February 10, 1975

Dr. Robert M. Solow
Department of Economics
Harvard University
Cambridge, Mass. 02138

Dear Dr. Sclow,

I just wanted to pase on how much I enjoyed reading your article
on inflation in the Public Interest No. 38. There was more wisdom packed
in a few worda, and highly intelligible ones at that, than I have seen
in a long time.

On page 65 you refer to a few partial remedies which are vary much
in line with my own thinking of the past several years. In particular,
why haven't more economists pressed more strongly for the government
issue of indexed bonds along the lines of your own suggestion! It seems
to me that the wider availability of such instruments would greatly
lessen the dead weight costs of inflation and insofar as these were
oriented to small savers would help mitigate some of the radistributional
inequities of the process. It seems to me thie algo has political
implications in that the frenzy that many people experience in trying to
hang @m to their savings (1) frastrates reasonable efforts at dealing with
the recession problem and (2) imposes rather more of a cost than the rest
of your discussion implies on the application of their energies towards
more economically productive ends. By providing a more secure place for
funds seeking such a hewwagni think that some of the side-effects of
inflation like hording of commodities and driving up their price might
be mitigated and these have further ripples in the economic structure.
Look at the contortions that we have to go through when the price of copper
exeeds the threshold for its monetary use.

You very rightly pointe out the difficulty of dissection the adverse
cpnsequences of inflation from the accompanying snarl in economic activity ~
our depression ~ amd I wonder if you really did give adequate weight to the
impact of inflation on venture capital. Perhaps this can albobe put down
to an inappropriate peychological stance, but it seems to me that during a
time that money can earn 52 (which implies a rather low rate of progressive
inflation), a risk enterprise that promises to yield 30% will seem very
attractive; when money costes 15%,even an anticipated 40% return on the same
basis fe not going to seem nearly as attractive since I think that
investors are going to look for some multiplier rather than additive factor
in what they look for from risk capital. I may be making the mistake of
blurring the two underlying phenomena but I do think that inflation really

swe! Mor0s
Dr. Robert M. Solow -~2-= 2/10/75

does intrinsically 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 disease was not inflation itself
but efforts to control it by clamping down on the money supply. Mave
you given any further thought to this particular question?

As to the indexing of tax rates, 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 is still 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 economics. The state having to worry about the management of its
debt and having access 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