February 10, 1975

Dr. Robert M. Solow
Department of scaaoaics
Elarvard unfv8rsity
Cambridge, Mess. 02138

Dear Dr. Solow,

  I just wanted to pass on how louch I enjoyed readiug your article
on inflation In the Public Interest #a. 38. Yhere vl~s more wisdom packed
in a few words, and highly intellfgible ones at that. than I have seen
In a longtti.

  On page 65 you refer to a few partlal rmtediee which are vary much
ln liae with my own thintriag of the pact eeveral years. Sn particular,
why havm't more 8eoaodsts pressed more strongly for the goveraaant
i88uh of bdexed bonds iLong the lines of your QULI fBuj&geationt It seems
to nm that the wider avai.Zabilfty of such inet -to would greatly
lessen the dead weight costs of imflation emd lmaofar as theme were
oriented to small mavors would help mitigate same of the redistrlbutlonal
fnequlties oftha proaeea. It seems to me this ale0 ha* political
implioationa lnthatthe frcmrythatmany peopleexperlence lutrylugto
bang Ba to thair savings (1) fr&strates reasonable effort6 at dealing with
the recession problrpr and (2) ioapoocre rather vmrs of a eoat than the rest
of your dlecuaeiou inplies on the applfcatfaa of their energies tovarde
more econaalcelly productive endo. By providing a Iore secure place for
funda seeking ouch a -1 think that same of the side-effects of
Inflation 12ke horda of cowmditlee and driving up their pries tight
be roitig8ted und these hva further ripple6 irt that SC-ic sltructure.
Look at the contortioms that wo havm to go through when the price of copper
tsxeede the threshold for its umnetary use.

  You very rightly pofnt out the difficulty of diemctioa the adverse
cpnaaquawes of hfllrrtlon from the accaupanyittg marl %n ecouanic activity -
our depress5an 0-J I vomhr ff you really did gfve adequate weight to the
@act of inflation on venture capital. Perhaps this can al&o&e put down
tom iarpproprkte poychologieal stanee,butZt scarrstomethatduring a
time that money can earn 5X (which -lies a rather low rate of progressive
iaflstloa), a risk enterprba that proaims to yield 30% will seem very
attractive; when waey costs lS%,avan 8~ anticipated BOX return on the same
basfs is not golug to m nearly as attractive siace I think that
investors are go2ng to look for edlllc~ multiplier rather than additive factor
In what thay look for from risk capital. I mny be making the mistake of
blurring the two w@erlying phanapeas but I: do think that inflation really

over


Dr. Robert H. Solow

-29

Z/10/75

does lntrinaically make it very difficult for a young firm to be able to
achieve the level of economic return that will keep investors interested
in potential technological innovation.

  But perhaps you will answer that the dieease wa8 not inflation itself
but efforts to control it by clataping down on the money supply. gave
you given any further thought to this particular question?

   As to the indexing of tax rates t that does not seem like a very
probable event - look what happened to Ford's proposal which began with
a flat 10% rebate (then dropped to a more sharply progressive incidence,
and ie stfll in serious trouble!) Perhaps even more to the point from the
standpoint of some sort of equity would be the indexing of capital values
invested before socalled capital gains are calculated for tax purposes.
But I wondered whether this was not in fact such a great incentive to the
treasury that it might be one of the underlying motives for a global and
perpetual inflationary policy. I suppose that is not very distant from the
debasement of the currency which I guess must be one of the first laws of
historical econamic8. The etate having to worry about the management of its
debt and hav%ng accesa to the principal tools of managing the value of
money obviously has Inexorable pressure in just one direction. You refer to
the interplay of wage and price pushes and I wonder whether taxes have been
adequately thought of in the same general connection.

  Anyhow, I do not want to lose sight of my main point which was to
ask you to put more political heft behind the idea of indexed savings bonds
which I think could do a great deal to take the sting out of inflation for
a great many people.

Sincerely yours,

Joshua Lederberg
Professor of Genetics

JL/rr