Worth: Mankiw Economics 5e 212 PART I11 Growth Theory: The Economy in the Very Long Run preciation 8 by dividing 2 by equation 1 6k/k=0.1y)/(25y) And we solve for the marginal product of capital MPK by dividing equation 3 by (MPK×k)/k=(0.3y)/(2.5y) MPK=0.12 Thus, about 4 percent of the capital stock depreciates each year, and the marginal product of capital is about 12 percent per year. The net marginal ital, MPK-8, is about 8 percent per year: We can now see that the return to capital (MPK-8=8 percent per year) ell in excess of the economy's average growth rate (n+g=3 percent per year) This fact, together with our previous analysis, indicates that the capital stock in he U.S. economy is well below the Golden Rule level. In other words, if th United States saved and invested a higher fraction of its income, it w more rapidly and eventually reach a steady state with higher consumption. This finding suggests that policymakers should want to increase the rate of saving and investment. In fact, for many years, increasing capital formation has been a high priority of economic policy. Changing the Rate of Saving The preceding calculations show that to move the U.S. economy toward the Golden Rule steady state, policymakers should increase national saving. But how can they do that? We saw in Chapter 3 that, as a matter of sheer accounting, gher ving means higher public saving, higher private saving, or some combination of the two. Much of the debate over policies to increase growth centers on which of these options is likely to be most effective. The most direct way in which the government affects national saving is hrough public saving-the difference between what the government receives in tax revenue and what it spends. When the government's spending exceeds its rev enue, the government is said to run a budget deficit, which represents negative lbic saving. As we saw in Chapter 3, a budget deficit raises interest rates and crowds out investment; the resulting reduction in the capital stock is part of the burden of the national debt on future generations. Conversely, if the government spends less than it raises in revenue, it is said to run a budget surplus. It can then re tire some of the national debt and stimulate investment The government also affects national saving by influencing private saving- he saving done by households and firms. In particular, how much people decide to save depends on the incentives they face, and these incentives are altered by variety of public policies. Many economists argue that high tax rates on capital cluding the corporate income tax, the federal income tax, the estate tax, Inc many state income and estate taxes-discourage private saving by reducing User JoENA: Job EFFo1424: 6264_ ch08: Pg 212: 27101#/eps at 100s ed,Feb13,20029:584MUser JOEWA:Job EFF01424:6264_ch08:Pg 212:27101#/eps at 100% *27101* Wed, Feb 13, 2002 9:58 AM We solve for the rate of depreciation d by dividing equation 2 by equation 1: d k/k = (0.1y)/(2.5y) d = 0.04. And we solve for the marginal product of capital MPK by dividing equation 3 by equation 1: (MPK × k)/k = (0.3y)/(2.5y) MPK = 0.12 Thus, about 4 percent of the capital stock depreciates each year, and the marginal product of capital is about 12 percent per year.The net marginal product of cap￾ital, MPK − d , is about 8 percent per year. We can now see that the return to capital (MPK − d = 8 percent per year) is well in excess of the economy’s average growth rate (n + g = 3 percent per year). This fact, together with our previous analysis, indicates that the capital stock in the U.S. economy is well below the Golden Rule level. In other words, if the United States saved and invested a higher fraction of its income, it would grow more rapidly and eventually reach a steady state with higher consumption.This finding suggests that policymakers should want to increase the rate of saving and investment. In fact, for many years, increasing capital formation has been a high priority of economic policy. Changing the Rate of Saving The preceding calculations show that to move the U.S. economy toward the Golden Rule steady state, policymakers should increase national saving. But how can they do that? We saw in Chapter 3 that, as a matter of sheer accounting, higher national saving means higher public saving, higher private saving, or some combination of the two. Much of the debate over policies to increase growth centers on which of these options is likely to be most effective. The most direct way in which the government affects national saving is through public saving—the difference between what the government receives in tax revenue and what it spends.When the government’s spending exceeds its rev￾enue, the government is said to run a budget deficit, which represents negative public saving. As we saw in Chapter 3, a budget deficit raises interest rates and crowds out investment; the resulting reduction in the capital stock is part of the burden of the national debt on future generations. Conversely, if the government spends less than it raises in revenue, it is said to run a budget surplus. It can then re￾tire some of the national debt and stimulate investment. The government also affects national saving by influencing private saving— the saving done by households and firms. In particular, how much people decide to save depends on the incentives they face, and these incentives are altered by a variety of public policies. Many economists argue that high tax rates on capital— including the corporate income tax, the federal income tax, the estate tax, and many state income and estate taxes—discourage private saving by reducing the 212 | PART III Growth Theory: The Economy in the Very Long Run