An Analytical Framework for Federal Policies and Programs Influencing Capital Formation in the United States

PAD-80-24: Published: Sep 23, 1980. Publicly Released: Sep 23, 1980.

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The rate of capital formation in the United States has slowed down. During the 1970's, the rate of increase in the net stock of fixed business capital was 25 percent lower than during the 1950's and 1960's. Because the slowdown was accompanied by a sharp acceleration in the rate of growth of the labor force, the rate of increase in the ratio of capital to labor declined even more. The ratio of capital to labor grew only 1 percent a year during the 1970's, compared with a 3 percent annual rate of increase from 1949 to 1969. GAO examined the means by which Federal policies, programs, and activities can affect the rate of capital formation. The purpose is to provide Congress with a perspective on an economic problem of major national significance, so that it can better evaluate policies designed to stimulate more rapid capital formation.

Various Federal programs and activities influence the process of capital formation. They affect the amount of new investment that private business voluntarily chooses to undertake, the willingness of individuals and businesses to save for the future, and the fraction of national income available to the private sector for consumption or capital formation. Federal expenditures have some of the following effects: (1) they add directly to the total stock of capital when they are invested in public capital such as roads, dams, ships, and office buildings; (2) in the form of transfer payments to individuals, they substitute to some extent for private savings that would otherwise be needed to provide for the exigencies of old age, disability, or unemployment; (3) they alter the distribution of income in ways that reduce people's willingness to save; and (4) they can crowd out private capital formation by preempting savings that might otherwise have been used by private investors. The most important channels through which Federal taxation affects the rate of capital formation are: (1) the size of the Federal budget deficit; (2) changes in the rate of taxation; and (3) differential rates of taxation on alternative investment opportunities. Other Federal programs and policies affect capital formation by their: (1) monetary policy; (2) Federal credit programs; (3) regulation of prices, rates of return, and conditions of entry in various industries; (4) expansion of Federal regulations; (5) price controls on oil and natural gas; and (6) activity in the international marketplace.

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