The Social Cost of Federal Financing 125 



A FINAL COMMENT 



Our statistical analysis has provided an estimate which is designed 

 to reflect the social cost of capital raised by federal taxation. We 

 defined our concept of social cost in terms of the opportunities 

 foregone in the private sector of the economy, either because of 

 curtailed investment or of curtailed consumption. According to 

 our results, if an efficient allocation of resources is the criterion, 

 only those public investments that can produce a rate of return 

 equal to the opportunity cost — or a rate of 5 to 6 per cent — should 

 be undertaken. In operational terms, this would require that an 

 interest rate of that order be used in the evaluation of projects. 



Acceptance of this conclusion, however, requires that the exact 

 meaning of the notion of efficiency in this context be made clear. 

 As we pointed out in Chapter II, efficiency is a relative concept 

 dependent on a specific distribution of income. An arrangement 

 which is efficient with one distribution of income may be inefficient 

 with another. The set of demands resulting from one income 

 distribution will not be identical with the demands generated by a 

 different income distribution, and so the prices which lead to 

 efficiency in one case will not be appropriate to the other. 



In considering the efficiency of an interest rate, this inter- 

 dependence takes on particular significance. The interest rate 

 indicates the relative value of output realized at different points in 

 time, including the relative values for different generations. When 

 we accept an interest rate determined by the preferences of the 

 present generation — as we do in our quantitative models — we 

 implicitly accept the time preference of the present generation of 

 decision-makers. Children and unborn generations have no vote 

 in the market place. With the power of the ballot distributed 

 differently from the power of the purse, the community — when 

 acting collectively through the political process — may decide on a 

 distribution of consumption among generations different from the 

 distribution it indicates through its saving behavior. There is no 

 logical reason to give priority to one judgment over the other; our 

 economic analysis must presuppose that the distribution of income 

 and consumption implicit in the efficient allocation of resources 

 is acceptable to society. Should an ethical choice be made through 

 the political process to distribute more of the total consumption to 

 future generations, our opportunity-cost measure of the interest 



