Paying Lawyers, Empowering Prosecutors, and Protecting Managers: Raising the Cost of Capital in America

Abstract

It is a safe generalization that no nation should increase the cost of raising capital except for compelling reasons. The lower the cost of capital to a nation's entrepreneurs, the more that will be purchased. When further units of capital are added to a fixed number of units of other factors of production, the return to those other factors is increased. For example, hypothesize two complementary factors of production that jointly produce products. The first factor is capital, domestic and foreign. We assume it to be extremely mobile. The second factor, domestic labor, we assume to be fixed in amount. Governmental measures that reduce the cost of capital will increase the return to labor as each additional unit of capital purchased competes for the fixed units of labor. Governmental measures that increase the cost of capital will in turn diminish the return to labor.