The Social Cost of Federal Financing 127 



tive is to increase the amount invested every year and to put the 

 funds into those lines of activity in which the rate of return is 

 greatest. In this way, the contribution to future output is maxi- 

 mized and, should the time profile of output made possible by the 

 investment place too much of the output in early years, an appro- 

 priate share of it can be reinvested. A series of reinvestment cycles, 

 each at a high rate of return, will make a greater contribution to 

 the welfare of future generations than investment in one very 

 durable project which yields a low rate of return. It may be 

 possible that the federal government is limited in the fields in 

 which it can employ the desired extra investment; that resource 

 projects yielding low rates of return must be undertaken because 

 of a lack of better opportunities. But this argument holds only 

 if the additional ethical judgment is made that the extra investment 

 must be carried on under federal aegis. 



There are other reasons for using a low interest rate. It may be 

 a means of subsidizing new regions in a manner designed to pro- 

 mote their growth to maturity. In some instances, the low interest 

 rate helps to justify projects needed as stand-by capacity for defense 

 purposes. Or it may be a means of increasing the economy's rate 

 of growth for the sake of preserving a lead over the Russian 

 economy. But in these situations, the low interest rate serves to 

 obscure the true issues. The public will be better informed and 

 will be able to come to a more soundly based judgment if the 

 costs of meeting these purposes are made explicit. 



Note to Chapter IV 



We present a brief formal derivation of the model employed to 

 measure the social cost of capital drawn from consumption. 



Let Ci — consumption expenditure of individual / in the present 



period. 

 Si — net saving of / in the present period, 

 Yi — disposable income of / in the present period, 

 ii n interest rate faced by / for his marginal saving borrowing 



decisions, 



for Economic Development and the Theory of Intertemporal Welfare Eco- 

 nomics," Quarterly Journal of Economics, February 1957. 



