America's Capital Opportunity

By Marshall Loeb

As President Carter went up the mountain to Camp David last week, he could not have chosen a better moment to ponder the nation's future policies. The U.S. is at a decisive tipping point in its history. It is a time when the domestic policies decided on now will do much to determine whether the nation surges ahead during the 1980s--or enters a period of prolonged stagnation.

There is much to be said for the widely held thesis that the U.S. will be gripped by both stagnant growth and roaring inflation through the next decade. This could be the grim legacy of the profligate, overregulated 1970s. In the current indulgent decade, the U.S. has spent too much and saved too little. It has spent too much of its wealth on immediate gratification and too little on investment for the future, too much on Government uses and not enough on private uses, too much on easy imports of energy from afar and not enough on hard-slogging development of energy at home. The consequences have been turgid productivity, leading to low economic growth; high budget deficits, leading to inflation; multiplying balance of payments deficits, leading to a weak dollar, which in turn reduces capital investment from abroad and holds back the expansion of jobs and real income.

Yet an equally strong case can be made that the 1980s will be a golden decade. The fact that the U.S. has slipped behind means that it has a tremendous backlog of demand for capital projects, a huge amount of unmet needs for the investment that creates real wealth. If the nation now chooses policies that will unleash that investment, there will be a capital burst that can lift the U.S. to new peaks of material prosperity and geopolitical strength.

Indisputably, the U.S. has lagged in global economic competition. Many of the nation's steel, automobile, rubber and other plants and mines are outmoded and inefficient. The reason is that relative to the size of its economy, the U.S. since the mid-1960s has invested only three-quarters as much as the West Germans and one-half as much as the Japanese in expanding and modernizing its factories and machines. Just to keep them up to date and to sharpen U.S. competitiveness in world markets, the President's Council of Economic Advisers projected in 1975, the U.S. would have to spend 12% of its national wealth on capital investment every year through 1979. Private economists have put the necessary figure as high as 16%. The nation has not even come close. Instead, it has spent in the range of 9.5% to 10%. By most expert estimates, the accumulated need for capital projects--factories, machines, transport systems, energy development--exceeds $200 billion.

The realization is growing that the shortfall in investment is the main source of the nation's economic difficulties, and that the shortfall itself is rooted in policies that have led to too much statism and not enough private initiative. Liberal or conservative, Republican or Democrat, almost all the experts agree on the causes of America's capital lag:

> Government policies have discouraged personal savings and thus have retarded capital formation.

> Federal spending has diverted money from investment to consumption.

> Regulation has shifted capital away from productive, job-creating investments and into activities that may or may not be worthwhile for society but that create no new wealth. For example, the metals, paper, utilities, chemical and other industries have had to spend large sums for mandatory environmental protection equipment instead of machines and plants. In its annual report last week, the Congressional Joint Economic Committee deplored the fact that industry in 1977 had to spend $6.9 billion for pollution-abatement equipment "that does not contribute directly to the production of measured output."

> Inflation has heightened the risks of investment and led to extreme uncertainty, so that business decision makers have no confidence that an investment today of $1--or $1 billion--will pay off in the future. In a highly inflationary economy, managers have no sound means of estimating the real cost of a long-term project, no way of knowing whether profits will cover that cost. So they delay or abandon investment projects that seem marginal or chancy. Instead, they put the company money into a smaller number of investments that seem to be sure winners--or into buying out existing companies rather than opening new branches.

> The high bill for energy imports has put a tax on the nation that slows capital growth, impedes productivity, weakens the dollar and aggravates inflation.

What needs to be done is to reverse these trends so that the nation spends relatively less personal income for today in order to save more for tomorrow; reduces the amount of money drained off by Government activities and increases the capital available for private investment; and decreases the sums flowing out for energy imports while expanding the sums put into developing domestic energy sources.

Accomplishing much of all that will be extremely tough for two reasons. First, laws enacted by previous Congresses commit the Government to increasing federal spending in the years ahead, even though such outlays reduce the capital available for investment; in many ways, the nation has mortgaged its future. Second, powerful groups have vested interests in keeping these laws just the way they are.

Since the early 1960s, Congress has passed so many laws that require automatic annual increases in federal outlays that the share of these "uncontrollables" has spiraled from less than $100 billion then to $404 billion in fiscal 1980. In the past ten years, they have jumped from 64% to 76% of the federal budget. Thus less than one-quarter of the budget is subject to paring--unless and until Congress is prepared to curb the uncontrollables. They seem politically sacrosanct because they are mostly transfer payments that go directly to citizens--for Social Security, Medicare, public assistance, veterans' benefits, civil service and military retirement funds. Nobody wishes to deprive further the aged and infirm, the poor and the ill. Yet the total bill for these benefits is expanding faster than the rate of inflation. Almost all legislators agree that the growth of Government spending should be reduced, but many are unwilling to face the wrath of lobbies for old people, veterans, civil servants and others.

Lobbies that support capital-sapping Government regulations are equally potent and vengeful. Big steelmakers, textile manufacturers and agribusiness interests put their political muscle behind tariffs and import quotas. Wealthy shipowners lavish contributions on legislators who support the Jones Act, which requires that U.S. flagships carry all cargo among domestic ports. Small but vocal groups--the membership of the 185 U.S. antinuclear organizations totals roughly 35,000--prevent the shift from imported oil to nuclear power.

It would seem suicidal for any political leader to challenge just a few of these groups, let alone most of them. Yet the broad mass of Americans are wearying of inflation, regulation and budget busting. They realize that those three mighty forces have impeded investment and caused the nation to fall behind, and they may be ready to support the courageous political leader who will tackle the special interests headon. In times of such ferment, the public may well be prepared to accept fairly radical steps. Some possibilities:

Encourage Capital Formation. Gradually remove all Government limits on the amount of interest that banks and other savings institutions can pay, and eliminate all taxes on that interest. This would provide a tremendous boost to private savers, particularly the poor and middle-income Americans, who put a larger proportion of their savings into banks than affluent people do. Simultaneously, reduce or eliminate the double taxation on stock dividends. This would give a lift to investors and pull large sums of money into the stock market, including much capital from abroad, to finance the creation of new enterprises and the expansion and modernization of existing companies.

Encourage Investment by Selectively Reducing Regulation. Some Government rules are beneficial because they stimulate investment. For example, one sound regulation that should be maintained is the rule that new automobiles must become increasingly gasoline-efficient until fleets average 27.5 miles per gal. in 1985.

That law not only will save energy but will also encourage investment in new and better products. But the environmental regulations that retard the switch to coal, the expansion of nuclear power and the development of oil shale are debilitating to the nation. They not only waste energy but also increase oil imports and kill off job-creating capital projects.

Discourage Inflation and Encourage Stability. Limit the long-term increase in federal subsidies, Government benefits and budget transfer payments to the size of the real increase in economic growth. That is, if the gross national product after inflation rises 3% in a year, these federal payments may rise no more than 3%. Meanwhile, limit the growth in the money supply to a noninflationary 4% to 6% annually, year after year.

Discourage the Growth of Federal Spending. Sharply reduce grants to the states, most of which are running surpluses and do not need such large payments. Pare the defense budget by returning to some form of military draft, paying 19-year-olds at a rate of $100 a month for one year's service. Such a move would arouse immediate protest and unpopularity, but it could reduce the Pentagon's personnel costs by several billions. As the growth of federal spending drops, the need for Government borrowing will decline, freeing up more capital for private investment.

Discourage Oil Imports. Impose a stiff federal tax on oil from abroad, enough to raise the price of gasoline to at least $1 per gal., which would still be much less than the price in any other industrial nation except Canada. Some of the money could be returned as tax credits to the poor and to people who need to use much gasoline in their work, including farmers. The rest of the funds could be used, to finance energy development at home. By restraining imports, the U.S. would slow the outflow of American capital to the OPEC cartel and would make still more of it available for investment in domestic energy sources.

Encourage Domestic Energy. Eliminate all controls on oil prices, which would then rise to world levels and stimulate conservation; such a move would also lead to the expansion of drilling in the U.S. and to the development of alternative sources of energy that would become economically competitive if oil prices were higher. Guarantee loans for the development of particularly chancy and costly alternatives: oil from shale and tar sands, natural gas from coal, and solar energy.

Encourage Energy Conservation. Place a 20% surtax on the commercial use of electricity--and watch those all-night lights that make skyscrapers glisten like Christmas trees blink out at 7 p.m. Use at least part of the revenues to increase tax credits for the purchase of insulation and the building of various energy-saving projects. This, in turn, would stimulate capital investment.

Already some favorable trends are in motion. Every poll shows the electorate moving closer to the political center. Voters are choosing candidates who advocate a sensible balance of moderate regulation and job-creating economic development. Taxes on capital and corporations are coming down, as well as taxes on individuals. In a nation of perpetual, peaceful revolution, the people are in revolt against high spending, heavy deficits and overreaching Government control.

What is needed is for the politicians to catch up with the people, to challenge them to accept some measures that might reduce special privileges for narrow-interest groups in order to enhance growth for the broad majority. If the U.S. continues to reverse some of the debilitating trends of the 1970s, then the 1980s could well become a brilliant decade for a nation that still has so many unmet needs--and so much potential for fulfilling them.

-- Marshall Loeb

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