How to Afford The Future

Economists of every persuasion have long agreed that the basis of the capitalistic system is, quite simply, privately owned capital: money that comes from accumulated savings and is used to finance investment. Now, however, worried policymakers and students of the system have begun to debate the causes and implications of a historic development. For the first time in more than half a century, the U.S., like some other industrial economies, faces an acute shortage of the capital that is needed to create new goods, profits, public services and--by no means least--jobs.

The looming capital shortage poses a long-range threat to the survival of the nation's economic system. More immediately, it raises doubts about the economy's ability to recover with vigor from the postwar era's most severe recession and push unemployment down to about 5% of the work force and keep it at that level. Ultimately, capital formation, as the economists call it, is job formation. Any faltering of the pace at which the nation saves its earnings and invests its resources translates directly into reduced economic activity and fewer jobs. Yet the share of resources devoted to investment in the U.S. lags behind that in other major industrialized countries--even severely strapped Italy and Britain (see chart). What is more, the need for additional goods and technology has never been greater. In the next few years, enormous outlays will be required to develop alternative sources of energy such as nuclear power, build the Alaska pipeline, improve pollution controls, erect more efficient factories and continue rebuilding the decaying cities.

Among Lowest. But will the funds be available? Although economists have been nervously debating the question for some time, the issue has only recently begun to penetrate the corridors of power in Washington. In testimony before the Senate Finance Committee, Treasury Secretary William Simon has warned that the U.S. faces "serious risks"--social as well as economic--if it does not increase its rate of capital investment. At a recent conference of top academic, business and political leaders on the nation's capital needs, sponsored by FORTUNE, Louisiana's Senator Russell Long declared that the approaching capital shortage could be "as severe as anything we have had in the economic history of the country."

The central startling statistic of the emerging capital crisis is that for two decades the U.S. has been accumulating funds in savings accounts, bonds and other forms of investment at a level equal to about 15% of the nation's gross national product. That rate of capital formation is one of the lowest in the industrialized world. Unless it is increased, many experts say, a shortage of investment funds will choke the still anemic housing industry, squeeze thousands of small- and medium-sized businesses out of the credit market and eventually abort the recovery--leaving the U.S. with insufficient plant capacity and an intolerably high level of unemployment. One of the gloomiest prognosticators, New York Stock Exchange Economist William Freund, calculates the investment needs of private industry alone at more than $4 trillion over the next decade. Freund predicts that industry will come up short by about $650 billion.

Jugular Vein. Other experts, among them Citibank Economist Leif Olsen, doubt that the shortfall will be that severe. Yet the price of avoiding crisis, the optimists agree, will be a sharp scaling down of the nation's investment goals through the mid-1980s. In a recent study sponsored by Washington's Brookings Institution, Harvard's James Duesenberry and two other economists derided "Cassandras" who are forecasting a shortage and concluded that "we can afford the future, but just barely." The Duesenberry study contends that Government can be counted upon to come to the rescue: by running big budget surpluses, the Treasury can create enough funds to finance a fat list of investments, including the building of a needed 25 million new homes by 1985. But can it? The idea that Government can overcome political pressures for heavy spending and run huge surpluses, argues U.S. Trust Vice Chairman James O'Leary, is "a lot of nonsense."

Whatever the specific merits of the debate, two things are clear: demand for capital in the U.S. over the next decade will be "staggeringly high," as O'Leary puts it, and more could be done to stimulate a healthier level of investment. Currently a variety of new tax incentives and other measures to encourage saving are being studied within the Administration and by the House Ways and Means Committee. Neither has made any concrete proposals so far, although the Administration is expected to do so this month.

Basically, there are two approaches to the problem. Some liberals advocate a system of allocated credit that would channel available capital into high priority projects, like energy development. The liberal argument is that capital is not so much in short supply as inefficiently used; for evidence, they point to the overbuilding of shopping centers and vacation condominiums. Conservatives, meanwhile, maintain that an allocation system is unworkable and would cripple the capitalist system--the jugular vein of which is the free movement of money. Moreover, they contend that the real need is for more investment. Among their proposals: lowering the capital gains tax and allowing companies to depreciate their plant and equipment faster and deduct dividends as an expense --thereby releasing more corporate funds for investment.

Catch-22. Some economists also argue that Government should deregulate interest rates on all savings accounts and pursue other policies designed to stimulate a higher rate of saving. Currently only about 10% of all personal disposable income in the U.S. is saved--a higher percentage than at any time since 1946 but less than the savings rates in other industrialized nations (Japan's rate, for example, is 23.6%). There is, however, a catch-22: the only way profligate Americans will save more is if they learn to spend less; yet for the next year or so, a robust level of consumer spending is needed to give the recovery momentum.

Until it becomes economically feasible to encourage more saving, Government will need to refrain from discouraging private borrowers by crowding them out of the money market with ever larger Treasury bond offerings. So far, the $59.9 billion deficit envisioned in the current federal budget has not proved difficult to finance. The danger of crowding out in the money market, and the real threat of a capital shortage, lies a year or so away, when the economy picks up added steam and corporations begin borrowing more heavily. But that is hardly a reason for postponing public debate over how to head off a crisis; in its quest for ways to spur more saving and investment, Government would do well to begin by devoting greater attention to increasing the rates of return that capital-short industries like utilities can earn. In the long run, perhaps nothing will channel needed capital into worthwhile investments any better than tax measures and other policies that make those investments profitable.

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