Dr. McCracken on 'the American disease'

Dr. Paul W. McCracken, former top economic adviser to President Nixon, was somewhat taken aback earlier this week while walking down a street in Tokyo's Ginza district. There in a storefront was a poster describing Japan as "No. 1." It referred to a best-selling book in that island nation which has the theme that Japan is the world's top nation economically.

Interviewed over the telephone on his return to his office at the University of Michigan, the professor of economics said that Americans are not sufficiently aware that both the Japanese and Europeans regard the United States economy as "sick."

Indeed, the Japanese speak of "the American disease," referring to the ills of the US economy, much as it used to be fashionable to speak of "the English disease."

Dr. McCracken asserted: "We have just got to start making some progress on some fundamental matters to revitalize this American economy of ours." At the moment, he added, it is an open question of whether the United States or Britain is at the bottom of the list of industrial nations in innovation, dynamism, and vigor.

"I don't think America and Washington have begun to awaken to the implications of this," he said.

What particularly concerns Dr. McCracken is the lack of sufficient investment in more modern plant and equipment by American business. During the last half of the 1970s, he noted, there was no increase in the net stock of capital per worker. In other words, the nation's corporations have just been running on the same spot in replacing machinery, equipment, or plants as they wear out. They used to add each year some 2.5 percent on a net basis (after real depreciation) to the nation's stock of capital per worker.

Without new and better equipment, the American standard of living has been stagnating.

What's to be done about it?

Dr. McCracken advocates allowing business to depreciate for tax purposes its present plant and equipment on the basis of current values. In other words, companies would add up the actual cost of their capital investments and then boost that cost according to the rise in the prices as measured by an index since the original purchase. (The index could be either the consumer price index or the gross national product "deflator" -- a broader price index.)

Such a step, he says, would increase the cash flow of corporations and thereby enable them to spend more to modernize their production facilities. As a result, the US economy "would look a lot better" by the end of the 1980s.

A better tax break for depreciation, Dr. McCracken admits, would also add to the nation's budget deficit. But he maintains that this would be worthwhile, in that the depreciation reform would tackle the nation's fundamental economic problem -- inadequate capital investment.

As a moderate economic conservative, the former chairman of the Council of Economic Advisers does approve of a longer-run strategy to balance the budget. But he regards the Carter administration's budget-balancing efforts as too rushed and haphazard.

"I am concerned about these spasms in Washington to produce a balanced 1981 budget," he said. "We have suddenly been seized with this obsession."

At this moment, Dr. McCracken sees the US economy as slipping into a recession. "We have to be prepared that it will be a fairly sharp reversal," he says.

Moreover, because the Federal Reserve System and the administration have made false starts before in tackling inflation, they have a "credibility problem," he continues. "This time they are going to have to stay with it [a tough anti-inflation position], even to the point of staying too long."

Dr. McCracken's recession viewpoint puts him within the consensus of economists. In the first few days of every month, Robert J. Eggert of Blue Chip Economic Indicators, Sedona, Ariz., surveys some 40 of the nation's top economic forecasters. On average, they forecast a moderate recession, with the nation's total output declining at a 2.1 percent annual rate in the current quarter, going down at a 3.1 percent rate in the third quarter, and slipping 0.7 percent in the final quarter, before coming back sluggishly at a plus 1 percent rate in the first quarter of next year.

Since Mr. Eggert's March survey, these economists have become considerably more pessimistic about inflation. The broad GNP deflator will rise 9.7 percent this year, they say. They predicted 9.4 percent just last month. The consumer price index will rise 13.9 percent instead of 12.6 percent, they say, an unusually sharp change for one month.

A more happy forecast is for interest rates to come down substantially soon. Short-term rates (as measured by 90-day commercial paper) will drop from 17.25 percent at the end of March to 15.9 percent by the end of June and 12 percent by the end of the year. Long-term rates (measured by AA utility bonds) should decline from 15.25 percent at the end of March to 12.7 percent by the end of 1980. But within this consensus, the range of predictions is wide.

Taking an early look at 1981, the consensus of the economists calls for a mere 1 percent growth in GNP -- a sluggish recovery. Unemployment will average 7.5 percent, having climbed to that level by the end of this year.

So Washington faces both a recession and fundamental economic problems.