Some educated observers foresee the stock market's imminent collapse and others predict a Dow of 36,000. As macroeconomists, they look at the value of market equity relative to the underlying corporate productive assets for which investors, essentially, are bidding. In simpler terms, people should get what they pay for. In a painstaking exercise of macroeconomic accounting, the authors calculate the value, relative to GNP, of each piece of the jigsaw puzzle. Economists have long been stymied by this measurement problem.
Capital includes both tangible and intangible capital.
Using national accounts data, the authors calculate the economy's overall profits. But calculating the rate of return for corporate capital is a bit trickier. We got what we paid for. One promising explanation for a doubling in equity prices relative to GNP might be that capital became more productive over time, raising the capital-output ratio. The Kennedy administration reduced marginal tax rates for the highest income bracket from 91 percent to 70 percent.