Unshackle Business To Get US Moving
IN 1960, John F. Kennedy focused his campaign for the White House on a need to get America moving again. Kennedy's successful strategy will surely echo throughout this political year. The economy has operated in slow motion for almost 20 years. The long-term trend of real growth is now 2.5 percent or lower, a full percentage point below where it was during the first quarter century after World War II.
This difference adds up. Last year real disposable income per employed worker was $30,240 in constant 1987 dollars. If the nation had maintained its early postwar trend, the average real income per worker (wages, salaries, benefits, and income from investments) would have been 41 percent higher, or $42,574.
The chief culprit is an equally long-term slump in the profitability of American corporations, which led to a parallel drop in net investment and productivity. What America needs, and what Washington has failed to provide, is a strategy to reverse this trend and get the economy moving.
Voters elected Presidents Reagan and Bush in part because of their pro-growth rhetoric. However, neither president tried to implement the radical shift in financing of United States health, safety, and environmental regulation needed to reinvigorate the economy.
An overhaul of the health-care system may be the litmus test for future performance. If Congress decides to finance national medical insurance with explicit or implicit corporate taxes, the result will be less investment, less productivity, and even lower growth rates.
The key damaging economic factor in the nation is easy to identify. As a share of the economy, saving and investment have eroded far below the standard of the last 50 years. US workers lack the tools they need to maintain their productivity, or output per hour. The lag in productivity has a direct impact on real incomes, growth, and living standards.
Saving and investment have declined for a simple reason: The return on investment has gone down, which dulled the incentive for firms to spend for productive facilities. Profits as a share of national income are now a fraction of their postwar norm. Corporate cash pays for the bulk of productive investment. Thus, growth in the capital stock has stalled.
There were many reasons for the erosion in profits. Congress boosted explicit corporate taxes $120 billion in 1986 by repealing investment incentives. Substandard returns created a setting where financial engineers were more important than product engineers. While merger mania made Wall Street rich, it left many companies with crushing burdens of debt and interest.
More fundamental over the long run was the huge, largely uncharted, increase in implicit corporate taxes to pay for federal health, safety, and environmental regulation. The nation must shift the burden of such taxes toward income from labor and away from income from property to resume its former growth rate.
If voters refuse to act, they will pay the price in lower living standards in relation to other advanced industrial countries.
Americans want clear air, clean water, and safe places to work. They want to protect endangered species and have comprehensive medical care. They are less clear how to pay for such benefits. Enter the mandated expenditure, the politician's dream and the economist's nightmare. Such laws require companies to use the "best available" technology to reach environmental and/or social goals.
Raising taxes would produce an immediate response from voters. However, mandating corporate outlays effectively masks the expenditure. It is almost impossible to trace who pays for such regulations or find out precisely what the costs are.
Robert Crandall, a senior fellow at the Brookings Institution, says Congress has ignored "years of research into market-based approaches to solving environmental problems.... We continue to spend far too much for the environmental results we obtain."
Average Americans are working harder and earning less. This pattern will not reverse without more investment and more productivity. That requires higher corporate profits.
r H. Erich Heinemann is chief economist of Ladenburg, Thalmann & Co., investment bankers in New York.
