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Cover Story: COMMENTARY
THE ECONOMY IS STARVING: SPOON-FEED IT INVESTMENT
Negation, Restriction, Inactivity -- these are the Government's watchwords. . . . But we arenot tottering to ourgraves. . . . There is no reason why we should not feel ourselves free to be bold, to be open, to experiment, to take action, to try the possibilities of things.
John Maynard Keynes, Essays in Persuasion, 1931
Keynes got it right. And this time around, only a vigorous fiscal policy can get the economy moving. The key, as Keynes stressed 60 years ago, is stimulating businesses to boost spending on new investment.
It's investment spending that lifts productivity. Workers, seeing their employers investing in the future, worry less about being laid off. Consumer spending picks up. Real wages rise, as does everyone's standard of living. And so on, in an ever-widening growth spiral. "An investment-led recovery addresses not only the short-term need to speed up the recovery; it also deals with fundamental long-term problems such as weak productivity growth and loss of U. S. competitiveness," says Lawrence Chimerine, senior adviser to DRI/McGraw-Hill.
NEEDED WORK. Obviously, moves to increase investment spending right now risk an even more mammoth federal deficit. But the price of fiscal stimulus is less than the cost of fiscal impotence. Real growth in gross national product has averaged a mere 0.5% for the past two and a half years. More worrisome is the cumulative, harmful effect of too little investment on future economic growth. Real business investment in the U. S. in the 1980s grew at an average annual rate of 3.3%, vs. 8.5% in Japan. And public spending on infrastructure fell from 2.3% of GNP two decades ago to 1.3% in the 1980s.
Back in the early 1930s, orthodox economic thinkers believed if President Herbert Hoover sat tight and waited, the economy's natural forces would bring about recovery. Treasury Secretary Andrew W. Mellon, for one, was a "passionate advocate of inaction," in economist John K. Galbraith's view. The experts agreed that all government had to do to restore business confidence was balance the budget. But that bleak decade showed how an economy can crawl along for years, trapped in high joblessness and low growth.
What can Washington do now? For starters, the federal government should restore an investment tax credit. Chimerine proposes a hefty 20% to 25% credit on new investment. To limit the Treasury's loss of revenue while encouraging new investment, the credit would be allowed only for incremental investments in productivity-enhancing equipment above a company's recent investment-spending pattern.
The government could also embark on an ambitious public-investment project. The work needs to be done anyway: Roads, harbors, sewage systems, communication links, and other economic building blocks are crumbling. And these public investments can bolster private returns by easing the distribution of goods and services. U. S. productivity growth fell from an average annual rate of 2.8% between 1953 and 1969, to 1.4% a year between 1970 and 1987. Almost 60% of that drop can be tied to lower public investment, estimates David A. Aschauer, an economist at Bates College.
INFLATION LID. But, you ask, what about the yawning federal-budget gap? That might be narrowed some by earmarking the multiyear "peace dividend" to pay for nonmilitary public investment. And revenue losses from the investment tax credit should be minimal, too, as higher equipment spending restores confidence and incomes, and eventually yields higher tax receipts. And what about inflation? Consumer prices are up a mere 2.8% over the past 12 months even as the budget deficit soars. Fierce global competition for market share and widespread corporate makeovers have been keeping a tight lid on inflationary pressures.
Every policy initiative entails risks. But bringing back the investment-oriented economics of John Maynard Keynes offers policymakers a solution to a short-term problem with long-term benefits to U. S. competitiveness.Christopher Farrell