New GNP Benchmark Shows Less Business Investment
JUST 10 years ago Ronald Reagan, the nation's newly elected president, set forth a program for economic recovery to ``revitalize economic growth ... and rekindle the nation's entrepreneurial instincts and creativity.'' At its core was a promise to provide new ``incentives for individuals to work, save, and invest.'' Much of this pledge turned out to be hollow. While the proportion of adult Americans at work indeed rose to new records, they have had to struggle to make ends meet.
Income grows slower in US
Economic growth was roughly 20 percent lower in the 1980s than the 1970s. After-tax income per worker in real (inflation-adjusted) terms averaged about $23,400 from 1980 through 1989, up 5.7 percent from the prior decade. In the 1970s, real incomes rose more than 18 percent; in the 1960s, they rose 25 percent.
Current trends - together with a prospective change in the method of measuring the nation's gross national product - suggest this sluggish trend will continue for the indefinite future. United States living standards are likely to remain under pressure for a long, long time.
Over the long run, a nation's well-being depends on the size and quality of its capital stock - in effect, the tools its workers can use to produce goods and services. Although US companies spent $4.3 trillion during the past decade to modernize their plants and equipment, most of these outlays replaced worn out or obsolete facilities. As a result, net saving and investment sank to postwar lows as a share of the economy.
This is a bleak picture. In fact, the situation may be even worse than now appears. Next November, the Commerce Department plans to shift its base for measuring inflation (and therefore real GNP - the nation's output of goods and services) from 1982 to 1987. That simple change will have a dramatic impact on the contours of the US economic landscape.
Preliminary data show that on a 1987 base, business investment averaged about 10 percent of GNP from 1982 through 1990, compared with 12 percent when measured in 1982 dollars. Gross foreign trade (exports plus imports) was less than 22 percent, down from almost 26 percent. By contrast, real personal consumption of services (not goods) rose to 35 percent of GNP from 32 percent.
If these shifts seem small, rest assured they imply huge differences in the makeup of the economy. For example, had business investment averaged 12 percent of GNP in 1987 dollars (rather than the 10 percent which the new figures show), investment in new plant and equipment would have been more than $700 billion higher.
According to Allan Young, who is in charge of the GNP accounts, two factors account for these changes:
1. Volatile movements in the prices of food and fuel sometimes affect the way the government measures changes in real GNP.
2. The 70 percent drop in the Commerce Department's price index for computers has been ``large enough to make the measurement of real GNP quite sensitive to the choice of price weights.''
In calculating real GNP, statisticians divide the actual expenditure by the price index for the item. Therefore, as the price falls for a given item (say, an IBM computer), its contribution to real GNP will go up.
To avoid such difficulties, the Commerce Department has regularly rebased its benchmark for real output. Over the past 30 years, it has published real GNP data in 1958, 1972, and 1982 dollars. In effect, by shifting its base to 1987 from 1982 (an interval of only five years) the Commerce Department is trying to correct the systematic overstatement of business investment during the Reagan years.
Behind such technical machinations lies the long-term slowdown in US growth. The impact of this trend has been devastating. Productivity (output per hour in nonfarm business) grew at a steady rate of 2.4 percent from 1948 through 1973. Since then, productivity has increased at an average rate of only eight-10ths of 1 percent.
Needed: saving and investment
In the long run, the only way to reinvigorate the economy will be through increased saving and investment. I have said it before and I will say it again: To compete with low-cost foreign labor, the US must have low-cost domestic capital. Congress could make an important contribution to this process by repealing the corporate income tax and substituting instead a broad-based consumption tax. I should live so long.