How the US Could Catch Up With Japanese Investment

A SEMINAL economic development has gone almost unnoticed by the national media. The Japanese have added another round to their astonishing arsenal of economic power by out-investing the United States in plant and equipment for the first time in the postwar era. President Bush should respond to this challenge by introducing a bold and ambitious initiative for boosting investment as the centerpiece of his next State of the Union address. Without such an initiative, the US risks becoming a second-rate economic power as we enter a new millennium. What makes Japan's achievement particularly extraordinary is that Japan will out-invest the US by nearly $50 billion in 1989 - $560 billion compared to $514 billion - despite the fact that its population is only half ours and its output of goods and services only 60 percent of our own. Japan will make $4,549 in per capita plant and equipment investment in 1989, the US only $2,065.

This ``investment gap'' is growing. Data Resources Inc., which provides these figures, estimates that the gap will increase to $80 billion by 1990. Unless reversed, this trend poses a threat far more dangerous to our societal health than the ``missile gaps'' which fevered our imaginations in the 1960s and 1970s.

If there is any one figure that virtually all economists agree is critical to a nation's industrial base, it is its investment in plant and equipment. Investment in plant - factories and office buildings - and equipment - machinery, computers, and tools - is a measurement of both productive capacity and a nation's future output. If we allow our investment to decline, it will only be a matter of time before we lose our lead in every other indicator of economic health as well.

What can we do to close this alarming ``investment gap?'' Unfortunately, neither the recent capital gains proposal nor projected deficit reduction for 1989 will do the job. The US needs a far more ambitious strategy to promote public and private sector investment in plant and equipment, education, training, civilian research and development (R&D), and infrastructure.

Most of our new investment will need to come from the private sector. But government must also play an active role - providing the overall incentives and, where necessary, direct financial support to keep America competitive. We must act now, before it is too late.

In his next State of the Union, President Bush should launch a national initiative that includes:

Real deficit reduction. Presidential leadership is required to put together a package of equitable spending cuts and revenue increases that will reduce the deficit to zero over the next four years.

Special investment and ``supersaver'' bonds. The US Treasury should issue small-denomination bonds, the proceeds of which would go toward investment in strategic industries and technologies. It should also support the ``supersaver bonds'' suggested by Thermo Electron chief George Hatsopoulos, which would encourage increased savings through regular payroll deductions.

Equitable capital gains reduction. We should raise capital gains taxes on short-term, speculative investment, but decrease them dramatically for investments held more than seven years. Any revenue loss should be made up by taxes on those who can most afford to pay.

Increase in civilian R&D. Spending on civilian R&D should be at least 50 percent of overall federal R&D spending. Spread over three years, and matched by the private sector, this would see an increase of $40 billion in investment in strategic industries - without any rise in the federal deficit.

Removal of Social Security from the unified budget. Social Security Trust Fund surpluses are used to fund the deficit, thereby reducing the pressure on us to cut deficit spending and increase savings. Removing Social Security from the unified budget would increase investment and improve the Fund's long-term viability.

Support for industry-led efforts to increase investment. The US government should ensure that new investment in plant and equipment is used wisely by creating a private sector Technology Corporation of America (TCA) to provide a framework for industry to form cooperative ventures capable of competing with the Japanese in strategic industries and technologies.

As the cold war fades into the background, a new battlefield is emerging - an economic one in which T-bills, not tanks, are the key to success. To win on this battlefield, we need an investment economics strategy that matches our top competitors' investment performance in technology, infrastructure, and our work force.