WE'LL
NEED TO GET ALL OF THE PLAYERS -- ADMINISTRATORS,
SCHOOL BOARDS, LOCAL BUSINESS LEADERS, PARENTS,
TEACHERS' UNIONS -- AROUND THE TABLE, WORKING TOGETHER.
THIS WILL DEMAND ACCOUNTABILITY FROM ALL OF US.
- 25 -
IT WILL REQUIRE THE BEST KIND OF COLLECTIVE EFFORT,
FROM ALL DIRECTIONS -- BUT IT HOLDS THE PROMISE OF
REAL PROGRESS.
MANY OF YOU HAVE BEEN PRIME MOVERS, SPENDING A
REMARKABLE AMOUNT OF YOUR OWN TIME MAKING GOOD ON THAT
PROMISE.
- 26 -
MORE THAN A THIRD OF YOU SERVE ON LOCAL SCHOOL BOARDS,
PUBLIC OR PRIVATE --OR ON THE BOARD OF A LOCAL COLLEGE
OR UNIVERSITY.
OTHERS AMONG YOU HAVE ESTABLISHED A PROGRAM WITH A
LOCAL COMMUNITY COLLEGE, OR "ADOPTED" A SCHOOL, OR
TAUGHT PART-TIME, OR PROMOTED SCIENCE EDUCATION ACROSS
A SCHOOL DISTRICT.
- 27 -
THAT'S THE KIND OF INVOLVEMENT THAT, WHILE IT ISN'T
ALWAYS EASY, LEADS TO THE KIND OF EDUCATIONAL REFORM
THAT LASTS. IT PLACES YOU AMONG THE "THOUSAND POINTS
OF LIGHT" THAT SPREAD HOPE AND OPPORTUNITY. You ARE
PART OF WHAT MAKES AMERICA SPECIAL.
- 28 -
BY INVESTING YOUR TIME AND TALENTS TOWARD THE EDUCATION
OF OUR YOUNG PEOPLE, YOU'RE HELPING TO BRING ABOUT
SOMETHING VITAL -- A FUNDAMENTAL CULTURAL SHIFT, THAT
REASSERTS THE VALUE OF LEARNING IN THIS COUNTRY.
You're BREATHING NEW LIFE INTO AN IDEA THAT HAS ALWAYS
BEEN A TESTAMENT TO THE AMERICAN SPIRIT: THAT DOING
WELL DEMANDS DOING GOOD.
- 29 -
NOTHING I MIGHT TELL YOU WOULD SAY IT BETTER THAN
YOUR OWN MISSION STATEMENT, WHICH SAYS ABC EXECUTIVES
"BELIEVE THEIR OWN BUSINESS SUCCESS CARRIES WITH IT A
RESPONSIBILITY TO HELP EXPAND ECONOMIC OPPORTUNITY
THROUGHOUT THE ECONOMY."
- 30 -
As LEADERS -- NOT ONLY IN BUSINESS BUT IN EVERY SECTOR
OF OUR SOCIETY -- YOU KNOW THAT THE NATIONAL INTEREST
REQUIRES US TO INVEST IN THE FUTURE. EDUCATION IS THE
BEST INVESTMENT WE CAN MAKE, IF WE WANT To BUILD A
BETTER AMERICA.
THANK YOU. AND GOD BLESS YOU ALL.
(Lange/Martin)
March 31, 1989
6:30 p.m.
PRESIDENTIAL REMARKS:
AMERICAN BUSINESS CONFERENCE
ROOM 450, OLD EXECUTIVE OFFICE BLDG.
TUESDAY, APRIL 4, 1989
2:00 P.M.
I've met with this group three times, over the last eight
years -- and every meeting has been a resounding success. So
I've got a mind to ask: Why can't we equal or exceed that kind
of contact over the next eight years?
Among the many close friends I have in the ABC, I'd like to
mention your former vice chairman, now Commerce Secretary, Bob
Mosbacher. Like all of you, he knows what it means to take
risks, to start a business, make it grow, and keep it
competitive. Here in Washington, he is putting his experience to
work. Bob is on the cutting edge of our national effort to Build
a Better America.
To be sitting in this room today, as ABC members, you've had
to keep your earnings at three times the growth of the economy,
plus inflation. Now, if Bob can just make that happen for every
business in America
I'll make him the Business Czar and we can
all go fishing.
You run the kind of high-growth businesses that represent
the most dynamic, entrepreneurial segment of the American
2
economy. And this government knows better than to fix what's
already working.
So this afternoon I'm going to address two areas of concern
to you: the economics of enterprise -- and the imperative for
education reform.
You folks know the same lesson that I learned as a
businessman. You need capital to grow. What you don't need is
higher taxes on your earnings, or higher taxes on your workers,
or higher taxes on those who invest their money in your firm.
Right now the government is making too big a claim on
America's capital to cover our deficit. That's capital that
should be invested in America's businesses. The best way to
channel more capital into productive investment is not higher
taxes. It's spending restraint.
The working paper you released last month was another
reminder that the deficit must be brought under control. So let
me reassure you --- this government will not become the fiscal
equivalent of Overeaters Anonymous. Accountability in government
demands that we put an end to this spending spiral.
You know, when George Kaufman -- that famous wit from the
Algonquin Round Table -- was at a party, he heard a self-made
3
millionaire boasting to a circle of people, "I was born into the
world without a single penny." And Kaufman answered, "Oh really.
When I was born, I owed twelve dollars."
Well, we don't have to let the deficit play a cruel joke on
future generations. Next year alone, federal revenues will rise
by more than $80 billion --- with no tax increase. And we're
going to use those funds to bring the deficit down below the
Gramm-Rudman-Hollings targets.
To spur greater investment in American business, we need to
bring our taxation of capital gains down -- in line with that of
our trading partners. In the budget we've proposed to Congress,
we want to restore the differential to 15 percent on long-held
assets.
How many of you, as you built your businesses, were able to
just walk up to a bank, and get a loan to cover your start-up
costs? Few, if any. Most of you probably raised capital by
offering people a share of the business -- and a stake in the
outcome.
Cutting the capital gains rate means more of that can
happen. It will give businesses more of the capital they need to
grow. It will bring in $4.8 billion more in tax revenues in
4
1990, according to the Treasury. And it will create more new
jobs.
That's no tax break for the rich. That's a fair shake for
every American.
Our budget consultations with Congress are going well.
We're determined to work with this Congress -- we're counting on
their cooperation, to find answers we can all live with.
We want to build on the energy and initiative of American
business -- without burdensome mandates that only enforce
solutions of uniform mediocrity. We don't want to limit the
flexibility of managers and workers, who are trying to find their
own best solutions. And you know, many are already succeeding.
Chamber of Commerce estimates suggest that workers are
receiving more fringe benefits than ever before. Total benefits
in 1987 were up 163 percent in a decade. And it is the market --
not government -- that is responsible for this growth.
Nearly eighty percent of growth in benefits is due to
voluntary action by employers. Only 21 percent is due to
government requirements. We want to keep it that way.
5
A "mandated benefit" is a contradiction in terms. How would
you feel if your doctor said, "Well, nothing's broken
but
we're going to put you in a full-body cast anyway." No thanks.
Mandated benefits are really mandated burdens. We cannot expect
America to be more competitive if we continue to heap burdensome
mandates on the productive private sector -- no matter how well-
intentioned those mandates are.
A hallmark of this administration will be its focus on the
future -- and the importance we attach to making the right kinds
of investment. There can be no investment more urgent -- or more
compelling for the future of American business, and this country
as a whole, than education. In this, all of us have a stake in
the outcome.
As labor markets continue to get tighter in the coming
years, many of you are going to be facing shortages of skilled
people. Some managers are already worried about a scarcity of
science and engineering graduates. And you've all read the
surveys that show Pacific Rim students outperforming our own.
Our best students can compete with anyone in the world.
We're not on the verge of some intellectual brown-out. But in
order to give business more of the people it needs to compete --
to help build America's prosperity -- and to give more of our
6
young people the skills they need to share in that prosperity --
my Administration has made education a national priority.
Our program is based on four principles: it rewards
excellence, helps those most in need, demands accountability, and
supports greater flexibility and choice.
Tomorrow, I will send to the Congress an education package.
We want to reward merit schools that make progress in terms of
raising student achievement, and reducing drug use and drop-out
rates. We're promoting parental choice and educational quality,
through magnet schools of excellence.
We want to provide alternative certification of teachers and
principals, to broaden the pool of talent available; President's
Awards to outstanding teachers; Urban Emergency Grants to
provide comprehensive help in fighting drugs for school districts
under siege; a National Science Scholars program for high school
seniors; and additional endowment matching grants for
historically black colleges and universities, which occupy a
unique and vital position in American higher education.
We are committed to a program of education reform that will
give our young people a solid foundation for the future. But to
make lasting improvements in education, we'll need to get all of
the players -- administrators, school boards, local business
7
leaders, parents, teachers' unions -- around the table, working
together.
This will demand accountability from all of us. It will
require the best kind of collective effort, from all directions
-- but it holds the promise of real progress.
Many of you have been prime movers, spending a remarkable
amount of your own time making good on that promise. More than
a third of you serve on local school boards, public or private --
or on the board of a local college or university.
Others among you have established a program with a local
community college, or "adopted" a school, or taught part-time, or
promoted science education across a school district. That's the
kind of involvement that, while it isn't always easy, leads to
the kind of educational reform that lasts. It places you among
the "thousand points of light" that spread hope and opportunity.
You are part of what makes America special.
By investing your time and talents toward the education of
our young people, you're helping to bring about something vital
-- a fundamental cultural shift, that reasserts the value of
learning in this country. You're breathing new life into an idea
8
that has always been a testament to the American spirit: that
doing well demands doing good.
Nothing I might tell you would say it better than your own
mission statement, which says ABC executives "believe their own
business success carries with it a responsibility to help expand
economic opportunity throughout the economy."
As leaders -- not only in business but in every sector of
our society -- you know that the national interest requires us to
invest in the future. Education is the best investment we can
make, if we want to Build a Better America.
Thank you. And God Bless you all.
GREAT Don'T you SAY upFROnT - THE THAT Economics "I'm Going OF TO
-Wity AREAS of concern TO you CATTERIS YOUR
ADDRESS ENTERPRISE TWO AND LATER EDUCATION. THE LATTER AMER. THE
PROFE DIRECT CONCERN, for W/OUT ASKILLED WORKFORCE, (Lange/Martin) ENTRE-
PRENEURSHIP OF will BE A RELIC OF the post"
March 30, 1989
(i.e. WARN speech AUDIENCE III in ADUANCE THAT This is A 2 -put 9:30 a.m.
PRESIDENTIAL REMARKS:
AMERICAN BUSINESS CONFERENCE
ROOM 450, OLD EXECUTIVE OFFICE BLDG.
TUESDAY, APRIL 4, 1989
2:00 P.M.
I've met with this group three times, over the last eight
RESOUNDING
years -- and every meeting has been a great success. So I've got
a mind to ask: Why can't we equal or exceed that kind of contact
over the next eight years?
will this be taken AS A DECLARATION
TO RUN Avain?
like to
Among the many close friends I have in the ABC, I'd mention
your former vice chairman, now Commerce Secretary, Bob Mosbacher.
Like all of you, he knows what it means to take risks, to build a
business, and to keep put America first. And he's already doing a
superb job.
To be sitting in this room today, as ABC members, you've had
to keep your earnings at three times the growth of the economy,
plus inflation. Now, if Bob can just make that happen for every
suaf
business in America
I'll make him the Business Czar and we can
all go fishing.
You run the kind of high-growth businesses that represent
the most dynamic, entrepreneurial segment of the American
economy. And this government knows better than to fix what's
already working.
2
So this afternoon I want to talk to you about what we're
doing to encourage flexibility for the present -- and investment
for the future.
For anyone running a business, flexibility and sound
investment are now more important than ever. Your concern about
domestic
a lack of savings is clearly motivated by a lack of investment
capital for American industry. Now, the personal savings rate
5.2
hit 5.9 percent in February nearly a seven year high. That's
tr post 3 month.
good news. But we we can, and must, support this trend bight
But me canot relax. Amus We can't MUST conTinue TO support Samm
When aimp rate
samings and investment
But the working paper you released last month on
overconsumption was another reminder that the deficit must be
brought under control. So let me reassure you -- this government
will not become the fiscal equivalent of Overeaters Anonymous.
Accountability in government demands that we put an end to this
spending spiral.
You know, when George Kaufman -- that famous wit from the
Algonquin Round Table -- was at a party, he heard a self-made
millionaire boasting to a circle of people, "I was born into the
world without a single penny." And Kaufman answered, "Oh really.
OWe
When I $ was born, I owed twelve dollars." A chilo boRn today will
over his lifetine.
Well, we don't have to let the deficit play a cruel joke on
3
future generations. Next year alone, federal tax revenues will
rise by more than $80 billion. And we're going to use those
funds to bring the deficit down below the Gramm-Rudman-Hollings
targets.
To spur greater investment in American business, we need to
bring our taxation of capital gains down -- in line with that of
our trading partners. In the budget we've proposed to Congress,
we want to restore the differential to 15 percent on long-held
assets.
How many of you, as you built your businesses, were able to
just walk up to a bank and get equity? Few, if any. Most of you
probably raised capital by offering people a share of the
business -- and a stake in the outcome.
gives more people a stake in in
Cutting the capital gains rate means more of that can
the outcome
happen. It will give businesses more of the capital they need to
grow. It will bring in $4.3 billion more in tax revenues,
Reports
MOSTOFALL,
according to the Treasury. And, it will create more new jobs.
That's no tax break for the rich. That's a fair shake for
every American.
The budget consultations are being held behind closed doors;
This
so I can't tell you how they're going. Which may strike you like
quationalite
from 4 the C/A
one of those spy movies where somebody knows a secret, and says,
"You know, I'd tell you -- but then I'd have to kill you. But
we're determined to work with this Congress -- you know, live and
weak
let live -- and I'm sure they feel the same way. We need to find
answers we can all live with.
We want to build on the energy and initiative of American
business -- and we're determined to avoid burdensome mandates
that only enforce solutions of uniform mediocrity. We don't want
to limit the flexibility of managers and workers, who are trying
to find their own best solutions. And you know, many are already
succeeding.
Chamber of Commerce estimates suggest that workers are
receiving more fringe benefits than ever before. Total benefits
in 1987 were up 163 percent in a decade. And it is the market --
not government -- that is responsible for this growth.
Nearly eighty percent of growth in the fringe share of
compensation is due to voluntary action by employers. Only 21
percent is due to government requirements. We want to keep it
that way.
"Mandated benefits" are a contradiction in terms. How would
spruce
you feel if your doctor said, "Well, nothing's broken
but
we're going to put you in a full-body cast anyway." No thanks.
What about M.b.s Killing jobs (as they're done in Emose?)
"MANDATED being are great, if your job wasn't
been elimated to pm for them.
(Justlike you,)
5
(Just
look to
A hallmark of this administration will be its focus on the
future -- and the importance we attach to making the right kinds
of investment. You don't make your money on short-term, day-to-
day trades -- you make it through sound long-term planning.
There can be no investment more urgent -- or more compelling
for the future of American business, and this country as a whole,
than education.
As labor markets get tighter in the coming years, many of
you are going to be facing shortages of skilled people. Some
managers are already worried about a scarcity of science and
engineering graduates. And you've all read the surveys that show
Pacific rim students outperforming our own.
Our best students can compete with anyone in the world.
RACIAL DOUBLE-entence
We're not on the verge of some intellectual brown-out) But in
order to give business more of the people it needs to compete, --
to help build America's prosperity -- and to give more of our
young people the skills they need to share in that prosperity --
URGENT
we have made education a national priority.
MUSTBE
Next week I will be sending to the Congress an education
Tomorrow,
legislation package. We want to reward merit schools that make
progress in terms of raising student achievement, and reducing
6
drug use and drop-out rates. We're promoting parental choice and
educational quality, through magnet schools of excellence.
We want to provide alternative certification of teachers and
principals, to broaden the pool of talent available; President's
Awards to outstanding teachers; Urban Emergency Grants to
provide comprehensive help in fighting drugs for school districts
under seige; a National Science Scholars program for high school
seniors; and additional endowment matching grants for
historically black colleges and universities, which occupy a
unique and vital position in American higher education.
We are committed to a program of education reform that will
give our young people a solid foundation for the future. But to
make lasting improvements in education, we'll need to get all of
the players -- superintendents and administrators, school boards,
local business leaders, teachers' unions -- around the table
wakingtozether together
This will demand accountability from all of us. It will
require the best kind of collective effort, from all directions
-- but it holds the promise of real progress.
Many of you have been prime movers, spending a remarkable
amount of your own time making good on that promise. More than
a third of you serve on local school boards, public or private --
or on the board of a local college or university.
7
Others among you have established a program with a local
or "adopted a sehool,
community college, or created Montessori schools, or taught part-
time, or promoted science education across a school district.
That's the kind of involvement that, while it isn't always easy,
leads to the kind of educational reform that lasts. Consider
yourself one in a thousand -- you know, points of light. speat
By investing your time and talents toward the education of
our young people, you're helping to bring about something vital
-- a fundamental cultural shift, that reasserts the value of
learning in this country.
You're breathing new life into an idea that has always been
a testament to the American spirit: that doing well demands
doing good.
Nothing I might tell you would say it better than your own
mission statement, which says ABC executives "believe their own
business success carries with it a responsibility to help expand
economic opportunity throughout the economy."
As business leaders, you understand the power of interests
held in common. Education is the one investment that guarantees
economic opportunity -- for every individual, and every business
in America. Thank you. And God bless you.
(Lange/Martin)
March 30, 1989
1:30 p.m.
PRESIDENTIAL REMARKS:
AMERICAN BUSINESS CONFERENCE
ROOM 450, OLD EXECUTIVE OFFICE BLDG.
TUESDAY, APRIL 4, 1989
2:00 P.M.
I've met with this group three times, over the last eight
years -- and every meeting has been a resounding success. So
I've got a mind to ask: Why can't we equal or exceed that kind
of contact over the next eight years?
Among the many close friends I have in the ABC, I'd like to
mention your former vice chairman, now Commerce Secretary, Bob
Mosbacher. Like all of you, he knows what it means to take
risks, to build a business, and to keep America first. He's
already doing a superb job.
To be sitting in this room today, as ABC members, you've had
to keep your earnings at three times the growth of the economy,
plus inflation. Now, if Bob can just make that happen for every
business in America
I'll make him the Business Czar and we can
all go fishing.
You run the kind of high-growth businesses that represent
the most dynamic, entrepreneurial segment of the American
economy. And this government knows better than to fix what's
already working.
Mark
Just Some - comments- w
How 10mg will in / -
p.s m speak / 8.483
2
So this afternoon I'm going to address two areas of concern
to you: the economics of enterprise --- and the imperative for
education reform.
For anyone running a business, sound investment and
flexibility in the marketplace are more important than ever.
Your concern about a lack of savings is clearly motivated by a
lack of domestic investment capital for American industry. Now,
the personal savings rate has hit 5.2 percent or better for the
past three months. That's good news. But we cannot relax.
The working paper you released last month on overconsumption
was another reminder that the deficit must be brought under
control. So let me reassure you -- this government will not
become the fiscal equivalent of Overeaters Anonymous.
Accountability in government demands that we put an end to this
spending spiral.
You know, when George Kaufman -- that famous wit from the
Algonquin Round Table -- was at a party, he heard a self-made
millionaire boasting to a circle of people, "I was born into the
world without a single penny." And Kaufman answered, "Oh really.
When I was born, I owed twelve dollars."
Well, we don't have to let the deficit play a cruel joke on
3
future generations. Next year alone, federal tax revenues will
rise by more than $80 billion. And we're going to use those
funds to bring the deficit down below the Gramm-Rudman-Hollings
targets.
To spur greater investment in American business, we need to
bring our taxation of capital gains down -- in line with that of
our trading partners. In the budget we've proposed to Congress,
we want to restore the differential to 15 percent on long-held
assets.
How many of you, as you built your businesses, were able to
just walk up to a bank and get equity? Few, if any. Most of you
probably raised capital by offering people a share of the
business -- and a stake in the outcome.
Cutting the capital gains rate means more of that can
happen. It will give businesses more of the capital they need to
grow. It will bring in $4.3 billion more in tax revenues,
according to the Treasury. And it will create more new jobs.
That's no tax break for the rich. That's a fair shake for
every American.
The budget consultations are being held behind closed doors;
X We fre encomaged by on progresson the budget
so I can't tell you how they're going But we're determined to
regotiations. Drh Darman of I are
4
work with this Congress -- we're counting on their cooperation,
to find answers we can all live with.
We want to build on the energy and initiative of American
to legislate
business -- and we're determined to avoid burdensome mandates
cannot
that only enforce solutions of uniform mediocrity. We don t want
to limit the flexibility of managers and workers, who are trying
to to find their own best solutions. And you know, many are already
succeeding.
studies inducate
the
Chamber of Commerce estimates suggest that workers are
receiving more fringe benefits than ever before. Total benefits
in 1987 were up 163 percent in a decade. And it is the market --
not government -- that is responsible for this growth.
Nearly eighty percent of growth in the fringe share of
compensation is due to voluntary action by employers. Only 21
percent is due to government requirements. We want to keep it
that way.
A "mandated benefit" is a contradiction in terms. How would
you feel if your doctor said, "Well, nothing's broken
but
bundeno
we're going to put you in a full-body cast anyway." No thanks.
A hallmark of this administration will be its focus on the
future -- and the importance we attach to making the right kinds
today to deliver 5 om the productivity dividends tombrow. Ad enhancing competitivens
of investment
You don't make your money on short-term, day-to-
day trades -- you make it through sound long-term planning.
There can be no investment more urgent -- or more compelling
for the future of American business, and this country as a whole,
than education. In this, all of us have a stake in the outcome.
Each of us has a stake
As labor markets get tighter in the coming years, many of
you are going to be facing shortages of skilled people. Some
managers are already worried about a scarcity of science and
engineering graduates. And you've all read the surveys that show
Pacific Rim students outperforming our own.
Our best students can compete with anyone in the world.
We're not on the verge of some intellectual brown-out. But in
order to give business more of the people it needs to compete --
to help build America's prosperity -- and to give more of our
young people the skills they need to share in that prosperity --
we have made education a national priority.
Tomorrow, I will send to the Congress an education package.
We want to reward merit schools that make progress in terms of
raising student achievement, and reducing drug use and drop-out
rates. We're promoting parental choice and educational quality,
through magnet schools of excellence.
6
We want to provide alternative certification of teachers and
principals, to broaden the pool of talent available; President's
Awards to outstanding teachers; Urban Emergency Grants to
provide comprehensive help in fighting drugs for school districts
under seige; a National Science Scholars program for high school
seniors; and additional endowment matching grants for
historically black colleges and universities, which occupy a
unique and vital position in American higher education.
We are committed to a program of education reform that will
give our young people a solid foundation for the future. But to
make lasting improvements in education, we'll need to get all of
the players -- superintendents and administrators, school boards,
local business leaders, teachers' unions -- around the table,
working together.
This will demand accountability from all of us. It will
require the best kind of collective effort, from all directions
-- but it holds the promise of real progress.
Many of you have been prime movers, spending a remarkable
amount of your own time making good on that promise. More than
a third of you serve on local school boards, public or private --
or on the board of a local college or university.
7
Others among you have established a program with a local
community college, or "adopted" a school, or taught part-time, or
promoted science education across a school district. That's the
kind of involvement that, while it isn't always easy, leads to
the kind of educational reform that lasts
Consider yourself one
in a thousand -- you know, points of light.
If is the kind
hishetplace denand
involvement le challenges of global
By investing your time and talents toward the education of
our young people, you're helping to bring about something vital
-- a fundamental cultural shift, that reasserts the value of
learning in this country.
You're breathing new life into an idea that has always been
a testament to the American spirit: that doing well demands
doing good.
Nothing I might tell you would say it better than your own
mission statement, which says ABC executives "believe their own
business success carries with it a responsibility to help expand
economic opportunity throughout the economy."
As business leaders, you understand the power of interests
held in common. Education is the one investment that guarantees
economic opportunity -- for every individual, and every business
in America. Thank you. And God bless you.
K. More pre-ebts
(Lange/Martin)
March 30, 1989
1:15 p.m.
PRESIDENTIAL REMARKS:
AMERICAN BUSINESS CONFERENCE
ROOM 450, OLD EXECUTIVE OFFICE BLDG.
TUESDAY, APRIL 4, 1989
2:00 P.M.
I've met with this group three times, over the last eight
years -- and every meeting has been a resounding success. So
I've got a mind to ask: Why can't we equal or exceed that kind
of contact over the next eight years?
Among the many close friends I have in the ABC, I'd like to
mention your former vice chairman, now Commerce Secretary, Bob
Mosbacher. Like all of you, he knows what it means to take
risks, to build a business, and to keep America first. He's
already doing a superb job.
To be sitting in this room today, as ABC members, you've had
to keep your earnings at three times the growth of the economy,
plus inflation. Now, if Bob can just make that happen for every
business in America
I'll make him the Business Czar and we can
all go fishing.
You run the kind of high-growth businesses that represent
the most dynamic, entrepreneurial segment of the American
economy. And this government knows better than to fix what's
already working.
the
2
So this afternoon I'm going to address two areas of concern
to you: the economics of enterprise, and education.
reform
For anyone running a business, flexibility and sound
investment are now more important than ever. Your concern about
a lack of savings is clearly motivated by a lack of domestic
investment capital for American industry. Now, the personal
savings rate has hit 5.2 percent or better for the past three
months. That's good news. But we cannot relax.
The working paper you released last month on overconsumption
was another reminder that the deficit must be brought under
control. So let me reassure you -- this government will not
become the fiscal equivalent of Overeaters Anonymous.
Accountability in government demands that we put an end to this
spending spiral.
You know, when George Kaufman -- that famous wit from the
Algonquin Round Table -- was at a party, he heard a self-made
millionaire boasting to a circle of people, "I was born into the
world without a single penny." And Kaufman answered, "Oh really.
When I was born, I owed twelve dollars."
Well, we don't have to let the deficit play a cruel joke on
future generations. Next year alone, federal tax revenues will
rise by more than $80 billion. And we're going to use those
3
funds to bring the deficit down below the Gramm-Rudman-Hollings
targets.
To spur greater investment in American business, we need to
bring our taxation of capital gains down -- in line with that of
our trading partners. In the budget we've proposed to Congress,
we want to restore the differential to 15 percent on long-held
assets.
How many of you, as you built your businesses, were able to
just walk up to a bank and get equity? Few, if any. Most of you
probably raised capital by offering people a share of the
business -- and a stake in the outcome.
Cutting the capital gains rate means more of that can
happen. It will give businesses more of the capital they need to
grow. It will bring in $4.3 billion more in tax revenues,
according to the Treasury. And it will create more new jobs.
That's no tax break for the rich. That's a fair shake for
every American.
The budget consultations are being held behind closed doors;
so I can't tell you how they're going. Which may strike you like
one of those spy movies where somebody knows a secret, and says,
"You know, I'd tell you -- but then I'd have to kill you. But
4
we're determined to work with this Congress -- we're counting on
their cooperation, to find answers we can all live with.
We want to build on the energy and initiative of American
business -- and we're determined to avoid burdensome mandates
that only enforce solutions of uniform mediocrity. We don't want
to limit the flexibility of managers and workers, who are trying
to find their own best solutions. And you know, many are already
succeeding.
Chamber of Commerce estimates suggest that workers are
receiving more fringe benefits than ever before. Total benefits
in 1987 were up 163 percent in a decade. And it is the market --
not government -- that is responsible for this growth.
Nearly eighty percent of growth in the fringe share of
compensation is due to voluntary action by employers. Only 21
percent is due to government requirements. We want to keep it
that way.
The knm
is
"Mandated benefits" are a contradiction in terms. How would
you feel if your doctor said, "Well, nothing's broken but
we're going to put you in a full-body cast anyway." No thanks.
A hallmark of this administration will be its focus on the
future -- and the importance we attach to making the right kinds
5
of investment. You don't make your money on short-term, day-to-
day trades -- you make it through sound long-term planning.
There can be no investment more urgent -- or more compelling
for the future of American business, and this country as a whole,
than education.
stake nitione
As labor markets get tighter in the coming years, many of
you are going to be facing shortages of skilled people. Some
managers are already worried about a scarcity of science and
engineering graduates. And you've all read the surveys that show
Pacific Rim students outperforming our own.
Our best students can compete with anyone in the world.
We're not on the verge of some intellectual brown-out. But in
order to give business more of the people it needs to compete --
to help build America's prosperity -- and to give more of our
young people the skills they need to share in that prosperity --
we have made education a national priority.
Tomorrow, I will send to the Congress an education package.
We want to reward merit schools that make progress in terms of
raising student achievement, and reducing drug use and drop-out
rates. We're promoting parental choice and educational quality,
through magnet schools of excellence.
6
We want to provide alternative certification of teachers and
principals, to broaden the pool of talent available; President's
Awards to outstanding teachers; Urban Emergency Grants to
provide comprehensive help in fighting drugs for school districts
under seige; a National Science Scholars program for high school
seniors; and additional endowment matching grants for
historically black colleges and universities, which occupy a
unique and vital position in American higher education.
We are committed to a program of education reform that will
give our young people a solid foundation for the future. But to
make lasting improvements in education, we'll need to get all of
the players -- superintendents and administrators, school boards,
local business leaders, teachers' unions -- around the table,
working together.
This will demand accountability from all of us. It will
require the best kind of collective effort, from all directions
-- but it holds the promise of real progress.
Many of you have been prime movers, spending a remarkable
amount of your own time making good on that promise. More than
a third of you serve on local school boards, public or private --
or on the board of a local college or university.
7
Others among you have established a program with a local
community college, or "adopted" a school, or taught part-time, or
promoted science education across a school district. That's the
kind of involvement that, while it isn't always easy, leads to
the kind of educational reform that lasts. Consider yourself one
in a thousand -- you know, points of light.
By investing your time and talents toward the education of
our young people, you're helping to bring about something vital
-- a fundamental cultural shift, that reasserts the value of
learning in this country.
You're breathing new life into an idea that has always been
a testament to the American spirit: that doing well demands
doing good.
Nothing I might tell you would say it better than your own
mission statement, which says ABC executives "believe their own
business success carries with it a responsibility to help expand
economic opportunity throughout the economy."
As business leaders, you understand the power of interests
held in common. Education is the one investment that guarantees
economic opportunity -- for every individual, and every business
in America. Thank you. And God bless you.
(Lange/Martin)
March 30, 1989
9:30 a.m.
PRESIDENTIAL REMARKS:
AMERICAN BUSINESS CONFERENCE
ROOM 450, OLD EXECUTIVE OFFICE BLDG.
TUESDAY, APRIL 4, 1989
2:00 P.M.
I've met with this group three times, over the last eight
years -- and every meeting has been a great success. So I've got
a mind to ask: Why can't we equal or exceed that kind of contact
over the next eight years?
Among the many close friends I have in the ABC, I'd X mention
your former vice chairman, now Commerce Secretary, Bob Mosbacher.
Like all of you, he knows what it means to take risks, to build a
business, and to keep America first. And he's already doing a
superb job.
To be sitting in this room today, as ABC members, you've had
to keep your earnings at three times the growth of the economy,
plus inflation. Now, if Bob can just make that happen for every
business in America
I'll make him the Business Czar and we can
all go fishing.
You run the kind of high-growth businesses that represent
the most dynamic, entrepreneurial segment of the American
economy. And this government knows better than to fix what's
already working.
2
So this afternoon I want to talk to you about what we're
doing to encourage flexibility for the present -- and investment
for the future.
For anyone running a business, flexibility and sound
investment are now more important than ever. Your concern about
a lack of savings is clearly motivated by a lack of investment
capital for American industry. Now, the personal savings rate
hit 5.9 percent in February -- nearly a seven-year high. That's
good news.
But the working paper you released last month on
overconsumption was another reminder that the deficit must be
brought under control. So let me reassure you -- this government
will not become the fiscal equivalent of Overeaters Anonymous.
Accountability in government demands that we put an end to this
spending spiral.
You know, when George Kaufman -- that famous wit from the
Algonquin Round Table -- was at a party, he heard a self-made
millionaire boasting to a circle of people, "I was born into the
world without a single penny." And Kaufman answered, "Oh really.
When I was born, I owed twelve dollars.' "
Well, we don't have to let the deficit play a cruel joke on
3
future generations. Next year alone, federal tax revenues will
rise by more than $80 billion. And we're going to use those
funds to bring the deficit down below the Gramm-Rudman-Hollings
targets.
To spur greater investment in American industry, we need to
bring our taxation of capital gains down -- in line with that of
our trading partners. In the budget we've proposed to Congress,
we want to restore the differential to 15 percent on long-held
investments.
How many of you, as you built your businesses, were able to
just walk up to a bank and get equity? Few, if any. Most of you
probably raised capital by offering people a share of the
business -- and a stake in the outcome.
Cutting the capital gains rate means more of that can
happen. It will give businesses more of the capital they need to
grow. It will bring in $4.3 billion more in tax revenues,
according to the Treasury. And it will create more new jobs.
That's no tax break for the rich. That's a fair shake for
every American.
The budget consultations are being held behind closed doors;
so I can't tell you how they're going. Which may strike you like
4
one of those spy movies where somebody knows a secret, and says,
"You know, I'd tell you -- but then I'd have to kill you. But
we're determined to work with this Congress -- you know, live and
let live -- to find answers we can all live with.
We want to build on the energy and initiative of American
business -- and we're determined to avoid burdensome mandates
that only enforce solutions of uniform mediocrity. We don't want
to limit the flexibility of managers and workers, who are trying
to find their own best solutions. And you know, many are already
succeeding.
Chamber of Commerce estimates suggest that workers are
receiving more fringe benefits than ever before. Total benefits
in 1987 were up 163 percent in a decade. And it is the market --
not government -- that is responsible for this growth.
Nearly eighty percent of growth in the fringe share of
compensation is due to voluntary action by employers. Only 21
percent is due to government requirements. We want to keep it
that way.
"Mandated benefits" are a contradiction in terms. How would
you feel if your doctor said, "Well, nothing's broken but
we're going to put you in a full-body cast anyway." No thanks.
5
A hallmark of this administration will be its focus on the
future -- and the importance we attach to making the right kinds
of investment. You don't make your money on short-term, day-to-
day trades -- you make it through sound long-term planning.
There can be no investment more urgent -- or more compelling
for the future of American business, and this country as a whole,
than education.
As labor markets get tighter in the coming years, many of
you are going to be facing shortages of skilled people. Some
managers are already worried about a scarcity of science and
engineering graduates. And you've all read the surveys that show
Pacific rim students outperforming our own.
Our best students can compete with anyone in the world.
We're not on the verge of some intellectual brown-out. But in
order to give business more of the people it needs to compete --
to help build America's prosperity -- and to give more of our
young people the skills they need to share in that prosperity --
we have made education a national priority.
TOMORROW,
Next week I will be sending to Congress an education
legislation package. We want to reward merit schools that make
progress in terms of raising student achievement, and reducing
6
drug use and drop-out rates. We're promoting parental choice and
educational quality, through magnet schools of excellence.
We want to provide alternative certification of teachers and
principals, to broaden the pool of talent available; President's
Awards to outstanding teachers; Urban Emergency Grants to
provide comprehensive help in fighting drugs for school districts
under seige; a National Science Scholars program for high school
seniors; and additional endowment matching grants for
historically black colleges and universities, which occupy a
unique and vital position in American higher education.
We are committed to a program of education reform that will
give our young people a solid foundation for the future. But to
make lasting improvements in education, we'll need to get all of
the players -- superintendents and administrators, school boards,
working tog ether.
local business leaders, teachers' unions -- around the tablex
joined in a common effort
This will demand accountability from all of us. It will
require the best kind of collective effort, from all directions
-- but it holds the promise of real progress.
Many of you have been prime movers, spending a remarkable
amount of your own time making good on that promise. More than
a third of you serve on local school boards, public or private --
or on the board of a local college or university.
7
Others among you have established a program with a local
"adopted" a
community college, or created Montessori schools, or taught part-
time, or promoted science education across a school district.
That's the kind of involvement that, while it isn't always easy,
leads to the kind of educational reform that lasts. Consider
yourself one in a thousand --- you know, points of light.
By investing your time and talents toward the education of
our young people, you're helping to bring about something vital
-- a fundamental cultural shift, that reasserts the value of
learning in this country.
You're breathing new life into an idea that has always been
a testament to the American spirit: that doing well demands
doing good.
Nothing I might tell you would say it better than your own
mission statement, which says ABC executives "believe their own
business success carries with it a responsibility to help expand
economic opportunity throughout the economy."
As business leaders, you understand the power of interests
held in common. Education is the one investment that guarantees
economic opportunity -- for every individual, and every business
in America. Thank you. And God bless you.
Juny to work in a little
THE PRESIDENT HAS SEEN
human on an anecdote
4/3/89
(Lange/Martin)
March 31, 1989
2/3 nel of way through
6:30 p.m.
PRESIDENTIAL REMARKS:
AMERICAN BUSINESS CONFERENCE
even a rogi-13m!!!
ROOM 450, OLD EXECUTIVE OFFICE BLDG.
TUESDAY, APRIL 4, 1989
2:00 P.M.
I've met with this group three times, over the last eight
years -- and every meeting has been a resounding success. so
- worthwite med
I've got a mind to ask: Why can't we equal or exceed that kind
of contact over the next eight years?
productive. 4 in glad to be bach.
Among the many close friends I have in the ABC, I'd like to
mention your former vice chairman, now Commerce Secretary, Bob
Mosbacher. Like all of you, he knows what it means to take
risks, to start a business, make it grow, and keep it
competitive. Here in Washington, he is putting his experience to
work. Bob is on the cutting edge of our national effort to Build
a Better America.
To be sitting in this room today, as ABC members, you've had
to keep your earnings at three times the growth of the economy,
plus inflation. Now, if Bob can just make that happen for every
business in America
I'll make him the Business Czar and we can
all go fishing.
You run the kind of high-growth businesses that represent
the most dynamic, entrepreneurial segment of the American
2
economy. And this government knows better than to fix what's
already working.
So this afternoon I'm going to address two areas of concern
to you: the economics of enterprise -- and the imperative for
education reform.
You folks know the same lesson that I learned as a
businessman. You need capital to grow. What you don't need is
higher taxes on your earnings, or higher taxes on your workers,
or higher taxes on those who invest their money in your firm.
Right now the government is making too big a claim on
America's capital to cover our deficit. That's capital that
should be invested in America's businesses. The best way to
channel more capital into productive investment is not higher
taxes. It's spending restraint.
The working paper you released last month was another
reminder that the deficit must be brought under control. So let
me reassure you -- this government will not become the fiscal
equivalent of Overeaters Anonymous. Accountability in government
demands that we put an end to this spending spiral.
You know, when George Kaufman -- that famous wit from the
Algonquin Round Table -- was at a party, he heard a self-made
3
millionaire boasting to a circle of people, "I was born into the
world without a single penny." And Kaufman answered, "Oh really.
When I was born, I owed twelve dollars."
Well, we don't have to let the deficit play a cruel joke on
future generations. Next year alone, FY1990 federal revenues will rise
by more than $80 billion -- with no tax increase. And we're
to meet on beat
going to use those funds to bring the deficit down below the
Gramm-Rudman-Hollings targets.
so Far have been
Our budget consultations with Congress are going well.
We're determined to work with this Congress -- we're counting on
their cooperation, to find answers we can all live with.
To spur greater investment in American business, we need to
bring our taxation of capital gains down -- in line with that of
our trading partners. In the budget we've proposed to Congress,
we want to restore the differential to 15 percent on long-held
assets.
How many of you, as you built your businesses, were able to
just walk up to a bank, and get a loan to cover your start-up
costs? Few, if any. Most of you probably raised capital by
offering people a share of the business -- and a stake in the
outcome.
4
Cutting the capital gains rate means more of that can
happen. It will give businesses more of the capital they need to
grow. It will bring in $4.8 billion more in tax revenues in
1990, according to the Treasury. And it will create more new
jobs.
That's no tax break for the rich. That's a fair shake for
every American.
We want to build on the energy and initiative of American
business -- without burdensome mandates that only enforce
solutions of uniform mediocrity. We don't want to limit the
flexibility of managers and workers, who are trying to find their
own best solutions. And you know, many are already succeeding.
Chamber of Commerce estimates suggest that workers are
receiving more fringe benefits than ever before. Total benefits
in 1987 were up 163 percent in a decade. And it is the market --
not government -- that is responsible for this growth.
Nearly eighty State percent of growth in benefits is due to
70
voluntary action by employers. Only percent is due to
government requirements. We want to keep it that way.
European
Our friends in Europe Rase tried mandated
thid angin again you all
over benefits and have have found since that found such bittle righters
they haven't had much fuccess. They're now looking for
ways to free up enterprise, American style and make it more flaxible,
not box. For us to go toward martaled benefits would be, as
yogi Berra put it, like "dija ruall our again."
drop
5
A "mandated benefit" is a contradiction in terms.
How would
you feel if your doctor said, Well, nothing's broken.
but
we're going to put you in a full-body cast anyway." No thanks.
Mandated benefits are really mandated burdens. America will be
more competitive if we continue to resist the temptation to heap
burdensome mandates on the productive private sector.
A hallmark of this administration will be its focus on the
future -- and the importance we attach to making the right kinds
of investment. There can be no investment more urgent -- or more
compelling for the future of American business, and this country
as a whole, than education. In this, all of us have a stake in
the outcome.
As labor markets continue to get tighter in the coming
years, many of you are going to be facing shortages of skilled
people. Some managers are already worried about a scarcity of
science and engineering graduates. And you've all read the
surveys that show many foreign students outperforming our own.
Although our best students can compete with anyone in the
world, the challenge we face is to adapt our educational system
so that all of our students receive the skills they need to share
in that prosperity -- my Administration has made education a
national priority.
6
Our program is based on four principles: it rewards
excellence, helps those most in need, demands accountability, and
supports greater flexibility and choice.
Tomorrow, I will send to the Congress our education package.
We want to reward merit schools that make progress in terms of
raising student achievement, and reducing drug use and drop-out
rates. We're promoting parental choice and educational quality,
through magnet schools of excellence.
We want to provide alternative certification of teachers and
principals, to broaden the pool of talent available; President's
Awards to outstanding teachers; Urban Emergency Grants to
provide comprehensive help in fighting drugs for school districts
under siege; a National Science Scholars program for high school
seniors; and additional endowment matching grants for
historically black colleges and universities, which occupy a
unique and vital position in American higher education.
We are committed to a program of education reform that will
give our young people a solid foundation for the future. But to
make lasting improvements in education, we'll need to get all of
the players -- administrators, school boards, local business
leaders, parents, teachers' unions -- around the table, working
together.
7
This will demand accountability from all of us. It will
require the best kind of collective effort, from all directions
-- but it holds the promise of real progress.
Many of you have been prime movers, spending a remarkable
amount of your own time making good on that promise. More than
a third of you serve on local school boards, public or private --
or on the board of a local college or university.
Others among you have established a program with a local
community college, or "adopted" a school, or taught part-time, or
promoted science education across a school district. That's the
kind of involvement that, while it isn't always easy, leads to
the kind of educational reform that lasts. It places you among
the "thousand points of light" that spread hope and opportunity.
You are part of what makes America special.
By investing your time and talents toward the education of
our young people, you're helping to bring about something vital
-- a fundamental cultural shift, that reasserts the value of
learning in this country. You're breathing new life into an idea
that has always been a testament to the American spirit: that
doing well demands doing good.
Nothing I might tell you would say it better than your own
mission statement, which says ABC executives "believe their own
8
business success carries with it a responsibility to help expand
economic opportunity throughout the economy. "
As leaders -- not only in business but in every sector of
our society -- you know that the national interest requires us to
invest in the future. Education is the best investment we can
make, if we want to Build a Better America.
Thank you. And God Bless you all.
THE WHITE HOUSE
WASHINGTON
FRINGE BENEFITS FOR AMERICAN WORKERS
Workers are Receiving More Fringe Benefits than Ever Before
According to Chamber of Commerce estimates, total
benefits reached $813.9 billion in 1987, up 163 percent
in a decade.
In 1987, total benefits reached a record 36.2 percent
of wages and salaries. That is more than twice the
share wages in the late 1950s.
Non-Cash Fringes, Especially Time Off, Is Rising Most Rapidly
Payment for Time Off amounted to 11 percent of payroll
in 1987, equivalent to 28.6 days off. Of this:
14.8 days (or 3 weeks) were paid vacation
8.6 days were paid holidays
3.6 days were paid sick days
1.6 days were for other reasons, including
parental leave
Twenty years ago, time off amounted to 20.5 days per
year. Ten years ago it was 25.5 days.
Total Cash Fringes are Rising But Declining as a Percent of
Payroll
Total Cash Fringes reached $652 billion in 1987, up 141
percent in a decade.
This was 19.3 percent of payroll, down from a peak of
20.6 percent in 1983, but still higher than the 18.4
percent of a decade ago. Possible reasons for this:
With lower tax rates, cash fringes are less
attractive relative to wages than they used
to be.
The rising stock market has meant that
companies need to contribute less new money
to fund their pension plans.
The Market, Not Government Is Responsible For Rising Fringes
79 percent of the growth in the fringe share of
compensation is due to voluntary action by employers.
Only 21 percent is due to government requirements.
BENEFITS AS A PERCENTAGE OF WAGES
ODD YEARS 1955 - 1987
36.0%
32.0%
28.0%
TOTAL
Non-Cash Fringe Benefits
24.0%
20.0%
16.0%
Cash Fringe Benefits
12.0%
8.0%
4.0%
Social Insurance Contribution
I
I
I
I
I
'55 '57 '59 '61 '63 '65 '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87
About ABC
Since its inception in 1981, the American Busi-
ness Conference has served as the voice of the midsize,
high-growth sector of the economy. Comprising one
hundred chief executive officers of high growth com-
panies with revenues over $25 million, ABC works to
create policies which promote fundamental economic
growth and new opportunities for entrepreneurship.
Copyright © 1989
George N. Hatsopoulos
Thermo Electron Corporation
101 First Avenue
P.O. Box 9046
Waltham; MA 02254-9046
Overconsumption:
The Challenge to U.S. Economic Policy
George N. Hatsopoulos, Paul R. Krugman,
and James M. Poterba
Jointly sponsored by the
American Business Conference and
Thermo Electron Corporation
Overconsumption: The Challenge to U.S. Economic Policy
Table of Contents
Acknowledgement
3
Foreword
4
Executive Summary
5
Overconsumption:
The Challenge to U.S. Economic Policy
6
Introduction
6
The Bottom Line
6
Short-run Risks of Low National Saving
7
Long-run Consequences of
Low National Saving
8
The Rise of Personal Consumption
9
A Strategy to Raise
National Saving
11
Reducing the Federal Deficit
12
Inducing Voluntary Increases
in Personal Saving
13
Slowing Down the Leveraging of
U.S. Corporations
14
A Possible Alternative
16
Conclusion
16
Appendices:
I. Determinants of Consumer Spending
17
Consumption Function Estimates
17
Explaining Consumption Growth,
1970 to 1988
20
Sensitivity Analysis
21
II. Why Has Leverage Increased?
23
III. Potential Effects of Saving Incentives
26
IV. Effect of Revenue-Neutral Changes In
Corporate Taxation on the Cost of Capital
26
3
Acknowledgement
This work benefited greatly from discussion and criti-
cisms from many economists, engineers, and business
executives. We are particularly grateful to Martin
Feldstein, Dale Jorgenson, Lawrence Summers, and Paul
Volcker for their time in reviewing this document and for
their constructive suggestions. We also thank the
economists of the Federal Reserve Bank of Boston for their
input and contribution.
We are particularly indebted to the members of the
American Business Conference, and especially to Barry
Rogstad, for the interest in the subject of national saving.
The impetus emerged from discussions of ABC chief execu-
tives during task force meetings on economic policy.
Finally, we wish to recognize the tireless and extraor-
dinary staff support provided by Linda Nordberg of
Thermo Electron Corporation.
Overconsumption: The Challenge to U.S. Economic Policy
Foreword
Overconsumption: The Challenge to U.S. Economic Policy is
one in a series of working papers sponsored by the American
Business Conference. These working papers advance innova-
tive ideas on issues relating to economic growth and capital
formation. Deliberately provocative, they are intended to
spark discussion and debate regarding how best the United
States can stimulate new investment, job creation, and
greater international competitiveness.
George Hatsopoulos, the lead author of this working
paper, is a founding member of the American Business
Conference, chairman and president of Thermo Electron
Corporation, and the author of numerous economic mono-
graphs including an ABC sponsored ground-breaking study
of comparative capital costs. In Overconsumption: The Challenge
to U.S. Economic Policy, Dr. Hatsopoulos and his collaborators,
Professor Paul Krugman and Professor James Poterba of the
Massachusetts Institute of Technology, examine one of the
most troubling economic phenomena of recent years-the
low level of savings in the American economy. They analyze
the sources and consequences of the problem and suggest
some highly intriguing policy options to address it.
Their paper could not be more timely. Our anemic na-
tional savings threatens the nation's capacity to generate suf-
ficient investment necessary to remain competitive in a global
market. Indeed, the members of the American Business Con-
ference— the chief executives of one hundred fast-growing,
midsize businesses-regard the low level of national savings,
which includes government dissaving in the form of chronic
federal budget deficits, as the single greatest economic prob-
lem confronting the country.
We would like to thank Dr. Hatsopoulos and his co-au-
thors for their efforts. Their paper has already ignited a lively
exchange among ABC members and will, we believe, simi-
larly enrich the ongoing dialogue on fiscal issues within the
economic policy-making community at large.
Arthur Levitt Jr., Chairman
Barry K. Rogstad, President
American Business Conference
New York and Washington, March 1989
5
Executive Summary
Overconsumption: The Challenge to U. S. Economic Policy
many sources. The most popular villain - the federal
budget deficit - accounts for less than half of the decrease.
For the first time in America's history, the prosperity
Reduced private saving bears more of the responsibility.
of its people is supported not by its production, but by the
Together these factors account for a decline in national sav-
selling of assets that took many generations to create. The
ing from 8 percent of national income in the 1970s, to
federal budget deficit is widely perceived as the central
barely 2 percent of national income today.
problem. The deficit is, however, only a contributing fac-
Our investigation suggests that four basic factors have
tor to a more fundamental problem: excessive consumption
played a central role in the decline in saving, or equiva-
relative to output.
lently, the growth of consumption:
The United States is currently consuming a higher
Growth of the federal deficit,
fraction of its national income than any other industrialized
nation and a far higher fraction than in any comparable
Changes in the demographic structure of
period of our history. Our high consumption rate (or equi-
the U.S. population,
valently, our low saving rate) is the single most important
Increased personal wealth, and
cause of both unprecedented trade deficits and inadequate
Increased cash payout from firms to investors.
domestic investment during the 1980s. Restoring na-
tional saving at least to the level of the 1970s should be
The last factor reflects both the substitution of high-in-
the central goal of national economic policy.
terest- debt for low-dividend-yield equity in corpo-
rate capital structures, as well as the forced realization of
The Costs of Overconsumption
capital gains resulting from debt-financed takeovers and
leveraged buy outs.
High current consumption poses many threats to the
U.S. economy. One is that our dependence on foreign cap-
Solutions to Overconsumption
ital and the growing overhang of debt expose the United
States to short-run risks. More fundamentally, our high
Slowing the growth of consumption relative to the
current consumption mortgages our future. Increasingly,
growth of national income requires prompt action on sev-
the U.S. economy has been attracting the capital it needs
eral fronts:
by selling our assets cheaply. Foreign investors have been
Reducing the Federal Deficit. Lowering government con-
induced to buy up U.S. land, corporations, and securities
sumption is the most direct method of attacking the over-
by a low dollar that makes these assets inexpensive in
consumption problem. Raising taxes, thereby lowering
foreign currency. This process cannot continue indefinitely;
private consumption, will also increase national saving
ultimately, inadequate national saving must translate into
although the net effect is less certain. The differential ef-
reduced investment. During the late 1980s, the United
fect of various tax changes on private saving, and thus
States had the lowest rate of net investment, as well as the
national saving, should be recognized.
lowest rate of productivity growth, of major industrial
countries. The principal long-run cost of overconsumption
Improving Incentives for Private Saving. Introducing a
is a gradual slowing down of the growth of living stan-
national campaign to promote saving and issuing "Super-
dards.
saver" bonds to encourage households to save for the
long-run could bolster the falling private saving rate.
The Causes of Overconsumption
Eliminating Incentives for Corporate Leverage. Equal tax
treatment of debt and equity would slow the growth of
The sharp fall in national saving during the 1980s has
corporate leverage and thereby reduce the trend toward
higher cash payout to shareholders, and bondholders.
Overconsumption: The Challenge to U.S. Economic Policy
Overconsumption:
The Challenge to U.S. Economic Policy
Introduction
The Bottom Line
The single greatest problem of the U.S. economy in the
Saving for the nation has the same definition as saving
late 1980s is its extremely low level of national saving. The
for an individual: the excess of income over expenditure for
current low national saving rate - the lowest rate we have ever
current consumption. For the nation as a whole, saving is de-
had except in times of war or depression, less than half the
fined as the difference between national income and national
rate in the severe recession year of 1982, and by far the lowest
consumption. National income, in turn, is simply net
rate in the industrial world - lies at the root of both our un-
national product - the value of goods and services produced
precedented trade deficits and our inadequate level of domes-
in the economy, less depreciation of the national capital stock
tic investment, which in turn is a major cause of low U.S.
- while national consumption is the sum of private consump-
productivity growth.
tion and consumption by the public sector.
Low U.S. national saving is usually blamed primarily
Table I shows the relation between national saving, net
on the federal budget deficit. While the budget deficit was an
domestic investment, and net U.S. investment abroad (the
important contributory factor to the decline in national saving in the
current account balance) in the period 1985 to 1987 compared
1980s, it was far from the whole story: declining private saving was
to the period 1970 to 1979, all expressed as a percent of
more important. Eliminating the budget deficit, therefore, will
national income.
not eliminate the national saving problem.
During the 1970s the United States saved on average
From 1985 to 1987 the federal deficit declined substan-
7.9 percent of its national income. Of that, 7.6 percent
tially. Yet private saving declined even more and, as a result,
was invested domestically and 0.3 percent abroad. In the
national saving declined. It therefore appears that there are
mid- 1980s (1985 to 1987) the United States experienced
important factors depressing national saving other than the
a dramatic decline of its national saving to an average of
budget deficit. In other words, a commitment by the United
2.1 percent of national income. Such a low rate of national
States to eliminate the federal deficit, important as this goal
saving is unprecedented for periods of economic expansion,
is, is not sufficient. We need a national policy that focuses on the
not only for the United States but for all industrialized na-
real bottom line: restoring national saving to at least the level of ten
tions.
years ago.
The decline in national saving has forced the United
The purpose of this paper is to review the causes and
States to borrow massively from foreigners ($417 billion
consequences of the low U.S. national saving rate and to prop-
from 1985 to 1987) and to reduce net domestic investment
ose some policy changes that could help to reverse its alarm-
by 2 percentage points relative to the 1970s, which in-
ing decline.
cluded two recessions. From 1985 to 1987, 60 percent of
net national investment was financed by borrowing abroad.
Table I
Saving and Investment
1985-1987
1970-1979
Difference
(percent of national income)
Net National Saving
2.1
7.9
(5.8)
Equals: Net Domestic Investment
5.7
7.6
(1.9)
Plus: Net U.S. Investment Abroad
(3.6)
0.3
(3.9)
1. Strictly speaking, national income as usually defined differs slightly
ment. For this reason national saving is typically somewhat higher than
from net national product because of an adjustment for indirect taxes on business.
measured; while national income is actually somewhat lower because of depre-
This technical distinction is of no importance to our discussion and in what
ciation on government capital. However, the decline in national saving is almost
follows, we will use the concepts of national income and net national product
certainly larger than measured because of cutbacks in government investment.
interchangeably.
There is another measurement issue that we should note. Both national in-
2. A rate of national saving that is inadequate to support net domestic
come and the saving rate are somewhat incorrectly measured because of failure
investment results in high real interest rates that depress the rate of capital
to take account of the fact that part of government expenditure is actually invest-
formation.
7
Our continued dependence on foreigners to finance
Short-run Risks of Low National Saving
most of our net investment not only poses serious short-
term risks, but undermines the prospects for growth of the
National saving can be used for two purposes: to in-
U.S. standard of living. The low rate of net investment dur-
vest in the growth of domestic capacity, or to accumulate
ing the mid-1980s is inconsistent with sustained economic
net claims on foreigners, which will yield income in the
growth and international competitiveness. In fact, it has
future. The decline in U.S. national saving in the 1980s
been argued³ that a rate of net investment far greater, not
has been met primarily by a shift of the United States from
less, than that of the past is needed for our country to com-
a balance of payments surplus, in which we were gradually
pete and prosper over the remainder of the century.
increasing our stock of overseas assets, to a balance of
Since national saving is the difference between income
payments deficit, in which 60 percent of net investment
and consumption, the decline in the national saving rate
in the United States is financed by borrowing abroad.
is equivalent to a rise in the share of output that is
America has also experienced a decline in the rate of domes-
consumed. Table II shows what happened in the 1985 to
tic investment.
1987 period as compared to the average between 1970 and
Some people have argued that the dependence of the
1979. The share of output consumed by the federal govern-
United States on capital inflows is not a problem, but a
ment, that is, government purchases, increased by only one
sign of strength: it shows the willingness of foreigners to
percentage point.⁴ Consumption by state and local govern-
invest here. This argument tries to make a parallel between
ments remained unchanged. The problem of low national
U.S. experience in the 1980s and our experience in the 19th
saving is therefore primarily a problem of high personal
century when large capital inflows helped to finance a high
consumption.
rate of investment. The parallel is, however, a false one.
As discussed later, the escalation of personal consump-
The United States has not been borrowing in order to in-
tion in the mid- 1980s was primarily the result of four fac-
vest. In fact, our investment rate is well below its level of
tors: large federal budget deficits, changing demog-
the 1960s and 1970s, and the lowest in the industrial
raphics, increases in personal wealth, and the financial re-
world. We are borrowing to consume.
structuring of the corporate sector through debt-financed
What this means is that the United States is not re-
takeovers and leveraged buy outs. Before describing in
peating its own history, or emulating rapidly growing
more detail what caused the rise in personal consumption,
economies like South Korea that have borrowed heavily in
however, we shall address the short- term risks and long-
order to finance high investment that leads to high produc-
term damage to our economy that result from sustained low
tivity growth. Instead, we are following the example of the
rates of national saving.
nations of Latin America, who borrowed heavily on world
Table II
Consumption and Net
1985-1987
1970-1979
Difference
National Saving
(percent of national income)
National Income
100.0
100.0
-
Less: Personal Consumption
74.1
69.3
4.8
Less: Federal Government Purchases
10.6
9.6
1.0
Less: State & Local Government Purchases
13.2
13.2
-
Equals Net National Saving
2.1
7.9
(5.8)
3. G.N. Hatsopoulos, P.R. Krugman, L.H. Summers, "U.S. Competi-
mid- 1980s was solely due to defense spending. In spite of these increases,
tiveness: Beyond the Trade Deficit," SCIENCE, 15 July 1988, Volume 241,
federal purchases were a smaller share of national income for the 1985 to 1987
pp. 299-307.
period than during the 1960s.
4. The term government purchases means only direct spending by
5. Some have argued that the recent growth in consumption is partly
government, for example, purchases of supplies and compensation of govern-
due to higher outlays for durables which should in part be considered in-
ment employees. These numbers do not include government transfers to
vestment rather than consumption. Even consumption of nondurables and
individuals of which the Social Security program is the largest component.
services as a share of national income increased by 4 percentage points between
We have included government payments to foreigners with government
the 1970s and the mid- 1980s.
purchases. The increase in government purchases between the 1970s and the
Overconsumption: The Challenge to U.S. Economic Policy
markets but failed to use the foreign capital to expand their
1986) among the major industrial countries. A squeeze on
productive capacity.
investment will further accelerate our relative decline.
What happened to the Latin nations was that it even-
This investment squeeze can be postponed for a time
tually became obvious that their dependence on foreign
to the extent that the United States is able to attract inflows
capital was unsustainable. When this happened, they ex-
of foreign capital. However, these inflows carry their own
perienced a loss of foreign confidence, and the capital in-
cost: an increasing share of U.S. assets end up being
flows on which they had become dependent were suddenly
foreign-owned, implying that in the future a growing share
cut off with devastating economic effects. At the moment
of U.S. output will be claimed by foreigners.
the creditworthiness of the United States is still regarded
There is a tendency on the part of most Americans to
as strong, because our foreign debt is still small compared
regard the issue of foreign ownership as marginal; we find
to the size of our economy; but the risk of a loss of confi-
it hard to imagine that an economy as large as that of the
dence and a cutoff of capital flows cannot be ruled out.
United States could be in the process of seriously mortgag-
If such a cutoff of capital flows were to occur, the en-
ing its future. Yet the numbers do not support such com-
suing reduction in national income could be substantial.
placency. The market value of all U.S. corporations, public
Most estimates suggest that capital inflows are currently
and private, large and small, is only $2,400 billion; foreign
allowing the U.S. economy to live 5 percent or more
claims on the United States are already more than $1,000
beyond its means. That means that a cutoff of capital flows
billion, and because of our dependence on foreign financ-
would force the United States to make a sudden adjustment
ing, net foreign claims are increasing at a rate of between
comparable in size to that forced by the energy crises of
$120 and $160 billion a year. Admittedly, most foreign in-
1973 and 1979 combined. The result could easily be a re-
vestment in the United States is in interest-bearing assets,
cession induced by the efforts of the Federal Reserve to con-
not corporate equities, and corporate assets are only one
trol inflation, with an associated loss to the economy con-
fifth of U.S. wealth. Nonetheless, foreigners could have a
siderably greater than 5 percent.
large stake in the U.S. economy, including control of a
These risks do not seem pressing at the present time,
number of corporations, by early in the next century.⁸
but for a very unfortunate reason: The low value of the dol-
Such a prospect might be viewed with equanimity if
lar makes the purchase of U.S. assets by foreigners very ad-
foreign investment in the United States were attracted by
vantageous to them. As a result, net U.S. wealth is being
the strength of our economy and were helping to finance
transferred to foreigners. If this transfer continues for a pro-
a high rate of investment. But this is not the case. We are
longed period, the long-run consequences for the well-
in effect selling U.S. assets to pay for consumption, not
being of the American people will be onerous.
to finance creation of productive capacity. And since 1985,
we have been able to attract foreign capital only by making
Long-run Consequences of Low National Saving
U.S. assets progressively cheaper in terms of foreign curren-
cies, through a continually depreciating dollar.
Low national saving must eventually translate into
The need to attract foreign financing by depreciating
low domestic investment. While it is possible to finance
the dollar, of course, adds to the eventual cost of our de-
investment for a time through foreign borrowing, eventu-
pendence on foreign funds. To a certain extent the U.S. is not
ally the U.S. economy must pay its own way, which means
only mortgaging its future through foreign borrowing, but holding
that the ability to invest is constrained by the willingness
a "fire sale" of its assets at bargain prices in order to raise funds.
to save. The problem is that investment is the single most
It is important to emphasize that there is nothing
important factor in determining the economy's rate of pro-
wrong per se with foreigners buying U.S. assets. If Amer-
ductivity growth. The United States already has the lowest
icans were to buy foreign assets of the same long-term value
rate of net investment and, not coincidentally, the lowest
as those foreigners bought in the United States, the trans-
rate of long-term productivity growth (measured as the per-
action could be beneficial to both. This would happen if
centage change in real GDP per employed person, 1979 to
the U.S. current account were balanced and if the exchange
6. The 5 percent number may seem surprising, given that the current
and high interest rates.
account deficit is only approximately 3 percent of gross national product. The
larger number results from observation of two main points. First, net national
8. Net foreign investment in the United States between 1985 and 1987
product is somewhat smaller than GNP, so the ratio of the current deficit to
was $417 billion. Of that 76.5 percent was invested in financial assets other
this number is larger. Much more important, in order to bring its trade
than direct investment, 18.2 percent was used to acquire U.S. corporations
quickly into balance, the United States would have to depreciate the dollar
and divisions of U.S. corporations, and 5.3 percent for other direct invest-
sharply. This dollar depreciation would drive up the price of imports, reducing
ments. Acquisitions of U.S. companies by foreigners have constituted an in-
U.S. real income and requiring a larger contraction in real spending.
creasing fraction of net foreign investment: 9.5 percent in 1985, 17.2 percent
in 1986, and 25 percent in 1987. Other direct investment as a share of net
7. The recent growth in corporate leverage which we discuss in more de-
foreign investment has been declining. (Source: Flow of Funds Accounts, Board
tail in Appendix II, could magnify the effects of a cutoff of foreign capital.
of Governors of the Federal Reserve System and Mergerstat Review, W.T.
Highly leveraged firms are particularly vulnerable during periods of recession
Grimm and Company.)
9
rate of the dollar were at its long-term equilibrium rate.
government debt.
The problem with the current situation is that the United
For a number of reasons, however, this stylized view
States is selling its assets to finance consumption and quite
is an inadequate description of actual consumption
possibly doing so at too low a price.⁹
behavior. The most common objection is that many house-
The problem of U.S. dependence on foreign capital
holds, especially low income households, may face liquid-
cannot be solved by treating symptoms - by trying a crash
ity constraints because they are unable to borrow against
program of reducing the trade deficit by forcing the dollar
future labor income. Such constraints force households into
down even further, or by trying to support the value of the
a shorter-term focus, in which changes in cash flow,
dollar in order to avoid a "fire sale." If the U.S. were some-
whether due to reduced taxes or higher pre-tax income,
how to eliminate its current account deficit without raising
may raise consumption more than their impact on lifetime
the national saving rate, we would be in even worse trouble
earnings would indicate. Even higher income households
because the inadequacy of domestic saving would force a
who hold substantial assets and do not face liquidity con-
severe squeeze on investment. On the other hand, if the
straints may, however, be excessively sensitive to current
U.S. were somehow to raise the value of the dollar, the
cash flow. They may base their spending on rules of thumb
result would be to further widen our current account de-
that give a high weight to current receipts. For example,
ficit. The only way to avoid a "fire sale" of our assets is not
sophisticated managers have a tendency to ratchet up their
to need one.
consumption in response to a high bonus during a year of
The above discussion leads to one conclusion: It is a
record earnings, although they are fully aware of the tem-
national imperative to increase national saving immediately.
porary nature of such a payment. Because of this, many
Such action is necessary both to reduce short-term risks
large corporations accrue bonuses and pay them over a
and, more importantly, to prevent long-term damage to
number of years.
America's economic future.
There is substantial empirical evidence that house-
holds associate consumption more with current cash flow
The Rise of Personal Consumption
than with unrealized capital gains. This was one reason that
corporations paid cash dividends prior to the Tax Reform
The unprecedented escalation of personal consump-
Act of 1986, even though under pre-1986 tax rules they
tion in the mid-1980s is a recent phenomenon-personal
could have reduced stockholder taxes by issuing stock
consumption as a percent of national income exceeded
dividends and transferring cash to stockholders through
previous historical peaks in each of the years after 1981.
share repurchases. Thermo Electron and other high
This escalation has been attributed to many causes includ-
technology companies did make use of stock dividends; but
ing the presence of large federal deficits during a long
this led to criticism from many stockholders who would
economic expansion, changes in demographics, the rise in
have preferred to receive cash dividends because they were
personal wealth, and the changing attitudes of people.
unwilling to sell shares to support current consumption.
The determinants of consumption are a source of
The evident inadequacy of a framework in which
intense debate among economists. Much thinking on the
households form fully rational lifetime consumption plans
subject assumes that individual households rationally
has led most econometric model-builders to adopt a specifi-
formulate lifetime consumption plans based on both their
cation for the aggregate consumption function in which
current wealth and their expected earnings. If this were a
both household net worth and current disposable income
good description of actual behavior, consumption spending
affect spending decisions. Our empirical research, sum-
would be unresponsive to many influences commonly
marized in Appendix I, extends the usual approach to es-
cited. For example, dividend payments and accrued but un-
timating aggregate consumption functions by examining
realized capital gains would have equal effects on consump-
the effect of forced conversions of corporate equities into
tion. In addition, tax cuts would not be spent, because
cash. 10 Such conversions have resulted from the extraordi-
households would foresee the eventual burden of servicing
nary level of activity in debt-financed takeovers and lever-
9. There is considerable debate over whether the dollar is currently
does come down. Either way, within a few years, the U.S. will be forced to
under- or over-valued relative to the level it will settle at in the long run.
do without the massive net capital inflows that have replaced our vanishing
Nothing crucial in our argument depends on which side is right. At the mo-
national saving up to this point.
ment financial markets believe that the dollar is weak enough to ensure a
steady decline in the U.S. current account deficit. If they are right, then cap-
ital inflows, which are by definition equal to the current deficit, will also
10. One would of course expect a correlation between voluntary realiza-
steadily decline, implying a growing squeeze on U.S. investment. If the cur-
tion of gains and consumption spending, since households may realize gains
rent deficit does not continue its decline, markets will without doubt force
to finance spending on durables or large nondurable purchases. Our analysis
the dollar still lower until it reaches a level at which the external deficit really
focuses on the spending effects of involuntary realizations.
Overconsumption: The Challenge to U.S. Economic Policy
aged buy outs in the 1980s. Figure 1 illustrates the
as a result of four factors: growth in disposable income, changing
magnitude and the unusual aspect of these activities. Prior
demographics, variation of household wealth, and forced conver-
to 1984 net new equity issues in the corporate sector were
sions of equity into cash. In the 1985 to 1987 period, the con-
very small, averaging about zero. Since 1984, net new
sumption share of national income was 4.7 percent greater
equity issues have been negative-equity retirements have
than in the 1970 to 1979 period. While the imprecision
exceeded new equity issues by large amounts. Concur-
of econometric estimates suggests that our findings be vie-
rently, net additions to debt have grown rapidly.
wed as illustrative rather than as a precise decomposition,
Debt-financed purchases of corporate stock force
our basic results suggest that the growth in disposable in-
stockholders to convert their equity holdings, at least tem-
come, due primarily to rapid increases in interest income,
porarily, into cash. This would not affect the fully rational
accounts for 1.8 percentage points (more than one third)
investors of the stylized view. They should view cash and
of this increase. The decline in the share of the population
stocks as affecting their wealth equally and should im-
under age sixteen, with its associated changes in spending
mediately reinvest any cash accruing from a sale of stock.
behavior, may explain one quarter of the consumption
In reality, however, this is not the case: cash receipts are
growth. Rising household wealth and forced equity-to-
more likely to induce current consumption than gains that
cash conversions each account for approximately one-sixth
have not been converted into cash. This observation is con-
of the increase in consumption as a share of national in-
sistent with previous empirical work and the results de-
come. There remains a small unexplained growth compo-
scribed in Appendix I, according to which persons con-
nent.
sume only about 3 cents of each dollar of increased net
The rise of disposable income as a percent of national
worth as contrasted to over 50 cents on each dollar of forced
income in the mid- 1980s relative to the 1970s, to which
conversions of equity to cash.
we attribute more than a third of the increase in consump-
Our study of the underlying determinants of con-
tion, is essentially the result of the change in only one
sumer spending sheds new light on the growth in consump-
component: personal interest income. Labor income, the
tion during the 1980s. Our findings summarized in Table III
largest component of disposable income, declined slightly.
and explained in more detail in Appendix I suggest that the rising
Transfer payments less personal taxes and contributions for
ratio of consumption to national income can be explained largely
social insurance remained virtually constant.
250
Figure 1
Nonfinancial Corporate
Sector
200
($ in billions)
150
100
50
0
50
Net
Additions
- 100
to Debt
Net New
Equity
- 150
Issues
1960
65
70
75
80
85
11
The rise in interest income resulted primarily from
when corporations shift from equity to debt, they ordinari-
the high real interest rates in the mid-1980s. Real interest
ly end up paying more in interest than they would have
rates¹¹ received by households averaged 6 percent in the
paid in dividends and have less retained earnings. Thus per-
1985 to 1987 period as compared to 1.5 percent in the
sonal disposable income rises at the expense of accrued
1970s. Real interest rates were much higher in the mid-
capital gains. Since the propensity to consume is much
1980s than in the past partly¹² because national saving was
higher for changes in disposable income than for accrued
insufficient to fund domestic investment. The link be-
capital gains, such a shift promotes consumption.
tween saving and interest rates implies that an autonomous
Aside from demographic change, then, the rising
decline in saving, say due to demographic factors, may be
share of private consumption in the 1980s may be attri-
magnified through its effect on interest rates. This multi-
buted to a rise in interest income, an increase in private
plier effect also worsens the federal deficit by increasing the
wealth that exceeded the growth in national wealth, and
interest paid by the federal government.
the direct impact of conversion of corporate equity to debt.
The rise of personal wealth in the mid-1980s, to
These factors were not exogenous, however. For example,
which we attribute a part of the rise in consumption, is
the rise in interest income was driven by the combination
partly due to the rise in the stock market which in the
of budget deficits and conversions of equity to debt, and
1980s more closely reflects the replacement cost of corpo-
corporate decapitalization was largely due to changes in the
rate net worth than it did in the 1970s. The rise of personal
tax laws.
wealth is also related to the increase in the federal deficit.
National net worth is all that Americans own. The appar-
A Strategy to Raise National Saving
ent net worth of households equals the national net worth
plus the federal debt. The large deficits of the 1980s caused
It is imperative that we increase national saving im-
national debt to grow faster than national net worth and,
mediately. This means, by definition, reducing consump-
as a result, personal wealth grew faster than national net
tion's share of net output. The ultimate goal should be to bring
worth.
national saving from about 2 percent of net output in the mid-
The contribution of debt-financed takeovers and
1980s. to above the 1970 to 1979 average of about 8 percent of
leveraged buy outs to the decline of national saving is not
net output. The increase, however, should not be done too
limited to their direct effect on consumption discussed
rapidly. Otherwise, we would risk taking the economy into
earlier. Forced conversions of equity into debt affect
a recession caused by insufficient demand. Such a recession
national saving in two additional ways. First the shift from
would tend to lengthen the period of adjustment. Rather,
equity to debt reduces federal revenues since interest pay-
we want to substitute for the decrease in domestic con-
ments may be deducted from the corporate tax burden
sumption a comparable increase in net exports and net
while retained earnings or dividends may not. 13 Second,
investment.
Table III
Sources of Consumption
Growth 1985 to 1987
Estimated Consumption
versus 1970 to 1979
Effect (% of NNP)
Disposables Income/NNP
1.8
Percentage of Population less than 16 years old
1.0
Net Worth/NNP
+0.8
After-Tax Cash from Takeovers/NNP
+0.7
Total Explained Change
+4.3
Unexplained Change
+0.4
11. Real interest rates were calculated by subtracting from nominal
12. Financial deregulation and the proliferation of high-risk, high-yield
interest rates the annual percent change of the personal consumption deflator.
securities to finance mergers and leveraged buyouts also contributed to the
Nominal interest rates were calculated as the ratio of personal interest income
high real interest rates received by households.
divided by deposits and credit market instruments owned by households.
(Source: Balance Sheets of the U.S. Economy, Board of Governors of the Federal
13. The net effect of LBOs on federal tax receipts is somewhat contro-
Reserve System, and National Income and Product Accounts of the United States,
versial. The forced realization of capital gains and the increased rate of corpo-
U.S. Department of Commerce.)
rate profits associated with these transactions may increase tax receipts, partly
offsetting revenue losses from increased interest deductions.
Overconsumption: The Challenge to U.S. Economic Policy
There are two ways to increase exports. The first is
economy that well. Nevertheless, we have to try - delaying
to reduce the exchange rate of the dollar and the second
only makes things worse.
is to improve the productivity of U.S. manufacturing and
There are three ways to increase national saving: (1) Reduce
the quality and distribution of the products it makes. The
the federal deficit, (2) induce voluntary increases in personal sav-
first way is costly - it makes U.S. assets cheaper and im-
ing, and (3) slow down the escalating leveraging of U.S. business.
ports more expensive. The second way is more lasting and
Each of these ways will be discussed in more detail.
in the long run more beneficial.
To make U.S. manufacturing inherently more com-
Reducing the Federal Deficit
petitive will require increases in the rate of investment not
only in tangible assets, but also in research, development,
The emergence of a large federal deficit in the 1980s
and marketing. Accordingly, a strategy focused primarily on
is a significant contributor to the decline in national sav-
an increased rate of investment to substitute for decreased consump-
ing. The popular view, however, that the deficit is the sole
tion not only helps avoid a recession but also helps solve our long-
villain does not stand up to analysis. First, as seen in Table
term problems.
IV, the decline in private saving is more important than
The rate of investment in industry depends strongly
the increase in the federal deficit in explaining the reduc-
on industry's cost of capital. The cost of capital is a com-
tion in national saving. Second, there is less than one-to-
posite of the cost of debt and the cost of equity. The cost
one correspondence between changes in the budget deficit
of equity, which is particularly important for long-term in-
and national saving.
vestments, has always been higher than the cost of debt
Table V shows the major components of federal
partly because interest payments on debt are excluded from
income and spending in the period 1970 to 1979,
taxation whereas dividends and retained earnings are not.
contrasted with 1985 to 1987. Direct purchases increased
As discussed later, changes in the tax code during the 1980s
mostly as a result of increased defense spending. Increases
have widened the difference between the two costs and have
in transfer payments were quite sizable. Net domestic
been instrumental in encouraging conversions from equity
interest increased partly because of the accumulation of
to debt in the corporate sector. What is needed to improve
deficits in the 1980s and partly because real interest rates
the competitiveness of our industry is both a lowering of
are higher now than in the past.
the overall cost of capital and a reduction of the gap be-
This last point implies not only that we are now pay-
tween the cost of equity and the cost of debt.
ing for past sins but also that the budget deficit is affected
An increase in our national saving rate will, of course,
by the level of interest rates which, in turn, is affected by
reduce interest rates. This reduction, however, may not be
the level of national saving. Thus, an improvement in na-
sufficient to achieve the required level of investment.
tional saving can, per se, improve the federal deficit.
Other initiatives, such as changes in the tax code, may also
As a matter of accounting, national saving is the sum
be required.
of government saving (the budget balance) and saving by
Doing all of these right things does not guarantee that
the private sector. This might lead one to conclude that
we can avoid either overheating the economy or slowing
changes in the budget deficit should be reflected one-for-
down the rate of output growth. We simply do not possess
one in changes in the national saving rate. This is not, how-
the skills, let alone the determination, to "fine-tune" the
ever, the case, because policies that change the budget de-
Table IV
Composition of Net
1985-1987
1970-1979
Difference
National Saving
(Percent of national income)
Private Saving
5.5
8.9
(3.4)
Plus federal government saving
(4.9)
(1.9)
(3.0)
Plus state and local government saving
1.5
0.9
0.6
Equals national saving
2.1
7.9
(5.8)
13
ficit may also affect private saving, often in ways that un-
consequences, leading to an emphasis on measures that nar-
dermine the effect on national saving.
row the deficit without any regard for their effect on the
Two extreme examples may make the point. On one
national saving rate - which is the true bottom line. 15
side, consider a reduction in the deficit achieved by reduc-
Nonetheless, now is not the time to do away with
ing government consumption. Since this directly reduces
targets for the budget deficit, even if these targets some-
consumption, we may expect it to be more or less fully re-
times distort policy. Recent political experience has shown
flected in higher saving. 14 On the other side, suppose the
that setting rigid targets is, for the time being, a vitally
government were to reduce its deficit with a higher tax on
necessary discipline on the political process. What we need
investment income. This would increase government sav-
to do is maintain the targets for deficit reduction, while
ing; but by reducing the private incentive to save, it would
placing them in the context of a broader policy aimed at
reduce private saving, so that the overall effect on national
raising national saving. Deficit reduction alone will not cure
saving would be far less than the reduction in the federal
the saving problem, especially if it is focused only on short-term
deficit (and could even be negative, if private saving were
accounting goals, but it remains a key part of an overall program.
especially sensitive to investor returns).
Other measures will usually lie between these ex-
Inducing Voluntary Increases in Personal Saving
tremes. A reduction in government transfer payments will
typically affect individuals who have a high propensity to
The ability of government to induce greater voluntary
consume, and thus will induce a strong response in national
saving has been badly underestimated by policymakers.
saving. A tax increase will be less effective, since many
The reason is the strong conviction of some leading
households may choose to save less rather than consume
economists that incentives to save don't work. This convic-
less, at least at first.
tion stems from absence of a definitive statistical associa-
The important points are: i.) reducing the federal
tion between personal saving and after-tax returns on per-
deficit may not lead to a corresponding increase in national
sonal saving accounts over many decades.
saving; and, ii.) the way in which the deficit is reduced
The absence of such statistical association is under-
matters - not all deficit reduction measures have the same
standable. As discussed previously, returns on investments
effect on national saving.
have different effects on consumption and saving depend-
At the present time the focus of federal deficit reduc-
ing on whether the return consists of accrued unrealized
tion efforts is on the narrowly defined accounting balance,
appreciation, or it is paid in cash. It is quite possible that
with a timetable for deficit reduction set by Gramm-Rud-
increases in real interest rates on credit market instruments
man-Hollings. This narrow focus has some unfortunate
encourage consumption whereas investment opportunities
for high real rates of appreciation encourage saving.
Table V
Federal Spending and
1985-1987
1970-1979
Difference
Revenue 1970-1987
(As percent of net national
Direct Purchases and
product)
payments to foreigners*
10.6
9.6
1.0
*Payments to foreigners were in-
cluded with direct purchases for
Plus transfers to persons
10.1
8.5
1.6
consistency with Table II.
Plus net domestic interest
3.0
1.3
1.7
Plus intergovernmental grants and other
3.4
3.8
(0.4)
Total outlays
27.1
23.2
3.9
Less revenue
22.2
21.3
0.9
Equals deficit
4.9
1.9
3.0
14. Reductions in government investment could discourage private sav-
cation on the part of the average household that we believe few if any consum-
ing by lowering the return to private investments although we suspect this
ers possess in practice.
effect is small. Some economists have argued that even a cut in government
consumption will not increase national saving, since the private sector will
15. One way to emphasize the importance of focusing on the true bottom
see that this cut reduces the need for future tax increases and therefore consume
line is to notice that a dollar of additional private savings is worth more to
more today. This argument presupposes a degree of knowledge and sophisti-
the economy than a dollar of deficit reduction because most measures that re-
duce the deficit will be at least partially offset by reduced private savings.
Overconsumption: The Challenge to U.S. Economic Policy
Many countries, including the United States, have
than anyone that to sell an idea, even one that has value,
experimented with saving incentives. Opinion in the
requires promotion.
United States has been soured by the failure of the avail-
The kind of saving initiative that might be effective
ability of IRAs to prevent the decline in saving in the
for the United States should emphasize several features.
1980s. Yet the pessimism about incentives is not warranted
First, the incentive should be valuable to households re-
by a more careful look.
gardless of tax bracket. Second, it should induce a regular
This is not the place for an extended survey of
pattern of saving, rather than solely encourage portfolio re-
evidence on saving incentives. We will simply note two
shuffling. Third, the initiative should come as part of a
points. First is that Canada has a program of saving incen-
public campaign on behalf of higher saving. Finally, the
tives in place and that in the 1980s Canada has not shared
size of the incentive should be adjusted to achieve a cost
in the precipitous U.S. saving decline. This observation,
effective increase in national saving.
together with some more formal econometric evidence,
A kind of proposal that might work is described below.
suggests that the program has indeed had a positive effect
The federal government would expand the current savings bond pro-
on saving. (A more detailed discussion of the evidence may
gram to issue higher yield zero-coupon "supersavings" bonds,
be found in Appendix III).
which would be non-negotiable and redeemable at face
Second, we note that the IRA as a saving incentive
value after 7 years. These bonds could be marketed through
had some severe limitations. On one side, the amount of
banks and other financial institutions to fulltime corporate
sheltered income was limited so that no incentive was pro-
employees who can purchase them only through monthly
vided at the margin for individuals who would be saving
payroll deductions, up to $5,000 per worker annually. The
heavily anyway. On the other hand, because the incentive
bonds would be either redeemed at maturity, at which time
was tax-based, it was most valuable to individuals with
any gain would be fully taxed, or they would be rolled over.
high income, who were most likely to be saving a good
The new bonds should be introduced with some fanfare, and the
deal in any case. Furthermore, the setup of the IRA encour-
government should lobby businesses to promote the bonds actively
aged last-minute financial reshuffling rather than a pre-
among their employees. We view the campaign to raise saving as
commitment to save more over time.
being at least as important as the actual saving instrument; active
In spite of this, some studies suggest that IRAs ac-
promotion is important. Business experience suggests that par-
tually had a positive effect on U.S. saving, i.e., that the
ticipation of employees in benefits such as stock purchase
saving rate fell in spite of rather than because of IRAs. A
plans or 401k plans increases dramatically after company-
better-conceived scheme should therefore have a good
sponsored seminars and other promotional activities.
chance of success.
Such a plan would, of course, impose some budgetary
The example of Japan is instructive. Before World
cost in the long run, because the government would, in
War II the Japanese people saved less than the Americans.
effect, be borrowing funds at above-market rates. Al-
Japan's enormous rate of personal saving after the war was
though such a cost may turn out to be very small compared
not merely attributal to cultural differences. It was the re-
to the benefit to the nation, nevertheless, the government
sult of a national campaign. Not only were incentives pro-
should adhere to the discipline of Gramm-Rudman-
vided, but more significantly, monthly seminars on the im-
Hollings and find a way to offset any revenue lost.
portance of workers' saving were conducted in most major
corporations and publicized in the media. Moreover, no
Slowing Down the Leveraging of U.S. Corporations
Japanese leader was promoting consumption as is
frequently done by leaders in the United States.
The ongoing shift from equity to debt in the corporate
Public promotions do work in America - from the
sector has probably been an important cause of low national
campaign on careful driving that started after World War
saving in the 1980s. It has also created an unnecessary
II to the promotion of energy conservation that started in
source of economic vulnerability by creating highly lever-
the mid-1970's. America now has a lower rate of
aged firms that would be placed at risk by any economic
automobile fatalities than any other country in the world,
downturn or rise in interest rates. Thus, it is desirable to
and our energy consumption in 1987 was the same as in
find a way of discouraging the growth of debt that we have
1973, even though the economy's output increased in real
recently seen.
terms by more than 50 percent. On this latter point, many
There are probably many reasons for the shift from
attribute the increase in U.S. energy productivity solely to
equity to debt that is taking place during the 1980s. The
higher prices. This is not quite so. There is ample evidence
most obvious of these is that tax incentives for corporate
that prior to the 1976 campaigns on energy conservation,
borrowing have significantly increased during the last dec-
prior to the Coalition to Save Energy, and before the
ade. The relative tax burden on debt as compared to equity
appointment of energy "czars" by corporations, few
depends on both corporate and investor taxes. The general
individuals or corporations made energy saving invest-
trend toward reductions in individual tax rates - from a
ments with paybacks greater than one year. After the cam-
maximum of 70 percent in 1980 to 28 percent today - has
paign, however, many investments were made with
reduced the net tax burden on interest payments and made
paybacks of over 4 years. Americans should know better
corporate borrowing more attractive than in the past.
15
To illustrate the effect of the changes in tax burdens
complete integration of corporate and personal income
on equity and debt that took place between 1980 and 1987,
taxes. Integration allows shareholders a tax credit against
an example is presented in Appendix II which compares
personal income tax based on corporate tax payments. It
the returns a top-bracket corporate investor would receive
eliminates (or with partial integration, reduces) the double
per dollar of pretax corporate profit from a corporation to-
tax burden on corporate earnings. It also reduces the cost
tally equity-financed to those from a corporation totally
of capital by eliminating one layer of taxation between the
debt-financed for the years 1980 and 1987. The results are
corporation and its investors. Such plans are practiced to
shown in Table VI.
different degrees in Great Britain, France, and most other
It is evident that in 1980 the tax code favored equity over
European countries. Japan has also achieved parity between
debt. In 1987, however, debt is much more favored than is equity.
the cost of equity and the cost of debt by providing zero
The changes in the tax code during the 1980s in favor of
taxes on capital gains from equities and a high tax rate,
debt will certainly increase the debt-to-equity ratio of U.S.
up to 70 percent, on interest received. 16
corporations relative to past experience.
A third set of plans involves actions designed to alter
Proposals to regulate takeovers and leveraged buy
the tax deductibility of some or all corporate borrowing.
Table VI
Returns to Top-bracket
1980
1987
Corporate Investors
(Percent of pretax corporate
Corporation A: All Debt
30
72
profit)
Firm A is representative of many
Corporation B: No debt, no dividends
39
48
corporations in the aftermath of
a leveraged buy out. Firm B is
Difference B less A
9
(24)
representative of many firms in
the high technology sector.
outs directly are inadvisable-interference with the free mar-
The most common proposals call for eliminating or restrict-
ket usually does more harm than good. Instead, we believe
ing the deductibility of corporate interest payments,
that the right approach is to remove one of the main incen-
particularly if the interest payments result from a corporate
tives for the increasing reliance on debt, the differential tax
control transaction (a merger or LBO). These plans equalize
treatment of debt and equity. Interest on debt is deductible
the costs of debt and equity by raising the former. The re-
by corporations; payments to stockholders, or retained
sulting increase in the cost of capital facing U.S. corpora-
earnings, are not. This distinction causes increasingly
tions would discourage investment and provide a competi-
important distortions in the economy. In addition to
tive advantage to foreign firms which are still able to de-
promoting consumption and reducing federal revenues, tax
duct interest payments.
incentives for debt encourage investments with quick
A variation of such a proposal has been developed by
returns. In practice debt cannot be used to finance a long-
the American Law Institute. 17 It calls for the disallowance
term research and development project only equity can.
of tax deductions on debt issues that have the effect of re-
We have already discussed the need to lower the cost of cap-
ducing equity. Although The American Law Institute's
ital and, in particular, the cost of equity to meet both our
proposal does not discourage new investments, it does in-
short-term and our long-term national objectives.
volve regulation and does not address the problem of
Ideally, we would want to lower the cost of equity to
foreign firms having a large advantage over American firms
that of debt without affecting the latter. That, however,
in buying U.S. corporations.
would be too costly to the federal government and, there-
The simplest proposal is that of eliminating the tax
fore, we have to find other ways to bring these two costs
deductibility of interest payments, and offsetting this with
in line. One policy which eliminates all distortion between
debt and equity finance is the expenditure or cash flow tax,
advocated in recent years by the Meade Commission in the
16. Prior to the 1989 Japanese tax reform, the tax code in Japan favored
equity over debt more than the United States did prior to 1980. This fact seems
United Kingdom (1978) and in the Treasury Department's
inconsistent with the high leverage of Japanese corporations Japanese
1977 report, Blueprints for Basic Tax Reform. The expendi-
corporations, however, started at the end of World War II with practically
no capital and the Bank of Japan provided them funds through the banking
ture tax would constitute a radical redefinition of the tax
system. As the equity markets developed, corporate leverage has been rapidly
base: rather than taxing households on the basis of current
declining.
income, they would be taxed on current expenditure.
17. See American Law Institute, Federal Income Tax Project, Tax
A second set of proposals calls for either a partial or
Advisory Group Draft No. 18 (Nov. 1988)
Overconsumption: The Challenge to U.S. Economic Policy
a reduction in the corporate tax rate that leaves actual taxes
corporations should be allowed to offset interest expense
unchanged for the average firm. The main problem with
against interest income as long as their net interest income
this proposal is that it would actually benefit owners of
is positive.
existing capital, while raising the cost of new capital to
Some may point out that a standard deduction based
firms. Thus it would provide a windfall to firms that are
on total capitalization is arbitrary. It is, but so is a deduc-
not investing much, while penalizing those that invest
tion for the cost of debt and not for the cost of equity. To
heavily - the reverse of what we would like to do. Not in-
allow an equal deduction for both equity and debt is fairer
cidentally, this would repeat the error of the 1986 tax re-
than what we now have and more conducive to economic
form, which eliminated accelerated depreciation while re-
growth.
ducing corporate taxes.
The reason for this effect may be stated briefly: under
Conclusion
existing law, the rate of depreciation allowed for tax
purposes is somewhat faster in real terms than the actual
The fundamental problem of the U.S. economy in the 1980s
economic rate. This is true even of physical investment in
is not the budget deficit but overconsumption. This overconsump-
capital. It is especially true of investment in "invisible"
tion is being financed through large-scale sales of U.S.
assets such as R&D, which can be expensed. As a result,
assets to foreigners at unfavorable terms, a process that
a unit of newly created capital has an advantage over an
postpones the day of reckoning but that increasingly
otherwise equivalent unit created some years earlier. A
mortgages the U.S. economic future.
reduction in the tax rate reduces this advantage.
Overconsumption is fed partly by the budget deficit,
Appendix IV examines this point numerically. It
but also by other sources. In particular, there is good reason
suggests that under realistic assumptions about inflation
to believe that the collapse of national saving and the
and depreciation, a combined elimination of interest
explosion of corporate debt in the 1980s are closely related.
deductions and tax cuts, even if revenue neutral, would
The increased leveraging of corporations has raised interest
have a significant effect in raising the cost of capital for
income, led to large realizations of capital gains that get
corporate investment. In addition, such an adjustment
translated in part into consumption, and contributed to
would result in a corporate tax rate of less than 22 percent,
the budget deficit.
well below the maximum personal tax rate of 28 percent.
Because overconsumption in the United States is not
Lowering of the corporate tax rate below the personal tax
simply a by-product of the budget deficit, it needs to be
rate creates many problems, inducing persons to incorpor-
addressed on several fronts. Modest progress on the budget
ate many of their personal activities.
deficit will not be enough: we need a concerted program aimed
at raising national saving from its unprecedentedly low level.
A Possible Alternative
In what follows we describe a relatively simple
method that reduces the cost of equity and raises the cost
of debt without affecting the cost of capital or federal re-
venues. The proposed change would replace the current de-
duction of interest on debt with a general deduction for
capital, set at some percentage of the over-all capitalization
of a company, however financed. At current debt to equity
ratios and interest rates, a cost-of-capital deduction equal
to 5 percent of capital would be approximately revenue-
neutral. Such a scheme would leave intact the present
favoring of new investment over existing capital and thus
avoid a windfall to old capital. At the same time, it would
remove the tax incentive for increasing debt. In
implementing such a proposal, carefully crafted transition
rules should be established to allow corporations with large
debt obligations ample time to replace their debt with
equity capital. 18 We do not foresee any insurmountable
18. For example, corporations can elect to continue deducting interest
problems.
expenses on any long-term debt acquired prior to enactment and on any short-
A central element of this proposal is the definition of
term debt up to the amount present at enactment. As long as they make use
total capitalization. For nonfinancial corporations, it is the
of such an election, no deduction on equity will be provided. Detailed transi-
tion rules are beyond the scope of this paper.
sum of recorded shareholders' equity plus the average of any
loans for which the interest rate paid is greater than the
19. This is necessary to prevent corporations from defining as debt other
liabilities such as accounts receivable. The rate of credit for capital could be
deducted rate, e.g. 5 percent. 19 For financial corporations
varied in line with Treasury bill yields or other measures of market required
only equity should be counted as capitalization, but these
returns.
17
Appendix I:
possibility that the aging of the U.S. population has raised
Determinants of Consumer Spending
aggregate spending for reasons unrelated to wealth or in-
come.²¹
The determination of consumer spending is a funda-
This appendix is divided into two parts. The first pre-
mental yet controversial issue. Standard economic theory
sents our estimates of the aggregate consumption function.
argues that absent credit market imperfections or consumer
In the second part, we use these estimates to evaluate the
myopia, consumption would depend only on household net
relative importance of a variety of factors in contributing
worth. This is the sum of the present value of current and
to the rise in consumption between the 1970s and the mid-
expected future labor earnings, plus current net holdings
1980s. We show that the growth in personal income as a
of real and financial assets. In this setting, neither the cash
share of NNP accounts for nearly 40 percent of the increase
income from investments nor the flow of after-tax wages
in real consumption. Demographic factors can explain
would affect spending unless it affected household net
another quarter of the consumption growth. Increased
worth.
household wealth and the growth in cash receipts from
A variety of considerations, however, make this
corporate takeovers also have positive effects on consump-
stylized view an inadequate description of actual consump-
tion, each accounting for about one-sixth of the consump-
tion increase.
tion behavior. 20 First, many households, especially lower
income households, may face constraints that make it
difficult to borrow against future labor income. If these
Consumption Function Estimates
households would like to borrow and consume more than
their current income, liquidity constraints may restrict
Our primary concern is explaining changes through
consumption to current after-tax income. Increases in cash
time in the ratio of consumption to national income, so
flow, whether due to reduced taxes or higher wages, there-
we use this ratio as the dependent variable in our estimated
fore raise consumption. Second, even high income house-
consumption function. We follow common practice in
holds with substantial asset holdings may over-react to fluc-
using the measure of disposable income reported in the Na-
tuations in current income, failing to distribute a current
tional Income and Product Accounts, along with the Fed-
windfall over current and future consumption. This is par-
eral Reserve Board's estimate of household net worth, as
ticularly relevant for our analysis of forced capital gain
explanatory variables. We add two variables to this list,
realizations.
the share of the population under age 16 and the value of
These considerations among others have led most
after-tax cash payout in mergers.
econometric model-builders to adopt a specification for the
The population share under age 16 is drawn from Cen-
aggregate consumption function in which both household
sus reports. We choose this measure of demographic shift
net worth and a measure of current cash income - typically
for two reasons. First, much of the popular discussion of
disposable income as reported in the National Income Ac-
why saving has declined has emphasized the aging of the
counts - affect spending decisions.
"baby boom" generation. Since consumption outlays by
This specification is usually applied to per capita con-
adults exceed those of children, consumption as a share of
sumption (denoted C) as
national income should be lower when the share of children
in the population is higher. The share of the population
under age 16 declines from 34.1 percent in 1960 to 24.5
where YD and W, respectively, measure per-capita dispos-
percent in 1987. Second, when we tried including more
able income and net worth. This equation makes clear that
detailed demographic variables (for example a set of vari-
changes in the economic environment that raise YD, either
ables measuring the fraction of the population in each ten-
by lowering taxes, raising real interest receipts, or increas-
year age group) we obtained very imprecise estimates. This
ing labor income, raise consumption. So do increases in
simply reflects the limited amount of time-series data av-
household net worth.
ailable for our study.
Our analysis extends the usual approach by including
We constructed a measure of the household sector's
after-tax cash receipts from forced capital gain realizations
after-tax cash receipts in merger transactions. W.T. Grimm
in corporate takeovers as an additional explanatory variable
and Company has tabulated the number and value of
in the consumption model. We do not constrain it to have
merger transactions since 1968. 22 Not all takeovers, how-
the same coefficient as disposable income. We also follow
ever, provide cash to stockholders of the target firm. If the
many previous studies in adding simple measures of the
takeover involves an exchange of securities, shareholders
population age structure to our equation, reflecting the
receive shares (or debt) in the acquirer in return for their
20. Further discussion of the "corporate veil" may be found in James M.
may be found in M. Boskin and L. Lau, "An Analysis of Postwar U.S.
Poterba, "Tax Policy and Corporate Saving," Brookings Papers on Economic Ac-
Consumption and Saving: Parts I and II," NBER Working Papers 2605 and
tivity 1987:2.
2606, Cambridge, MA, 1988.
21. A detailed examination of demographic influences on consumption
22. These data are presented each year in the Mergerstat Review
Overconsumption: The Challenge to U.S. Economic Policy
shares in the target. Only cash takeovers generate after-tax
in current dollars and constant (1982) dollars and as a frac-
cash flow for investors. Unfortunately W.T. Grimm does
tion of net national product.
not report the amount of acquisition activity by financing
Our focus on the consumption effects of cash receipts
method. It does, however, report the number of cash mer-
from takeovers suggests a minor modification to the
gers as well as the number of other types. To construct a
National Income Accounts disposable income measure.
proxy for the value of cash payouts in corporate control
Disposable income equals personal income less taxes. Some
transactions, we multiplied the total value of takeovers in
of these taxes result from the realization of capital gains in
each year by the share of transactions involving cash pay-
control transactions, and therefore reduce disposable
ments. Provided the average size of cash and non-cash mer-
income, even though capital gains themselves are not
gers is not very different, our data-series should provide
included in personal or disposable income. When capital
a reasonable guide to the time-series movements in cash
gain realizations are high, other things equal, disposable
payout. 23 For the years 1950 to 1967, we extrapolated the
income will be low. We correct for this spurious negative
Grimm data-series using information from the Federal
link between realizations and disposable income by
Trade Commission on the value of large mergers in mining
defining:
and manufacturing.24
Augmented = NIPA Disposable Income
We conjecture that households' after-tax cash receipts
Disposable
+ Capital Gains Taxes
from corporate control transactions may affect consump-
Income
on Cash Merger Payout
tion. These receipts are smaller than total cash payments
for two reasons: households do not own all corporate equity,
We estimate the basic consumption relationship
and they are liable for taxes on the cash they receive. Since
using annual time-series data for the 1950 to 1987 period.
there is no direct information on the ownership of firms
Our central regression result, which corrects for serially
involved in corporate control contests, we assume that the
correlated errors in the consumption function using
household share in these firms equals their share of domes-
autoregressive least squares, is shown below:²⁶
tically-held corporate equity. Data on equity ownership are
C/NNP =
reported annually in the Flow of Funds Balance Sheets of the
.28x(1/Real Per Capita NNP)
U.S. Economy. 25 We estimate the tax liability associated
(.10)
with these transactions in a crude manner, assuming that
the stockholder's basis in his shares is half the sale price.
+ .83 X (Augmented Disposable Income/NNP)
We also assume that the gains are taxed at the maximum
(.03)
statutory capital gains rate, so the tax liability equals:
+ .59 X (After-Tax Receipts from Takeovers/NNP)
Capital gains taxes on cash merger payout = tcg X (.5) X
(.42)
(household equity share) X (cash takeovers).
+ .03 X (Household Net Worth/NNP)
(.01)
Using these data, we define after-tax cash receipt
series as:
- .22 X (Share of Population < 16)
(.06)
(1-.5 tcg) X (household share of equities) X (cash takeovers).
First-Order Autoregressive Coefficient: 39 (.18) R² = .91
This is the variable included in our regression equa-
tion. The data series is shown in Table VII, measured both
The estimated coefficients on disposable income and
on net worth are similar to those in earlier studies. 27 The
estimates also suggest an important link between after-tax
23. Our estimates of the share of transactions involving cash payout are
broadly comparable with the five-year averages, based on value, reported in
receipts from takeovers and consumer spending, with a
Julian R. Franks, Robert S. Harris, and Colin Mayer, "Means of Payment in
marginal propensity to spend of 59. This coefficient is not
Takeovers: Results for the United Kingdom and the United States," in A.
estimated with the same precision as the coefficients on
Auerbach, ed., Corporate Takeovers: Causes and Consequences (Chicago:
University of Chicago Press, 1988). We describe alternative results using
income or wealth, however. The hypothesis that this
these data below.
coefficient equals zero can be rejected at the 85 percent con-
24. U.S. Federal Trade Commission, Statistical Report on Mergers and Ac-
fidence level, although not the conventional 95 percent
quisitions: 1978, Bureau of Economics, Washington, D.C., 1980. We esti-
level. 28 There is also strong empirical support for the view
mated the share of merger transactions involving cash during the 1950 to 1967
period using the five-year average shares reported in Franks et al.
26. We do not include a constant term, but instead include the variable
1/Real Per Capita NNP, because this results when the linear specification for
25. The Flow of Funds includes nonprofit institutions along with
real per capita consumption used in most studies is deflated by net national
individuals in the "household" sector. Although we would prefer to exclude
product per capita. The numbers in parentheses are coefficient standard errors.
these untaxed institutions from our definition of the household sector, that
T-ratios may be obtained by dividing the coefficient by its standard error.
is not possible given available data. We exclude foreign equity holdings in
calculating the household share because most such holdings are concentrated
27. These results are broadly consistent with many previous empirical
in subsidiaries rather than general portfolio investment. Our results are not
studies.
significantly affected, and suggest a larger effect of cash payout on consump-
tion, if we include foreign ownership in calculating the household share of
28. The coefficient on cash receipts from takeovers is also somewhat sen-
equities.
sitive to our choices regarding demographic variables.
19
that demographic shifts have altered the level of consumer
corrections for capital gains taxes are imprecise, we re-
spending. The next sub-section evaluates the substantive
placed our tax-adjusted measure of payout with the un-
importance of these findings.
adjusted level of cash payout. This variable has a stronger
Since our evidence that cash receipts from corporate
statistical effect on consumption than our corrected mea-
control transactions affect consumption is the principal
sure, supporting our general view of a link between cash
contribution of our econometric results, we explored the
transactions and consumption. Second, we used an alterna-
robustness of the findings in several ways. First, since our
tive measure of the share of cash payout in takeovers based
Table VII
Household Cash Receipts
Year
Current Dollars
Constant (1982) Dollars
Percent of NNP
from Takeover Activity
1950
0.0
0.1
0.0
(Columns 1 and 2 are measured
1951
0.0
0.1
0.0
in billions of dollars. The data
reflect the total value of mergers
1952
0.1
0.2
0.0
reported by W.T. Grimm, mul-
1953
0.1
0.5
0.0
tiplied by the share of such mer-
1954
0.3
0.9
0.1
gers for cash and the share of cor-
porate equity held by house-
1955
0.4
1.4
0.1
holds. We also perform tax ad-
1956
0.3
1.1
0.1
justments as described in the
1957
0.2
0.7
0.1
text.)
1958
0.2
0.6
0.0
1959
0.3
0.8
0.1
1960
0.7
2.0
0.1
1961
0.9
2.6
0.2
1962
1.0
2.8
0.2
1963
1.1
3.1
0.2
1964
1.0
2.8
0.2
1965
2.2
6.3
0.3
1966
2.3
6.2
0.3
1967
5.6
14.9
0.7
1968
10.7
27.3
1.3
1969
6.4
15.7
0.7
1970
4.3
9.9
0.5
1971
3.5
7.7
0.3
1972
4.5
9.6
0.4
1973
5.1
10.3
0.4
1974
4.4
7.9
0.3
1975
4.3
7.2
0.3
1976
7.6
12.1
0.5
1977
8.4
12.6
0.5
1978
11.7
16.4
0.6
1979
16.8
21.5
0.7
1980
16.0
18.5
0.7
1981
28.6
30.3
1.1
1982
18.7
18.7
0.7
1983
22.2
21.3
0.7
1984
44.1
40.8
1.3
1985
71.1
63.8
2.0
1986
57.5
50.3
1.5
1987
48.2
40.3
1.2
Overconsumption: The Challenge to U.S. Economic Policy
on the five-year average share rather than the annual share
Explaining Consumption Growth, 1970 to 1987
of cash in total payouts. 29 This increased the estimated
effect to nearly the same size as the disposable income coef-
To evaluate the importance of various changes in the
ficient. We also recognized that not all cash payouts result
economic environment on the share of national income de-
from takeovers: some firms repurchase shares for reasons un-
voted to consumption, we use our estimates of the aggre-
related to corporate control. We therefore constructed a
gate consumption function to explain changes between the
measure of gross share repurchases from the Flow of Funds
1970 to 1979 and 1985 to 1987 periods. The estimated
and included this in our consumption models. Once again
coefficients provide some guidance on the relative impor-
the effect was larger than the 59 effect estimated above.
tance of changes in disposable income, wealth, demog-
The other coefficients in the consumption equation were
raphic composition, and the role of corporate control trans-
not substantially affected by these changes.
actions. The table shows our basic findings in tabular
The possibility that each dollar of after-tax cash pay-
form.
out from corporate takeovers generates 59 cents of addi-
Table VIII reports the mean of each of the explanatory
tional spending strikes us as implausibly large. 30 We there-
variables from our consumption model for the 1970 to
fore examine the robustness of our conclusions about the
1979 and 1985 to 1987 periods. Between these periods, the
source of consumption changes by considering smaller
ratio of consumption to net national product increased by
spending propensities as well. Our findings clearly estab-
4.7 percentage points. Disposable income (excluding our
lish, however, that there may be important links between
measure of after-tax cash from takeovers) increased by 2.1
corporate control transactions and national saving.
percent of NNP. The table shows that interest receipts grew
Table VIII
Baseline Calculation of
1985-87
Estimated
Sources of Consumption
1985-
1980-
1970-
less
Consumption
Growth
1987
1987
1979
1970-79
Effect
Consumption/NNP
74.0
73.1
69.3
+ 4.7
+ 4.7
Disposable Income/NNP
79.5
79.7
77.4
+ 2.1
X
.83
=
+ 1.8
Labor Income/NNP
60.6
61.2
61.5
- 0.9
X
.83
=
-
0.7
Interest Income/NNP
13.2
12.8
8.3
+ 4.9
X
.83
=
+ 4.1
Other Capital
Income/NNP
10.0
9.7
12.0
- 2.0
X
.83
=
-
1.7
Transfers/NNP
13.7
13.9
11.5
+ 2.2
X
.83
=
+ 1.8
Taxes/NNP
(18.0)
(17.9)
(15.9)
- 2.1
X
.83
=
- 1.7
After-Tax Cash from
Takeovers/NNP
1.6
1.1
0.5
+ 1.1
X
.59
=
+ 0.7
Net Worth/NNP
331.0
332.1
305.1
+25.9
X
.03
=
+ 0.8
Percent of
population < 16
24.7
25.2
29.4
4.7
X 22
=
+ 1.0
Total Predicted Change in consumption/NNP
+ 4.3
Unexplained Component of consumption/NNP
0.4
especially rapidly. Transfers net of taxes did not. While
transfers rose by over 2 percent of NNP, this rise was es-
sentially matched by growth in taxes as a share of NNP.
The net effect on disposable income is therefore very small.
(This stands in marked contrast to the differences between
the 1960s and 1970s when transfers net of taxes increased
29. The five-year averages are drawn from Franks, Harris, and Mayer,
op cit.
significantly as a share of NNP.) Using our estimates of
the marginal propensity to consume from disposable in-
30. The coefficient on forced realizations may reflect more than simply
come of .83, the net effect of these changes has been to in-
the marginal propensity to spend from cash receipts. If increased takeover ac-
crease the consumption to NNP ratio by 1.8 percentage
tivity raises all share prices, for example, and this wealth effect increases con-
sumption, our estimated coefficient could be biased upwards.
points.
21
The household sector's after-tax receipts of cash
Sensitivity Analysis
income from takeovers also increased from 0.5 to 1.6 per-
cent of NNP between 1970 to 1979 and 1985 to 1987.
Our calculations of how changes in the U.S. economy
Given our estimate that these receipts raise consumption
between the 1970 to 1979 and 1985 to 1987 period, have
by 59 cents on the dollar, we attribute an increase in the
affected consumption rely exclusively on our estimated con-
consumption to NNP ratio of 0.7 percent to this shift in
sumption function. Since we make several important as-
the economic environment. Our findings suggest similar
sumptions in estimation, for example by constraining all
effects from shifts in net worth. While the value of house-
of the components of disposable income to have the same
hold net worth averaged 3.05 times net national product
effect on consumption, some evidence on the robustness
during the 1970 to 1979 period, this ratio increased to 3.31
of our findings is useful.
times NNP during the more recent years. However, the
We report one alternative calculation of consumption
small effect of net worth on consumption (.03) implies that
effects in which we assume that the marginal propensity
even this large wealth change raises consumption by 0.8
to consume out of transfers is higher than that out of other
percent of NNP.
forms of disposable income (perhaps because transfers are
Finally, our estimates imply that demographic shifts
received by liquidity constrained households; perhaps be-
have had a significant effect on the share of national income
cause households assume that they are more permanent
devoted to consumption. Between 1970 and 1979, the
than other forms of income). We set this marginal spend-
share of the population under age 16 declined. The average
ing propensity to unity in our alternative calculation. We
share during this period was 29.4 percent. In the 1985 to
also consider the possibility that the spending propensity
1987 period, by comparison, only 24.7 percent of the
from capital income is lower than our estimates suggest,
population was in this age category. Given our estimate
and set both the MPC from after-tax cash income received
that a one percent decline in the share of the population
in takeovers and the receipts from other capital income
in this age group raises the share of NNP devoted to con-
equal to .3. We do not modify our other estimated
sumption by 22 percent, we estimate that changes in the
coefficients. The results of this calculation are shown in
demographic mix could account for a consumption shift
Table X on the next page.
of 1.0 percent of NNP, or nearly one quarter of the decline
The results are less successful than our earlier calcu-
between 1970 to 1979 and 1985 to 1987.
lations in explaining the growth of consumption. The es-
Although demographic factors can explain some of
timates still explain 60 percent of the consumption in-
the long-run shifts in consumption patterns, they are un-
crease, however, which is substantially more than earlier
likely to explain short-run variations in saving rates such
studies of the saving decline have accounted for.
as the decline between the early and mid-1980s. This is
Our analysis has focused on comparing the experience
because demographic variables change very slowly, as
of the 1980s with that of the previous decade. This com-
demonstrated in Table IX. To explain significant year-
parison is motivated by the striking rise in U.S. consump-
to-year variation in saving rates on the basis of demographic
tion during the 1980s. Our estimating equation can also
factors, the marginal propensities to save across different
be used, however, to analyze changes in consumption be-
groups would have to differ by far more than plausible
tween other time periods. One useful way of validating our
estimates would suggest.
model is to see if it correctly predicts the change between
Table IX
Share of U.S. Population
Year
1
17-24
25-34
35-44
45-54
55-64
by Age Groups
>65 >
1950
0.297
0.119
0.158
0.142
0.115
0.088
0.081
1960
0.341
0.106
0.127
0.134
0.114
0.086
0.092
1970
0.321
0.139
0.123
0.113
0.114
0.091
0.098
1980
0.261
0.152
0.165
0.114
0.100
0.096
0.113
1985
0.248
0.135
0.177
0.133
0.094
0.093
0.119
1987
0.245
0.127
0.178
0.141
0.095
0.090
0.122
Overconsumption: The Challenge to U.S. Economic Policy
Table X
Alternative Calculation of
Estimated
Sources of Consumption
Consumption
Growth
1985-1987
1970-1979
Difference
Effect
Consumption/NNP
74.0
69.3
+ 4.7
+ 4.7
Disposable Income/NNP
79.5
77.4
+ 2.1
Labor Income/NNP
60.6
61.5
- 0.9
X
.83
=
- 0.7
Interest Income/NNP
13.2
8.3
+ 4.9
X .30
=
+ 1.5
Other Capital Income/NNP
10.0
12.0
- 2.0
X .30
=
- 0.6
Transfers/NNP
13.7
11.5
+ 2.2
X 1.00
=
+ 2.2
Taxes/NNP
(18.0)
(15.9)
- 2.1
X .83
=
- 1.7
After-Tax Cash from
Takeovers/NNP
1.6
0.5
+ 1.1
X
.30
=
+ 0.3
Net Worth/NNP
331.0
305.1
+ 25.9
X .03
=
+ 0.8
Percent of
Population<16
24.7
29.4
- 4.7
X 22
=
+ 1.0
Total Predicted Change in Consumption/NNP
+ 2.8
Unexplained Component of Consumption/NNP
+ 1.9
two earlier periods, say the 1960s and the 1970s. If the
with the later periods that we focused on above. Two fea-
model significantly mispredicts in these time periods, then
tures of the comparison between the 1960s and 1970s are
its reliability in accounting for the experience in the 1980s
striking. First, in contrast to the recent period, there was
would be open to question.
rapid growth in transfers. These payments increased from
Table XI reports decadal averages for the variables in
6.9 to 11.5 percent of NNP between the 1960s and 1970s.
our consumption function for both the 1960s and 1970s.
Taxes also increased, but by only 2.6 percent of NNP. The
These averages are of independent interest for their contrast
second important pattern is the pronounced decline in
Table XI
Sources of Consumption
Estimated
Growth
Consumption
1960-1979
1970-1979
1960-1969
Difference
Effect
Consumption/NNP
69.3
68.5
+ 0.8
+ 0.8
Disposable Income/NNP
77.8
75.7
+ 2.1
X
.83
=
+ 1.7
Labor Income/NNP
61.5
60.0
+ 1.5
X
.83
=
+ 1.3
Interest Income/NNP
8.3
6.0
+ 2.3
X
.83
=
+ 1.9
Other Capital Income/NNP
12.0
15.7
- 3.7
X
.83
=
- 3.1
Transfers/NNP
11.5
6.9
+ 4.6
X
.83
=
+ 3.8
Taxes/NNP
(15.9)
(13.3)
- 2.6
X
.83
=
- 2.2
After-Tax Cash from
Takeovers/NNP
0.5
0.4
+ 0.1
X
.59
=
+ 0.1
Net Worth/NNP
305.1
341.1
36.0
X
.03
=
- 1.1
Percent of
Population < 16
29.4
33.9
- 4.5
X 22
=
+ 0.9
Total Predicted Change in Consumption/NNP
+ 1.6
Unexplained Component of Consumption/NNP
+ 0.9
23
household net worth as a share of NNP. While net worth
Appendix II:
averaged 3.41 times national income during the 1960s, the
decline in the national debt as percent of NNP combined
Why Has Leverage Increased?
with the decline in stock market values during the 1970s
reduced this average to only 3.05. The 1980s have witnes-
Growth in corporate leverage during the 1980s is the
sed a rebound in the ratio of net worth to NNP, but not
result of many different factors. First, the tax incentives
to the level of the 1960s.
for corporate borrowing have increased during the last de-
The last column of Table XI shows the predicted
cade. The relative tax burden on debt vs. equity depends
change in consumption as a share of NNP from each of the
on both corporate and investor taxes. The general trend to-
components of our consumption equation. The results
ward reductions in individual tax rates (from a maximum
provide encouraging evidence on the predictive power of
rate of 70 percent in 1980 to 28 percent today) has reduced
this model. Between the 1960s and the 1970s, the con-
the net tax burden on interest payments and made corpor-
sumption share of national income increased by 0.8 per-
ate borrowing more attractive relative to equity.
cent. Our equation predicts a 1.6 percentage point increase
A simple example, presented in detail in Table XII,
which consists of a 2.7 percentage point increase due to
illustrates the changing tax posture toward debt. In 1980,
changes in disposable income, demography, and cash
a firm earning one dollar in pretax profits and using equity
receipts from takeovers, which is partly offset by a 1.1
finance would have 54 cents available after-tax for equity-
percent decline attributed to changing wealth. Although
holders (the marginal corporate tax rate was 46 percent).
the equation does not predict the actual change exactly, it
If all of this after-tax profit was reinvested, then a sharehol-
yields a reasonable estimate (and correctly predicts the
der in the top tax bracket would eventually pay a capital
direction) of the consumption change.
gains tax of 28 percent and would receive 39 cents after
all taxes. This makes the conservative (high-tax) assump-
tion that capital gains are taxed at their statutory rate of
28 percent and neglects the benefit resulting from deferral
of tax liability until gains are realized. For a bond-financed
project, the firm would pay no tax, the interest recipient
would pay personal income tax of 70 cents per dollar of in-
terest income and would receive 30 cents after all taxes.
Thus, from the perspective of the top-bracket investor, the
tax burden on equity and debt gave a preference to equity.
The lower panel of Table XII examines the company's
tax burden in 1987. The same investor providing funds to
the same firm would earn an after-tax return of 72 cents
on a debt-financed project, compared with 48 cents for an
equity-financed project. The after-tax return from a debt-fi-
nanced project is now significantly larger than that from
an equity-financed project, just the opposite of the situa-
tion before the 1981 tax reform. Thus, for high-bracket in-
dividual investors, the incentive for holding corporate debt
has grown significantly during the 1980s. 31
A second consideration encouraging higher borrow-
ing is the development of financial institutions that reduce
the costs of bankruptcy and near-bankruptcy. An obvious
example of this is "strip-financing, a technique whereby
investors who purchase low-grade corporate debt also re-
31. The 1981 tax reform clearly encouraged leverage. The net effect of
the 1986 tax reform is less clear. For tax exempt investors, for example, cor-
porate tax rate reductions have made equity more attractive relative to debt.
On balance, however, there is little question that during the mid- 1980s lever-
age has been more attractive than in previous decades.
recession.
Overconsumption: The Challenge to U.S. Economic Policy
Overconsumption: The Challenge to U.S. Economic Policy
Appendix III:
Appendix IV:
Potential Effects of Saving Incentives
Effect of Revenue-Neutral Changes in
Although empirical studies of how rates of return af-
Corporate Taxation on the Cost of Capital
fect private saving are inconclusive there are two recent
sources of evidence suggesting that raising the after-tax re-
We shall examine the effect on the cost of capital of
turn to saving might draw forth a private saving response.
two revenue-neutral alternatives to the present structure of
First, evidence on the IRA experiment of the early
corporate taxation. Under alternative 1 the deductibility
1980s compiled by Venti and Wise suggests that only
of interest payments is eliminated and the resulting in-
about thirty cents of each dollar contributed to IRAs was
crease in corporate taxation is offset by a lowering of the
drawn from other saving instruments. 32 As much as se-
corporate tax rate. Under alternative 2 the deductibility
of interest payments is replaced by a general deduction for
venty cents per dollar was "new saving," money that would
have been spent or paid in taxes were it not for IRAs³. The
both equity and debt at a fixed percentage of total corporate
sharp decline (more than fifty percent) in IRA participation
capitalization such that the government revenue is not al-
tered.
in 1987, when contributions were no longer deductible for
The real cost of capital C for corporate investments net
many households, further supports the view that interest
incentives can affect saving.
of depreciation is given by the general expression35
Second, comparisons of saving behavior in the United
= 1 TZ (p* + δ ) - δ
States and Canada reveal an interesting pattern: the saving
rate in Canada has diverged from that in the United States
where T is the corporate tax rate at the margin
for the last decade, coincident with the introduction and
p* is the real after-tax cost of funds
widespread use of tax-sheltered saving plans for home pur-
π is the inflation rate
chase and retirement. Estimates by Carroll and Summers34
δ is the depreciation rate of the asset
suggest that each dollar of sheltered saving raises the Cana-
δₐ is the depreciation rate allowed for the asset by
dian saving rate by at least one dollar relative to its U.S.
the tax code and Z is the present value of depreciation
counterpart. This may even suggest that widespread avail-
allowance.
ability of such sheltered accounts promotes a culture of sav-
The present value of depreciation allowances Z
ing in which households devote more attention to future
equals δₐ p* + π + δₐ). This present value
plans and the need for deferring consumption.
approaches zero with increased inflation and approaches
unity with accelerated depreciation allowances.
The real after tax cost of funds for a firm is the average
of its real cost of equity and its real cost of debt, weighted
by the relative amounts of equity and debt used to finance
a new project. The costs of equity and debt are determined
by the requirements of stockholders and creditors, respec-
tively. For example, assume that stockholders demand, on
average, a return of 12 percent on equity investments and
creditors an interest rate of 10 percent on corporate bonds.
Moreover, let the inflation rate be 4 percent. The real after-
tax cost of equity for the average corporation would be 8
percent (12 percent less 4 percent). The real after-tax cost
of debt, however, is not 10 percent less 4 percent, because
interest payments are deductible. If the corporate tax rate
is 40 percent (say 34 percent federal and 9 percent state)
then the real after tax cost of debt would be 10 x(1-0.4)
-4=2 percent. For a firm that uses 50 percent equity
32. See S. Venti and D. Wise, "IRAs and Saving," in M. Feldstein, ed.,
funds and 50 percent borrowed funds to make investments,
The Effects of Taxation on Capital Accumulation (Chicago: University of Chicago
the real cost of funds is = 5 percent.
Press, 1987).
For this cost of funds, the cost of capital C for an investment
33. The revenue cost to the Treasury, estimated at approximately thirty
whose economic depreciation rate is 10 percent per year is
cents per dollar of IRA contribution, highlights our earlier point on the dis-
9.7 percent if the tax code allows economic depreciation,
tinction between a policy's effect on government and total saving. Although
8.1 percent if it allows double-declining-balance deprecia-
IRAs increased the federal deficit, their net effect on national saving was
positive.
tion, and 5 percent if it allows expensing.
34. See C. Carroll and L. Summers, "Why have private savings rates in
35. This expression is based on the approach first proposed by R.E. Hall
the United States and Canada diverged?", Journal of Monetary Economics 20,
and D.W. Jorgenson, "Tax Policy and Investment Behavior," American
249-279 (1987).
Economic Review 57, June 1967, 391- 414.
27
Table XIV
Cost of Capital Under
Various Taxation
Depreciation Allowances:
Current Law
Alternative 1
Alternative 2
Alternatives
Economic
equal 10 percent
9.7
10.6
9.7
Double Declining
equal 20 percent
8.1
9.2
8.1
Expensing
5.0
7.0
5.0
Consider now the two modifications of the tax law.
tion, and 5.0 to 7.0 percent if it provides for expensing
Under the first alternative, corporations lose the tax deduc-
as it does for investments in research and development.
tion on interest payments but pay the same taxes because
Under the second alternative, the deduction on debt
the corporate tax rate is lowered. To calculate what the new
is lowered from 10 percent, which is the assumed average
corporate tax rate would have to be, we assume a pretax
interest rate, to a standard 5 percent. This deduction is also
corporate return of 20 percent (this would produce an after-
extended to equity capital at a fixed 5 percent rate. Thus,
tax return equal to the cost of equity, i.e. 12 percent). It
although the real cost of debt to corporations increases the
is further assumed that this pretax return on equity would
real cost of equity will decline, resulting in no change in
not be altered as a result of the enactment of the tax
the cost of funds and, therefore, no change in the cost of
change. 36 Accordingly, the new tax rate is calculated to be
capital.³⁷
29 percent (22 percent federal and 9 percent state). The
The results are summarized in Table XIV. Alternative
marginal real cost of funds for the firm under this alterna-
2 is more attractive than alternative 1 because it does not
tive will be
raise the cost of capital and discourage new investment.
0.5x(12-4) + 0.5(10-4) = 7 percent
The disadvantage of alternative 1 versus either current
law or alternative 2 is more pronounced for investments
The resulting cost of capital for an asset having a deprecia-
in research and development that can be fully expensed.
tion rate of 10 percent per year rises from 9.7 to 10.6 per-
In fact, since such investments can be financed in practice
cent if the tax code provides for economic depreciation, 8.1
only with equity, alternative 2 provides stronger invest-
to 9.5 percent if it provides for double-declining-deprecia-
ment incentives than current law.
36. In the long run, reductions in the corporate tax rate are likely to
lead to lower pre-tax returns.
37. For firms using more debt than equity in their capital structure, this
change would raise the cost of capital. It would have an opposite effect on
firms using mostly equity finance.
Notes:
Design: Taccino/Gray Design
Type: Alexandria Type Company, Inc.
About the Authors
GeorgeN. Hatsopoulos is founder, Chairman of the
Board, and President of Thermo Electron Corporation.
He is Chairman of the Federal Reserve Bank of Boston,
a member of the board of directors of the American
Business Conference, and a member of the Board of
Directors of the National Bureau of Economic Research
among other distinguished positions. He is the author
of over 60 articles in professional journals and the prin-
cipal author of three books and numerous publications.
Dr. Hatsopoulos received his education at the National
Technical University of Athens and the Massachusetts
Institute of Technology where he received his
Bachelor's, Master's, Engineer's, and Doctor's degrees.
He served on the faculty of MIT from 1956 to 1962 and
has continued his association with the Institute, cur-
rently serving as Senior Lecturer.
PaulR. Krugman is a Professor of Economics at the
Massachusetts Institute of Technology and a research as-
sociate at the National Bureau of Economic Research.
He is a member of the Board of Advisors for the Insti-
tute of International Economics, a member of the Group
of Thirty and a fellow of the Econometric Society. He
is a member of the Board of Economists for the Los
Angeles Times and has published articles on numerous
domestic and international economic issues. Dr. Krug-
man received his B.A. from Yale University and his
Ph.1 from the Massachusetts Institute of Technology.
He has taught at MIT since 1979.
JamesM. Poterba is a Professor of Economics at the
Massachusetts Institute of Technology and a Research
Associate at the National Bureau of Economic Research.
His principal research fields are the economics of taxa-
tion, corporate finance, and financial economics. He has
published widely in professional, journals and is a fellow
of the Econometric Society. Dr. Poterba received his un-
dergraduate training at Harvard University and holds
the Doctor of Philosophy degree from Oxford Univer-
sity. He has taught at MIT since 1982.
1730 K Street, NW
Washington, DC 20006
(202) 822-9300
Barry K. Rogstad
President
American
Business
Conference
March 24, 1989
Mr. Jeff Vogt
Office of Public Liaison
The White House
Washington, DC 20500
Dear Jeff:
Here is a letter for Bobbie that conveys some additional information that might
be useful to the President's speechwriters.
Regards,
Barry Barry K. Rogstad
BKR:mcp
encs.
VCoalmon of Growth Companies
1730 K Street, NW
Washington, DC 20006
(202) 822-9300
Barry K. Rogstad
President
American
Business
Conference
March 24, 1989
The Honorable Bobbie Kilberg
Deputy Assistant to the President
The White House
Washington, DC 20500
Dear Bobbie:
We are honored that President Bush has consented to speak to the members of the
American Business Conference at our meeting here in Washington early next month.
I am enclosing a paper describing the nature and mission of ABC. In addition, for
purposes of preparing the President's presentation, you may find the following
background information helpful.
o
President Bush is a long-standing and valued friend of ABC. As Vice President,
he met with our members in October 1981 (at which time he hosted a reception at
the Vice Presidential residence), March 1983, and October 1985. Last January,
shortly before the inauguration, he and Vice President Quayle hosted a session
with some of America's leading entrepreneurs including one of our members, Tom
Wathen, President of Pinkerton's Inc. The President has a number of personal
acquaintances and friends among our membership; indeed, Secretary of Commerce
Bob Mosbacher is a former vice chairman of ABC.
ABC enthusiastically supports the President's budget initiative, especially its
focus on capital formation and growth.
We share as well the President's emphasis upon education as a key ingredient for
increasing labor productivity and, therefore, the nation's international
competitiveness. A number of our members are very active at the state and local
level in programs to promote educational excellence.
Coalition
of
Growth
The Honorable Bobbie Kilberg
March 24, 1989
Page 2
0
ABC, perhaps more than any other business organization in Washington, has con-
sistently endorsed a pragmatic free trade and investment policy as the only
reasonable response to an interdependent global marketplace.
The members of the ABC feel that the President closely embodies the ideals and goals
of our organization. For that reason, we will not only support his short-term
economic goals, but want to contribute to the achievement of his long-term
priorities for the nation and the world. I trust that the meeting with the
President next month will be the beginning of a long and constructive partnership to
that end.
Sincerely,
Barry Barry K. Rogstad
BKR:mcp
enc.
American
Business
Conference
A Coalition of Growth Companies
THE AMERICAN BUSINESS CONFERENCE
Founded in 1981 and comprising one hundred chief executives of
fast-growing, mid-size companies, the American Business Conference
(ABC) is the non-partisan voice of the high-growth, entrepreneurial
sector of the economy.
Mission
The mission of the American Business Conference is the promotion
of public policies to encourage growth, job creation, and a higher
standard of living for all Americans. ABC executives believe their
own business success carries with it a responsibility to help expand
economic opportunity throughout the economy.
accountable
Membership
To qualify for membership in ABC, a company must have annual
revenues of at least $25 million and must be growing in revenues or
earnings at a minimum annual rate of three times the growth of the
economy plus inflation. Member firms who can no longer maintain the
growth criterion leave the organization and are replaced with other
qualified companies.
ABC maintains a distribution of manufacturing, service, financial
service and real estate firms in its membership roughly proportional
to the configuration of the economy as a whole. Membership in ABC is
limited to one hundred.
Agenda
Just as it keeps its membership limited and select, so too ABC
focuses on a few, very important issues directly related to economic
growth.
O Fiscal Policy: ABC regards the stimulation of national
savings and the continued reduction of the federal deficit
as the nation's leading economic priorities. ABC believes
that deficit reduction is primarily a matter of reducing
the rate of increase in federal spending. To that end,
ABC urges a bipartisan scrutiny of all federal spending
programs in an effort to bring the budget into balance
without new taxes. ABC does not accept the proposition
that higher taxes are a substitute for a disciplined,
accountable federal budget.
In the event that future, unforeseen economic circum-
stances call for new taxes in order to keep the budget in
balance, ABC would support such taxes only if the new
revenues are dedicated explicitly and without exception to
deficit reduction. The burden of any new levies should
fall on consumption rather than savings. In the longer
term, ABC believes that an examination of the merits of a
transition to a consumption-based income tax is in order.
International Trade and Finance: ABC is committed to free
and fair Trade as well as the unhindered international
flow of investment capital. The American economy has
demonstrasbly benefitted from both. The United States must
be on guarrd to insure that the vigorous enforcement of its
trade laws -- which is a legitimate response to a world
trading system still marked by barriers to trade and
investment -- does not result in furthering the sort of
protectiomism the laws were designed to counteract.
Human Capaital: By their very nature, ABC companies depend
upon human skills for imaginative business concepts and
innovative technology. Over time the more advanced
countries of the world can be expected to grow in indus-
tries that: are more technology and knowledge intensive,
that provide higher value-added goods and services, and
that are Increasingly dependent on human skills. The
long-ranges competitiveness of ABC companies and of
American Chusiness generally, depends upon the maintenance
of a world class work force. To that end, ABC strongly
supports knew initiatives to promote educational excellence
at all leveels.
Activities
ABC in all of its activities depends upon the participation and
initiative of its executives. That fact gives ABC's perspective
special credibility. Throughout the year ABC executives are prepared
to offer their perspective in a number of forums on both short- and
long-term critical economic issues.
O Membership Meetings: To advance their economic ideas, ABC
executives regularly meet the nation's most important
policymakers. Twice each year, all ABC members come to
Washington for three days of policy meetings. The number
of people participating in each meeting is kept small:
perhaps two or three senators or administration officials
with an equal number of executives. The discussion agenda
typically reflects ABC executives' interests.
ABC executives also meet in plenary session to hear from
the president of the United States, the vice president,
the chairman of the Federal Reserve, and other distin-
guished speakers. In the plenary sessions as well as the
small sessions, the atmosphere is sufficiently informal to
allow a healthy exchange of views.
Other Policy Meeings: Beyond the twice-yearly membership
meetings, ABC executives often visit Washington individ-
ually and in small groups to discuss the views of the
membership before committees of Congress. A number of ABC
executives serve on various trade and advisory committees
to the president, and three ABC members are directors of
Federal Reserve Banks.
Publications: Together with direct advocacy, ABC
executives place great emphasis upon the study of entrepre-
neurship and management practice. ABC is well-known for
its monographs topics such as on capital costs, saving and
consumption, the contribution of entrepreneurship to the
economy, and the elements for success in the world market-
place. These and other ABC publications are drawn
directly from the experiences of ABC member companies.
Seminars: ABC also co-sponsors seminars and other
programs to allow further public debate on economic policy
issues, and frequently ABC executives are asked to speak
to meetings of business leaders and policymakers.
Through personal advocacy and publications, ABC executives
attempt to bring a fresh, informed, and neutral outlook on economic
policy-making.
The American Business Conference sees itself as a "laboratory of
excellence," dedicated to communicating the outlook and practices of
the sort of firms that are on the leading edge of the American
economy as the nation moves into the next century.
(Lange/Martin)
March 30, 1989
9:30 a.m.
PRESIDENTIAL REMARKS:
AMERICAN BUSINESS CONFERENCE
ROOM 450, OLD EXECUTIVE OFFICE BLDG.
TUESDAY, APRIL 4, 1989
2:00 P.M.
I've met with this group three times, over the last eight
years -- and every meeting has been a great success. So I've got
a mind to ask: Why can't we equal or exceed that kind of contact
over the next eight years?
Among the many close friends I have in the ABC, I'd mention
your former vice chairman, now Commerce Secretary, Bob Mosbacher.
Like all of you, he knows what it means to take risks, to build a
business, and to keep America first. And he's already doing a
superb job.
To be sitting in this room today, as ABC members, you've had
to keep your earnings at three times the growth of the economy,
plus inflation. Now, if Bob can just make that happen for every
business in America
I'll make him the Business Czar and we can
all go fishing.
You run the kind of high-growth businesses that represent
the most dynamic, entrepreneurial segment of the American
economy. And this government knows better than to fix what's
already working.
2
So this afternoon I want to talk to you about what we're
doing to encourage flexibility for the present -- and investment
for the future.
For anyone running a business, flexibility and sound
investment are now more important than ever. Your concern about
a lack of savings is clearly motivated by a lack of investment
capital for American industry. Now, the personal savings rate
hit 5.9 percent in February -- nearly a seven-year high. That's
good news.
But the working paper you released last month on
overconsumption was another reminder that the deficit must be
brought under control. So let me reassure you -- this government
will not become the fiscal equivalent of Overeaters Anonymous.
Accountability in government demands that we put an end to this
spending spiral.
You know, when George Kaufman -- that famous wit from the
Algonquin Round Table -- was at a party, he heard a self-made
millionaire boasting to a circle of people, "I was born into the
world without a single penny." And Kaufman answered, "Oh really.
When I was born, I owed twelve dollars."
Well, we don't have to let the deficit play a cruel joke on
3
future generations. Next year alone, federal tax revenues will
rise by more than $80 billion. And we're going to use those
funds to bring the deficit down below the Gramm-Rudman-Hollings
targets.
To spur greater investment in American indistry, baquer we need to
bring our taxation of capital gains down -- in line with that of
our trading partners. In the budget we've proposed to Congress,
we want to restore the differential to 15 percent on long-held
invo tments assets.
How many of you, as you built your businesses, were able to
just walk up to a bank and get equity? Few, if any. Most of you
probably raised capital by offering people a share of the
business -- and a stake in the outcome.
Cutting the capital gains rate means more of that can
happen. It will give businesses more of the capital they need to
grow. It will bring in $4.3 billion more in tax revenues,
according to the Treasury. And it will create more new jobs.
That's no tax break for the rich. That's a fair shake for
every American.
The budget consultations are being held behind closed doors;
so I can't tell you how they're going. Which may strike you like
4
one of those spy movies where somebody knows a secret, and says,
"You know, I'd tell you -- but then I'd have to kill you." But
we're determined to work with this Congress -- you know, live and
let live / to find answers we can all live with.
and I'm sure Congress feels the same way -- weneed
We want to build on the energy and initiative of American
business -- and we're determined to avoid burdensome mandates
that only enforce solutions of uniform mediocrity. We don't want
to limit the flexibility of managers and workers, who are trying
to find their own best solutions. And you know, many are already
succeeding.
Chamber of Commerce estimates suggest that workers are
receiving more fringe benefits than ever before. Total benefits
in 1987 were up 163 percent in a decade. And it is the market --
not government -- that is responsible for this growth.
Nearly eighty percent of growth in the fringe share of
compensation is due to voluntary action by employers. Only 21
percent is due to government requirements. We want to keep it
that way.
"Mandated benefits" are a contradiction in terms. How would
you feel if your doctor said, "Well, nothing's broken
but
we're going to put you in a full-body cast anyway." No thanks.
5
A hallmark of this administration will be its focus on the
future -- and the importance we attach to making the right kinds
of investment. You don't make your money on short-term, day-to-
day trades -- you make it through sound long-term planning.
There can be no investment more urgent -- or more compelling
for the future of American business, and this country as a whole,
than education.
As labor markets get tighter in the coming years, many of
you are going to be facing shortages of skilled people. Some
managers are already worried about a scarcity of science and
engineering graduates. And you've all read the surveys that show
Pacific rim students outperforming our own.
Our best students can compete with anyone in the world.
We're not on the verge of some intellectual brown-out. But in
order to give business more of the people it needs to compete --
to help build America's prosperity -- and to give more of our
young people the skills they need to share in that prosperity --
we have made education a national priority.
Next week I will be sending to Congress an education
legislation package. We want to reward merit schools that make
progress in terms of raising student achievement, and reducing
6
drug use and drop-out rates. We're promoting parental choice and
educational quality, through magnet schools of excellence.
We want to provide alternative certification of teachers and
principals, to broaden the pool of talent available; President's
Awards to outstanding teachers; Urban Emergency Grants to
provide comprehensive help in fighting drugs for school districts
under seige; a National Science Scholars program for high school
seniors; and additional endowment matching grants for
historically black colleges and universities, which occupy a
unique and vital position in American higher education.
We are committed to a program of education reform that will
give our young people a solid foundation for the future. But to
make lasting improvements in education, we'll need to get all of
the players -- superintendents and administrators, school boards,
local business leaders, teachers' unions -- around the table.
This will demand accountability, from all of us. It will
require the best kind of collective effort, from all directions
-- but it holds the promise of real progress.
Many of you have been prime movers, spending a remarkable
amount of your own time making good on that promise. More than
a third of you serve on local school boards, public or private --
or on the board of a local college or university.
7
Others among you have established a program with a local
community college, or created Montessori schools, or taught part-
time, or promoted science education across a school district.
That's the kind of involvement that, while it isn't always easy,
leads to the kind of educational reform that lasts. Consider
yourself one in a thousand -- you know, points of light.
By investing your time and talents toward the education of
our young people, you're helping to bring about something vital
-- a fundamental cultural shift, that reasserts the value of
learning in this country.
You're breathing new life into an idea that has always been
a testament to the American spirit: that doing well demands
doing good.
Nothing I might tell you would say it better than your own
mission statement, which says ABC executives "believe their own
business success carries with it a responsibility to help expand
economic opportunity throughout the economy."
As business leaders, you understand the power of interests
held in common. Education is the one investment that guarantees
economic opportunity -- for every individual, and every business
in America. Thank you. And God bless you.
EXECUTIVE OFFICE OF THE PRESIDENT
Interest Rates
OFFICE OF MANAGEMENT AND BUDGET
Q4 GNP
WASHINGTON. D.C. 20503
THE
Housing Finance
Bean Counting
March 24, 1989
MEMORANDUM FOR THE DIRECTOR
FROM:
John C. Weicher
SUBJECT:
Friday Economic and Financial Report
Interest Rates Stabilize After Recent Jump
This week, interest rates stabilized and even fell slightly on
long maturities. That's a welcome change from the prior week's
increase of 20 basis points. February's Consumer Price Index,
released this week, was a bit better than the market expected,
with about a 5 percent annual rate rise overall and also exclud-
ing volatile food and energy items. Despite this good news, the
underlying rate of inflation this year has averaged 5.3 percent,
up about 1/2 percentage point from last year.
Consumer Price Index
(% change, annual rate)
December to December
Jan
Feb
1985
1986
1987
1988
1989
Total
3.8
1.1
4.4
4.4
7.2
5.1
Food
2.7
3.8
3.5
5.2
9.3
5.0
Energy
1.9
-19.5
8.2
0.5
9.8
6.9
Ex. Food & Energy
4.3
3.8
4.2
4.7
5.9
4.8
Fed Chairman Alan Greenspan and Vice-Chairman Manuel Johnson, in
separate remarks on Wednesday, made clear that the Fed has
stopped raising the federal funds rate for the time being while
they wait for the effects of their previous tightening moves to
appear. They stressed the long lags in monetary policy and their
desire to avoid overkill and reduce the possibility of a re-
cession. This is a clear sign that the FOMC, which meets next
week, is unlikely to change policy.
- 2 -
The bond market bounced up a bit after the Fed officials' re-
marks, but the stock market headed down. In the past week,
technology stocks have been hit on reports of lower earnings.
IBM and Digital Equipment dropped by over 8 percent. Weakness
at these major computer manufacturers is a signal of a slowdown
in investment spending.
Nominal interest rates are now about 1/2 percentage point higher
on long maturities and 1-1/4 percentage point higher on short
maturities than projected in the budget. While this increases
outlays and the deficit, the effects will be almost entirely
offset by higher-than-expected inflation. Tax receipts increase
proportionately to the rise in prices, while noninterest program
outlays are slower to adjust in the short run. Eventually,
outlays are likely to be adjusted for higher inflation, so that
receipts and outlays change about equally.
of course, higher inflation is bad news for the economy and
threatens the continuation of the expansion, but it has a roughly
neutral effect on the deficit in the long run. What really
matters for the budget is real interest rates and real growth
rates. This year's rise in nominal interest rates has been
fairly closely matched by rising inflation, with little average
change in real rates. Real growth was slightly higher than the
Administration's projection for the fourth quarter of 1988. The
budget assumes a decline in real interest rates and healthy
growth over the next year and a half, a more favorable outcome
than most private sector forecasts. But so far, overall economic
performance is consistent with the economic projections that
matter most for the budget.
Fourth Quarter GNP
Now that all the data are in for the final quarter of last year,
it is clear that the economy was somewhat stronger than initially
reported. The Bureau of Economic Analysis places real GNP growth
at a 2.4 percent annual rate, up 0.4 percentage points from the
prior reading. A change of this magnitude is not exceptional, in
fact, it is equal to the average revision during the past dozen
years. Excluding the drought, which cut 1.1 percentage points
off the growth rate, real GNP rose at a 3.5 percent annual rate.
Over the four quarter of the year, GNP also rose 3.5 percent
excluding the drought's effects.
The fourth quarter inflation estimates were not revised. The GNP
implicit price deflator was up at a 5.3 percent annual rate and
the GNP fixed-weighted price index, which is based on a constant
composition of output, was up at a 4.2 percent rate. (See
attachment for details of fourth quarter GNP.)
The Administration has assumed that rising interest rates over
the past year will put a damper on nonfarm growth this year, but
not enough to cause unemployment to rise. The year is still
young, but there are signs that this is already happening. The
- 3 -
sectors that were at the forefront of the expansion last year are
moderating. Manufacturing production and employment slowed dur-
ing the first two months of this year. In part, this reflects
diminished competitiveness because of the dollar's appreciation.
On the domestic front, businesses' orders for new equipment have
not risen since the third quarter of last year, which will curb
capital spending in the coming months. Finally, consumer spend-
ing also waned in January and February as auto sales slumped. At
the same time, unemployment has actually fallen.
A slackening pace does not necessarily signal an end to the
expansion. In fact, the composite index of leading indicators
rose 0.7 percent in December and 0.6 percent in January, the most
recent months available. That's the best back-to-back showing
since last June and is consistent with the Administration's
forecast for continued growth in the nonfarm economy, albeit at a
slower pace than during 1988.
The Evolution of Home Finance: Part I
The problems of the Federal Savings and Loan Insurance Corpora-
tion have simultaneously focused public attention on the American
housing finance system and obscured the nature of the fundamental
changes that have occurred over the last decade. This story is
the first in a series on the housing finance system. It
describes the evolution of the system. Subsequent stories will
discuss the changes in the mortgage instrument itself, in origi-
nation and servicing, and in the sources of funds for mortgages.
A Flawed Foundation
The "traditional housing finance system," dating back to the
Depression, was in reality two essentially competing systems of
home finance, each with Federal support: the thrift industry,
and the separate system of FHA/VA insurance and secondary market
development designed to attract commercial banks, life insurance
companies, pension funds and other investors to mortgages.
O Federal support for thrifts was initiated by President
Hoover. The Federal Home Loan Bank System was created in
1932 to charter and regulate Federal savings and loan insti-
tutions, and to provide advances (loans) to all S&Ls. This
was supplemented in 1934 by the creation of the Federal
Savings and Loan Insurance Corporation to insure thrifts'
deposits. The thrifts originated, serviced, and held
mortgages in their own portfolios.
President Roosevelt started the Federal Housing Administra-
tion in 1934 to insure mortgages, hoping to encourage commer-
cial banks and other institutions to originate and hold them.
The Federal National Mortgage Association (Fannie Mae) was
established in 1938 to create a secondary market for FHA
insured mortgages. In the immediate postwar period, the
- 4 -
Veterans Administration joined the FHA as a mortgage insurer.
In this system, there was a split between origination and
investing: mortgage bankers typically originated and
serviced mortgages, but sold them directly or through Fannie
Mae to other institutions which were the ultimate investors.
The S&LS were heavily regulated, in return for deposit insurance
and preferential access to capital markets, and the regulations
eventually hamstrung the system. S&LS were required to hold most
of their assets in mortgages. They were permitted to originate
mortgages only within 50 miles of their home office. These
holdings were financed primarily by local savings deposits.
Restricting thrifts to mortgages, primarily local, ignored the
wisdom of portfolio diversification. Moreover, financing port-
folios of long-term, fixed-rate mortgages by short-term savings
deposits exposed thrifts to interest rate risk. So long as
interest rates were relatively stable, such lending was profit-
able. But when interest rates rose, shocked by inflation, this
term mismatch led to tremendous losses.
Accelerating Inflation
As inflation ratcheted upward in the mid-1960s, the early 1970s,
and again in the late 1970s, these flaws became evident. In
1966, Regulation Q, which restricted the interest rates that
commercial banks could pay on deposits, was extended to S&Ls in
the hope of holding down their cost of funds. Instead, it
resulted in disintermediation -- a reduction in the growth of
deposits available for mortgage lending. On the second ratchet
in the early 1970s, money market mutual funds were created; they
invested in relatively short-term, high-quality assets, and were
free of the restrictions on insured depository institutions. In
the third cycle, MMMFs skyrocketed from $3.5 billion in 1977 to
$180 billion in 1981; there was a net decline in thrift deposits.
The first effect of inflation was to limit and destabilize the
funds thrifts had available for home finance.
The second, closely related, effect was to reduce thrifts'
profits and the value of their portfolios. On a market value
basis, by 1980 the industry as a whole had a negative net worth
of about 12.5% of assets. Although this industry-wide figure
improved as interest rates came down in the 1980s, a substantial
and growing fraction of the industry was insolvent. In any other
industry, they would have gone out of business. But insolvent
depository institutions can only go out of business when the
Federal Government closes or merges them. Instead, the FSLIC
exercised forbearance. Many thrifts with little or no net worth
continued in business, competing for funds, increasing the volume
of originations, and seeking higher returns. Their decisions
were subject to moral hazard; they might profit, but with no
equity, they could lose no more.
- 5 -
The nature of the mortgage instrument was also affected by the
continuing inflation. As rising home prices and higher interest
rates reduced the affordability of homes, potential buyers sought
both lower down payment requirements and easier monthly terms.
On the lenders' side, high and variable inflation created a
desire for variable or adjustable rate mortgages, which would
shift some of the interest rate risk to the borrower.
Bundles and Packages
Another major force restructuring the mortgage market in the
1970s was the increasing power and diminishing cost of computers
and telecommunications. New information technology made it
possible to "unbundle" different mortgage services so that
different firms could handle origination, insurance, servicing,
and holding. It also made possible the securitization of mort-
gages. This financial innovation "packaged" the cash flows on a
pool of mortgages into a variety of securities. These
securities, with quite different characteristics than the
underlying mortgages, were designed to appeal to a variety of
investors. They were sold in the secondary market, and were more
liquid than the underlying mortgages. Securitization will be
discussed more fully in a forthcoming article in this series.
The establishment of the Government National Mortgage Association
(Ginnie Mae) in 1968 accelerated the development of the secondary
market. Ginnie Mae bought FHA and VA insured mortgages, and
created pass-through securities on which it guaranteed timely
payment of principal and interest. In 1970, the Federal National
Mortgage Corporation (Freddie Mac) was chartered and charged with
creating a secondary market in conventional (uninsured) mortgages
to increase the liquidity of thrifts, and Fannie Mae was permit-
ted to buy conventional loans as well. As a result, mortgage
qualifying and underwriting standards became more uniform to
facilitate sale to the secondary market.
The Culmination
By the end of the 1970s, these forces created massive pressures
for changes in the housing finance system. To permit thrifts to
compete for funds and smooth the flow of financing for mortgages,
the Depository Institutions Deregulation and Monetary Control Act
of 1980 set up a schedule for the elimination of deposit rate
ceilings and the Garn-St Germain Act of 1982 authorized a deposit
account similar to money market fund accounts. The DIDMCA also
permited thrifts to hold up to 20% of assets in consumer loans,
commercial paper, and long-term corporate debt; Garn-St Germain
permitted investment in corporate and government securities with
no geographic limitation and increased the allowable limit for
these non-mortgage investments to 40% by 1984. For mortgages,
geographic limits on origination had been widened in several
stages, and by 1983 were eliminated throughout the nation. And
in 1981, thrifts were permitted to originate and hold any kind of
adjustable rate mortgage.
- 6 -
The result of these changes is that the housing finance system of
1989 is much removed from the system of 1979, and vastly differ-
ent from that of 1969. Twenty years ago, nearly all mortgages
carried fixed rates for terms of 25 to 30 years; more than half
were originated by S&Ls, and more than half were held by them in
their own portfolios; few were sold in the secondary market; and
mortgage securities were unknown. Moreover, interest rates then
were much lower. Before the 1970s, S&Ls lived in a friendly
environment, one that enabled them to grow and prosper. High
inflation and new information technologies have changed all that:
today's environment is a hostile one for S&Ls. It is no wonder
that they have to struggle to survive.
Sweet Forecast Worth Hill of Beans
OMB is widely regarded as having the best bean counters in the
world, and the Office of Economic Policy has the best of the
best. This week, OEP's Jim Simpson won the NEOB cafeteria's
jellybean counting contest. His estimate of 539 beans was
closest to the actual count of 535, an error of less than 1
percent. The next closest was 619 beans. According to an
informed source, most estimates were in the low thousands, which
reinforces the view that OMBers believe in rosey scenarios. But
not OMB's economists: Jim has provided proof positive that
realism prevails in this office! "Forecasting is not an exact
science", but this forecast was right on the bean, er-- beam.
HAPPY EASTER!
FOURTH QUARTER GNP
The economy grew at a revised annual rate of 2.4 percent in the fourth quarter, up
0.4 percentage points from the previous estimate. Excluding the drought, fourth
quarter GNP was 1.1 percentage points higher. Inflation, as measured by both the
implicit price deflator and the fixed-weighted index, remained unchanged; therefore
all of the increase in nominal GNP was attributable to higher real growth.
1988
Q1
02
Q3
Q4
Q4
Prelim.
Final
(% change, saar)
Real GNP
3.4
3.0
2.5
2.0
2.4
Excluding Drought
3.4
3.9
3.0
3.1
3.5
GNP Price Deflator
1.7
5.5
4.7
5.3
5.3
GNP Fixed-Weighted Price Index
3.5
5.0
5.3
4.2
4.2
Nominal GNP
5.4
8.7
7.3
7.2
7.6
The boost to fourth quarter GNP came mostly from business fixed investment, which was
down less than initially measured, and from higher federal spending. Most of the
higher federal nondefense revision was due to transactions of the Commodity Credit
Corporation (CCC). Growth of consumption and residential investment was unchanged.
The upward revisions more than offset a deterioration in the net export balance.
Business Fixed Investment
7.6
15.0
4.0
-4.6
-2.9
Personal Consumption
4.5
3.0
3.9
3.5
3.5
Residential Investment
6.5
0.2
4.3
10.9
10.9
Federal Government
-21.0
4.7
-13.2
16.8
20.7
Defense
-5.3
-1.5
-10.5
7.5
9.9
Nondefense
-60.1
33.2
-22.5
60.5
71.5
Nondefense Excluding CCC
-1.9
1.5
-12.9
8.0
10.9
State and Local
3.5
3.2
1.1
5.1
6.0
The real net export deficit widened, mostly due to a downward revision in exports.
Imports were revised up slightly. Inventories remained essentially unchanged.
($82 billions)
Net Exports
-109.0
-92.6
-93.9
-103.3
-105.4
Exports
486.2
496.9
514.0
523.6
522.1
Imports
595.1
589.5
607.9
626.8
627.4
Inventory Change
66.0
35.3
39.5
29.3
29.1
Nonfarm
51.9
30.1
40.4
37.7
37.6
Farm
14.1
5.3
-0.8
-8.3
-8.5
Nominal and real disposable income were revised downward as a result of smaller gains
in wages, proprietors' income and interest income. Corporate profits in the fourth
quarter increased sharply. The quarterly pattern of profits last year was quite
volatile, but overall they rose 7.5 percent.
(% change, saar)
Nominal Disposable Income
7.4
5.6
10.4
9.4
8.8
Real Disposable Income
5.0
0.0
5.6
4.8
4.1
Saving Rate (%)
4.4
3.7
4.2
4.5
4.3
Corporate Profits
0.1
13.7
4.4
NA
12.6
RECENT ECONOMIC INDICATORS MARCH 24, 1989
(S.A. OR AS INDICATED)
Feb-88
Mar-88
Apr-88
May-88
Jun-88
Jul-88
Aug-88
Sep-88
Oct-88
Nov-88
Dec-88
Jan-89
Feb-89
GNP (QUARTERLY SERIES, % A.R.)
NOMINAL GNP
5.4
8.7
7.3
7.6
REAL GNP
3.4
3.0
2.5
2.4
IMPLICIT PRICE DEFLATOR
1.7
5.5
4.7
5.3
FIXED-WEIGHT PRICE INDEX
3.5
5.0
5.3
4.2
REAL DISP. PERS. INC.
5.0
0.0
5.6
4.1
OPERATING PROFITS
0.1
13.7
4.4
12.6
LEADING AND COINCIDENT INDICATORS
LEADING INDEX
140.3
140.8
141.5
141.5
143.9
142.7
144.1
143.7
143.9
143.9
144.9
145.7
NA
PERCENT
1.2
0.4
0.5
0.0
1.7
-0.8
1.0
-0.3
0.1
0.0
0.7
0.6
NA
COINCIDENT INDEX
126.5
127.3
127.3
127.6
128.5
128.9
129.3
129.3
130.6
130.7
131.6
132.9
NA
PERCENT
0.7
0.6
0.0
0.2
0.7
0.3
0.3
0.0
1.0
0.1
0.7
1.0
NA
INDUSTRIAL PRODUCTION
134.4
134.7
135.4
136.1
136.5
138.0
138.5
138.6
139.4
139.9
140.5
141.1
141.1
PERCENT
0.0
0.2
0.5
0.5
0.3
1.1
0.4
0.1
0.6
0.4
0.4
0.4
0.0
CAPACITY UTIL. MFG.
82.6
82.7
82.9
83.3
83.3
84.0
84.0
84.0
84.3
84.4
84.5
84.8
84.6
EMPLOYMENT INDICATORS
CIVILIAN EMPLOYMENT, MIL.
114.3
114.1
114.7
114.4
115.0
115.0
115.2
115.4
115.6
115.9
116.0
116.7
116.9
CIV. UNEMPLOYMENT RATE, PERCENT
5.7
5.6
5.5
5.6
5.4
5.4
5.6
5.4
5.3
5.4
5.3
5.4
5.1
NONFARM PAYROLL EMPLOYMENT, MIL.
104.7
105.0
105.3
105.5
106.1
106.3
106.4
106.7
107.0
107.4
107.6
108.1
106.3
AVG. WEEKLY HOURS, MFG.
41.0
40.9
41.2
41.0
41.1
41.1
41.0
41.2
41.2
41.2
40.8
41.0
41.0
INITIAL CLAIMS UNEMP. INS., THOUS.
321.6
308.0
304.5
310.8
304.1
325.4
305.1
292.8
295.4
300.5
309.0
292.5
308.8
CONSUMER SECTOR
RETAIL SALES, BIL. $
131.9
133.7
133.2
134.1
135.0
136.7
136.1
135.8
137.8
139.5
139.2
140.1
139.5
PERCENT
1.2
1.3
-0.3
0.7
0.7
1.2
-0.4
-0.2
1.5
1.2
-0.2
0.7
-0.4
TOTAL AUTO SALES, MIL. UNITS, A.R.
11.1
10.6
10.5
10.4
11.0
10.7
10.6
10.6
9.8
10.2
11.5
9.8
9.9
DOMESTIC
7.9
7.5
7.2
7.3
7.8
7.8
7.4
7.6
6.8
7.2
8.4
7.0
7.1
IMPORTED
3.2
3.1
3.3
3.0
3.1
3.0
3.2
3.1
3.0
2.9
3.1
2.7
2.8
PERSONAL INCOME, BIL. $, A.R.
3946.7
3985.9
4001.0
4021.4
4044.9
4075.3
4091.8
4114.7
4175.5
4165.2
4200.8
4272.9
4315.3
PERCENT
0.6
1.0
0.4
0.5
0.6
0.8
0.4
0.6
1.5
-0.2
0.9
1.7
1.0
DISP. PERS. INC., BIL. $, A.R.
3376.7
3406.4
3357.6
3441.5
3465.3
3491.1
3505.9
3525.5
3580.0
3567.9
3599.5
3659.9
3699.7
PERCENT
1.0
0.9
-1.4
2.5
0.7
0.7
0.4
0.6
1.5
-0.3
0.9
1.7
1.1
REAL DISP. PERS. INC., BIL. $, A.R.
2768.0
2779.2
2721.5
2776.5
2788.4
2797.0
2802.2
2802.0
2832.5
2818.5
2834.3
2863.4
2889.6
PERCENT
1.0
0.4
-2.1
2.0
0.4
0.3
0.2
0.0
1.1
-0.5
0.6
1.0
0.9
PERS. CONSUMP. EXP., BIL. $, A.R.
3125.4
3149.0
3161.3
3190.9
3231.5
3241.7
3271.7
3270.2
3307.7
3325.4
3346.0
3357.9
3375.7
PERCENT
0.5
0.8
0.4
0.9
1.3
0.3
0.9
0.0
1.1
0.5
0.6
0.4
0.5
REAL PERS. CONSUMP. EXP., BIL. $, A.R.
2562.0
2569.2
2562.5
2574.3
2600.3
2597.3
2615.0
2599.1
2617.1
2626.9
2634.6
2627.2
2636.6
PERCENT
0.5
0.3
-0.3
0.5
1.0
-0.1
0.7
-0.6
0.7
0.4
0.3
-0.3
0.4
HOUSING SECTOR
HOUSING STARTS, THOU. UNITS, A.R.
1511.0
1528.0
1576.0
1392.0
1463.0
1478.0
1459.0
1463.0
1532.0
1567.0
1577.0
1690.0
1496.0
SINGLE-FAMILY
1095.0
1169.0
1087.0
1001.0
1088.0
1067.0
1076.0
1039.0
1136.0
1138.0
1141.0
1202.0
1045.0
HOUSING PERMITS, THOU. UNITS, A.R.
1429.0
1476.0
1449.0
1436.0
1493.0
1420.0
1464.0
1394.0
1516.0
1516.0
1566.0
1507.0
1404.0
American
Business
Conference
A Coulition of Growth Companies
116
TELECOPIER TRANSMISSION
FROM
AMERICAN BUSINESS CONFERENCE
DATE: 3/29
TIME:
9:35
TO: MARK LANGE
TELECOPIER #
DEPARTMENT:
TELEPHONE #
COMPANY:
FROM: JOHN ENDEAN
TELECOPIER # (202) 467-4070
TELEPHONE # (202) 822-9300
NUMBER OF PAGES TO FOLLOW: 2
REMARKS: RE PRESIDENT BUSH 's REMARKS BEFORE
AMERICAN BUSINESS CONFERENCE
NOTE: IF THERE ARE ANY QUESTIONS REGARDING THIS DOCUMENT, PLEASE CALL
AT THE ABOVE NUMBER.
American
Business
Conference
A Coalition of Growth Companies
MEMORANDUM
To:
Mark Lange
From: John Endean
Date: March 29, 1989
Attached are a few examples of ABC members' activities on
behalf of educational excellence. Quite candidly I have not
included the names of the executives in the examples I have
given because virtually all one hundred of our members are
involved in one way or another in this issue and we are
sensitive about singling out for special mention only half a
dozen or SO.
It is a cliche to say that business is "concerned" about
educational excellence. I think what distinguishes our CEOs is
their willingness to spend a remarkable amount of their own time
making good on that generalized concern.
ABC members, the chief executives of high growth,
entrepreneurial firms, are directly and personally involved in
promoting better educational standards at all levels in their
local schools and colleges. Some examples:
A number of ABC executives have taken the lead in
their home cities in public-private partnerships to
explore what the appropriate role for business is in
improving K-12 education.
One ABC chief executive is sponsoring a geography and
political/economic class for 5th through 8th graders
in his local grade school. He is planning to give
about $5,000 to the program and will also do some of
the teaching because he believes that to be
competitive in the world "we had better understand
it." He plans to focus on science and math next.
Several ABC executives hold part-time teaching
positions in local colleges and universities.
An ABC executive has begun a continuing education
center for employees. At the company's expense, 65
men and women will take a 30-week course to improve
their reading skills. The program will be undertaken
in cooperation with the local community college.
A Minnesota-based chief executive has been very active
in promoting parental choice in selecting public
schools for children. so crucial is improved
education to this executive's company that he has
hired someone to work full-time on the issue.
An ABC chief executive's interest in education led him
to become involved in the establishment of several
Montessori Schools.
An ABC executive is Chairman of the Boston Museum of
Science and has in that capacity been instrumental in
promoting science education in the Boston schools.
Well over one third of ABC chief executives serve on
either a local school board, on the board of a private
secondary school, or on the board of a local college
or university.
20246740707
4566218;# 1
MAR-29-89 WED 12:03 ABC
P.01
American
Business
Conference
Photocopy-Preservation
A Coalition of Growth Companies
TELECOPIER TRANSMISSION
FROM
AMERICAN BUSINESS CONFERENCE
DATE: 3/29
TIME:
9:35
TO: MARK LANGE
TELECOPIER $
DEPARTMENT:
TELEPHONE #
COMPANY:
FROM: JOHN ENDEAN
TELECOPIER # (202) 467-4070
TELEPHONE # (202) 822-9300
NUMBER OF PAGES TO FOLLOW:
2
REMARKS: RE PRESIDENT BUSH'S REMARKS BEFORE
AMERICAN BUSINESS CONFERENCE
NOTE: IF THERE ARE ANY QUESTIONS REGARDING THIS DOCUMENT, PLEASE CALL
AT THE ABOVE NUMBER.
BY:XERUX
IELEVUrIER
TTO)
MAR-29-89 WED 12:04 ABC
P.02
American
Business
Conference
A Coalition of Growth Companies
MEMORANDUM
To:
Mark Lange
From: John Endean
Photocopy-Preservation
Date: March 29, 1989
Attached are a few examples of ABC members' activities on
behalf of educational excellence. Quite candidly I have not
included the names of the executives in the examples I have
given because virtually all one hundred of our members are
involved in one way or another in this issue and we are
sensitive about singling out for special mention only half a
dozen or SO.
It is a cliche to say that business is "concerned" about
educational excellence. I think what distinguishes our CEOs is
their willingness to spend a remarkable amount of their own time
making good on that generalized concern.
RC
BY:XEROX TELECOPIER 7011 ; 3-29-89 12:07PM ;
2024674070-
4566218:# 3
MAR-29-89 WED 12:04 ABC
P.03
Photocopy-Preservation
ABC members, the chief executives of high growth,
entrepreneurial firms, are directly and personally involved in
promoting better educational standards at all levels in their
local schools and colleges. Some examples:
A number of ABC executives have taken the lead in
their home cities in public-private partnerships to
explore what the appropriate role for business is in
improving K-12 education.
One ABC chief executive is sponsoring a geography and
political/economic class for 5th through 8th graders
in his local grade school. He is planning to give
about $5,000 to the program and will also do some of
the teaching because he believes that to be
competitive in the world "we had better understand
it." He plans to focus on science and math next.
Several ABC executives hold part-time teaching
positions in local colleges and universities.
An ABC executive has begun a continuing education
center for employees. At the company's expense, 65
men and women will take a 30-week course to improve
their reading skills. The program will be undertaken
in cooperation with the local community college.
A Minnesota-based chief executive has been very active
in promoting parental choice in selecting public
schools for children. So crucial is improved
education to this executive's company that he has
hired someone to work full-time on the issue.
An ABC chief executive's interest in education led him
to become involved in the establishment of several
Montessori Schools.
An ABC executive is Chairman of the Boston Museum of
Science and has in that capacity been instrumental in
promoting science education in the Boston schools.
well over one third of ABC chief executives serve on
either a local school board, on the board of a private
secondary school, or on the board of a local college
or university.
- flexibility, and accountability in fusiness
in education
& in government.
Business
Flexibility -- deceards sorrings & investment ABC
cgs You cut
means no mardated body-cast3
min. wage.
accountaf -- your mission statement expand
econopter.
- derive from account. to comm, yes
fatalso
Education
econ. common
serve
Flurib. force
Account
Gout
Accountable [ethics]