Incentives, not pump-priming, favored to boost US economy
"There are," says William C. Freund, "three ways for a family to improve its real standard of living. It can put more members to work, work longer hours, or increase productivity."
The last course, says Dr. Freund, chief economist of the New York Stock Exchange, is best -- not only for families, but for the United States economy as a whole.
Agreeing with him is a fresh report from the Joint Economic Committee (JEC) of Congress, urging Americans to produce more as the key to solving long-term economic problems, including inflation.
This coincidence of views is not surprising, since Dr. Freund is a principal author of a study on the relationship between productivity and inflation, done for the JEC.
The report makes the following points:
* Pumping money into the economy to combat recessions -- the general practice since World War II -- is ineffective and bad economics.
Not only does such "countercyclical" aid come too late, but it tends to overstimulate the economy and feed inflation.
This happens partly because recessions often are officially recognized as such, and legislation passed to offset them, only after the downturn is partly through its course.
Pump-priming programs, designed to speed up consumption, take effect just as the economy may be picking upon its own.
* A better answer, in the JEC view, is to stimulate production, not consumption -- to take those steps which foster long-term structural improvements in the economy.
This means, according to the JEC and its chairman, Sen. Lloyd Bentsen (D) of Texas, that business should be allowed, and encouraged, to invest money in more modern ways of getting things done.
"Top focus," Dr. Freund said in an interview, "should be to reduce the corporate tax load," leaving more investment capital in management's hands.
At present, he believes, the combinatin of inflation and taxes yields so small a return on capital that managers hesitate to invest for the long-term future.They feel compelled to concentrate on getting a good short-run return for stockholders.
Arthur F. Burns, former Federal Reserve Board chairman, puts it another way: "Businessmen used to think about generating profits. now they seek inflation hedges.
"Because of inflation," says Dr. Burns, "people look for hedges, to avoid loss of purchasing power. Some of the best minds in business are spending their time and energy looking for hedges."
This whole concept of "supply side" economics -- encouragement of production, not consumption -- not only permeates the JEC approach, but will form an important part of the "economic renewal" program President Carter plans to unveil soon.
His top-level Economic Policy Group (EPG) has prepared a blueprint for Mr. Carter. Reportedly the plan lumps together programs already enacted -- synthetic fuels, other energy measures, mass transit -- plus a tax cut in the range of $25 billion, and about $5 billion in new spending.
If the President sticks to his conviction that a pre-election tax cut would be wrong, he will present the package to Congress next january, though he plans to outline it soon.
A major part of White house-proposed tax reductions would be of the "supply side" kind, designed to stimulate investment and up-grade the plants and equipment.
Trade union leaders sometimes view the concept of productivity with suspicion , as though it implied a speedup on the job.
Not so, according to Freund and other specialists. If a company's workers, they explain, win higher wages, they must match those gains by producing more goods. Otherwise, unit labor costs -- or the cost to their employer of making a product -- rise. This increase is passed on to consumers in the form of higher prices. inflation results.
"From a 3 percent annual growth in the 1960s," says Freund, "productivity growth slipped to 2 percent, then 1 percent, and in 1979 into the minus column."
Americans' expectation of a 3 percent annual rise in their standard of living , says Federal Reserve Board chairman Paul A. Volcker, "became built into wage contracts," with the result that wages rose faster then productivity.
In essence, according to Dr. Freund and Paul B. Manchester, co-authors of the productivity report for the JEC, wage increases break into two parts:
* An increase to compensate labor for past inflation, or "catch-up."
* Then, like frosting on the cake, something more to reward workers for their perceived past productivity gains.
This is what Mr. Volcker means by expectations becoming built into wage contracts. But if output per manhour has not grown as much as perceived -- as has been the case in recently -- the cost of mankind goods goes up.
The result, says Freund, is a spiral of wages and prices chsing each other upward. how to break the cycle?
One way is to provide workers with more modern machinery.
On this theory rests the case for supply side economics, or reducing the tax load on business.