US Economy Should Start to Recover Before Autumn

THE 1990-91 recession should be over by Labor Day. The 1992 recovery will likely be led by a surge in investment. Consumer spending, which makes up two-thirds of the United States economy, should account for only about one-third of the $150 billion advance in total output that is probable next year. Shoppers turned cautious long before the recession started last July. They presumably will remain so next year. Paying down debt and rebuilding depleted savings accounts should remain the top priority.

By contrast, gross investment in plant, equipment, and housing - only 16 percent of total output - will likely be up more than $60 billion, or 41 percent of the probable 1992 gain.

These are the principal conclusions to emerge from a detailed examination of the American economy for the next 18 months. Inflation should continue to slow, reflecting long-lingering effects of the Federal Reserve's four-year campaign of rigorous monetary restraint.

Resurgent corporate profits are likely to play a critical role in the economy in 1992. The most dramatic turnaround will likely be in manufacturing, which has been paring its work force for more than two years. The more employment declines, the more profits will snap back.

While higher profits create obvious benefits for investors (not to mention hard-pressed tax collectors), the profits will have a much wider impact on the general economy.

Internal cash is the dominant source of funding for investment in plant and equipment. The investment-led economic recovery that appears to be in store for next year will depend on restoring reasonable profits for US companies.

If investment snaps back in 1992, that would mitigate (but not solve) some of the fundamental problems created by the long-run shortfall in net saving and investment in the US economy.

The Wall Street Journal's opinion page published a bit of revisionist nonsense recently which suggested that the nation had enjoyed an ``awesome economic boom'' during the 1980s - largely powered by a 76 percent jump in outlays for business equipment.

Reality was just the reverse. The economic growth rate during the 1980s was the slowest for any decade since World War II, down some 20 percent from the 1970s. Net investment (gross outlays less true, or ``economic'' depreciation) averaged 3.3 percent of gross national product, far below the postwar norm of 6.7 percent.

The rapid decline in the price of computers (measured in 1982 dollars) has distorted GNP badly. As I reported several weeks ago, when GNP is recast in 1987 dollars next November, almost half of the investment ``boom'' that so impressed the contributor to the Wall Street Journal will simply disappear.

Weakness in saving and investment caused a steady erosion in the nation's growth potential in the 1980s. As the Federal Reserve Bank of New York noted recently, this erosion was accompanied by a sharp increase in net indebtedness to foreigners. Continued low saving and investment would reduce US ability to respond to the squeeze on living standards.

A basic change in tax policy - to shift the burden of taxation from investment to consumption - is essential for the nation to reorder its priorities and get back on the growth track. In this context, the ``Working Family Tax Relief Act of 1991,'' introduced recently by a group of House and Senate Democrats, is profoundly disturbing.

This bill - which its sponsors dubbed ``Robin Hood tax policy'' - would reduce or eliminate taxes for millions of taxpayers in part through the mechanism of a ``refundable tax credit of $800 per child.'' At the same time, the measure would increase the top Federal tax rate to 35 percent for taxpayers earning more than $130,000 plus an additional 11 percent surcharge for taxpayers with incomes of more than $250,000.

In effect, the bill would increase the tax rate on saving and reduce the tax rate on consumption, the opposite of what the country needs.