A prosperous society
WE can put our recommendation for a national economic-policy agenda into one word: Invest.
Given a few more words, we urge: Invest in new plant, in new equipment, and perhaps most important of all, in human capital.
To invest, we need to save. The nation savings rate must be increased.
National savings is the sum of private savings plus government savings (i.e., budget surplus), or, in the real world, of private savings less the budget deficit.
Foreigners continue to find the US an attractive place to invest, and so they have kept us afloat by loaning us money. But this may be a case of the success of our social-political system carrying us when economic self-discipline has failed.
The economically neatest way to increase national savings is also the politically stickiest: slashing the budget deficit. The mechanisms for increasing the rate of private savings are much more uncertain, as we will discuss below. But deficit cuts automatically hike national savings.
The problem is that too much of the budget is seen as already locked in. Guerrilla warfare among self-proclaimed ``rescuers'' of the social security system has become a staple of the presidential campaign trail. Liberals charge that conservatives want to spend too much on defense. Conservatives charge that liberals want to spend too much on social programs. This conflict is resolved by spending too much on both, plus benefits best characterized as welfare for the middle classes.
Some of this spending is mandated by law, some argue. Well, the laws may need to be changed. And expenditures that are investments in the future should get precedence over pure consumption.
Deficit spending is a traditional remedy to keep an economy from stalling out. But at this point it's no longer a question of giving the car some more gas; we've flooded the engine.
There should be a lull, however brief, between the presidential inauguration next January and the beginning of the 1990 election campaign. That might be the time for a statesmanlike bipartisan effort to tackle the deficit.
This all sounds like hopeless idealism, we know. But idealism is the very foundation of the American system. That political realities and economic rationality seldom run in the same direction is a ``truism'' that needs to be repealed.
Measures to increase private savings might also be worth taking. The problem is we aren't sure just what would do the trick. One lesson of supply-side economics has been that in a relatively low-tax society like the US, much of government policy has a relatively marginal affect on individual behavior.
Some evidence suggests that universal individual retirement accounts (IRAs) really did encourage new savings, and didn't just give people tax breaks on savings already set aside. Unfortunately, IRAs haven't been in place too long, and now tax reform is limiting them, so it's hard to be too sure about them. In any case, to stimulate savings, it matters less how a tax-advantaged account is targeted - whether for retirement savings, for education, or whatever - than that savers get a tax break for saving, period.
The tax code generally, including the new reforms, is full of pitfalls and potholes for those who would increase national savings. That interest paid on loans has been tax-deductible, while interest earned on savings has been taxable income, has been one of the paradoxes of the system. It's all to the good that the deductibility of consumer-loan interest is being phased out, but we would further suggest reviewing the tax code carefully for other disincentives to saving.
Living within our national means also means not consuming more than we as a nation produce: in other words, trimming the trade deficit.
The challenge here is to resist the easy way out: protectionism. This would only invite retaliation, and at a time when US exports are (at last!) rising and so we indeed would have more to lose by such retaliation than would have been the case fairly recently. President Reagan has had a good record of favoring free and expanding trade, and we hope his successor continues this policy.
Trimming the trade deficit would be another way of finding something to invest in plant, equipment, and people.
The work ethic in the United States is not dead. Indeed, the US has one of the highest labor force participation rates, and one of the highest productivity rates, in the world. The trouble is that with low investment, and attendant low productivity growth, people have been working harder, not smarter; for longer hours, but no more money.
Net investment has recently turned up, but for many, the past few years have been ones of stagnating or even declining standards of living.
Economists wise enough to be modest admit that they don't fully understand why productivity growth rates stagnated throughout the developed world during the late 1970s. Productivity growth is easier to track when we're talking about making more widgets in fewer hours. With the white-collar and service sectors looming larger nowadays, how do we measure their productivity, anyway?
Fair enough. But that white-collar and service-sector productivity is hard to measure does not mean we should give up on trying to increase it.
And education - investment in human capital - will remain a critical part of the equation. The $25-an-hour-plus-benefits steelworker who has lost his job and then been told that he is qualified for pumping gas and not much else is the symbol of ``post-industrial'' American society. But it needn't have happened that way. If his employer had invested more in plant and equipment, the worker might not have been laid off. If he or his employer, or perhaps his union, had invested more directly in him, he might still have been laid off, but even so, he would have been likelier to find a good new job.
In sum, to keep the US economy on track, we must:
Increase national savings, including private savings.
Invest in plant, equipment, and human capital.
Cut the federal budget deficit.
Cut the trade deficit.
Last of a series.