CHAPTER THIRTY-NINE
Needed: A Full-Investment Budget
ECONOMIC POLICY IN THE DEVELOPED non-Communist countries has largely been based these last thirty years on belief in John Maynard Keynes’ “invisible hand”: consumer demand automatically and dependably creates investment and employment. But the evidence of these thirty years—and of the New Deal policies twenty years before them—has failed to validate the Keynesian theorem. And in the last ten or fi fteen years the actual experience has been the very opposite from what Keynes postulated: policies to raise consumption have produced sharply lower capital formation, declining investment, declining productivity, increasingly intractable unemployment, and self-delusions of a “soft landing.”
For long years the one exception, the one non-Keynesian country, was Japan. During her years of rapid industrial growth and emergence as an economic great power Japan built her economic policy around capital formation rather than around consumption. The result was the world’s highest savings rate, high investment, fast-rising productivity, high employment—and rising consumption as well. But a few years ago, largely as a result of the second “oil shock” after the Iranian Revolution of 1979, Japan too joined the parade. She is now trying to jack up consumer demand through steadily mounting deficits in the national budget—which of course is always popular in the short run, apparently painless, and thus politically tempting. Almost immediately, however, capital formation in Japan began to go down and the rate of productivity increase slowed sharply. If Japan continues on the Keynesian primrose path for a few years more, she too may become vulnerable to stagflation—the wasting disease caused by inadequate capital formation, lagging productivity, and excessive consumption.
Even the Keynesians now admit that America’s greatest economic need is a rapid increase in capital formation. And all but a few Keynesian diehards—mainly to be found among politicians rather than among economists—also admit now that there is no magic wand and no Keynesian “multiplier” which automatically transforms consumer demand into capital and investment. The capital needs ahead are indeed very large and may be greater than anything we faced since the explosive industrial buildup of World War II. There is the need rapidly to automate major old industries, such as automobile-making—if it isn’t done there won’t be an American automobile industry ten years hence. The new growth industries—telecommunications, mini-processors, bioengineering, and so on—all require massive investment; they are all highly capital-intensive. Whichever way we tackle the energy problem—coal, “synfuels,” or atomic power—capital is the basic raw material needed. And since 1950 or 1960 we have permitted transportation to erode; railroads, ports, and highways all will require billions of capital each year just to stay even.
But how can the acknowledged and persistent need for investment be built into the decision-making process and into American economic policy? The answer may well be a full-investment budget.
Twenty years ago, in the early Kennedy years, we developed the concept of the full-employment budget. Starting out from the Keynesian postulate that consumption creates investment and thus jobs, the full-employment budget calculated the amount of additional consumer demand needed to bring unemployment down to the figure theoretically considered full employment. And then, so the logic of the full-employment budget went, government deficit spending would be used to give consumers the needed extra personal income and purchasing power. Alas, the theory did not work—deficit spending created the personal income, but again and again failed to generate the promised investment.
A full-investment budget would not operate through budget deficits or budget surpluses. Its aim would mainly be not to do the wrong things—not to penalize capital formation, savings, and investment or not to subsidize excessive consumption. Its most important result, at least in the early years, would probably be identification and diagnosis: How big is the gap between the investment the American economy needs and the investment it actually receives? And what effect do certain economic, tax, and monetary policies have on capital formation? Do they encourage or discourage it?
Like the full-employment budget, the full-investment budget would start out with jobs. How many jobs does the American economy have to generate in the next three to five years, and what kinds of jobs? And then it would ask, “And how much investment is needed to provide the jobs?” For at the heart of America’s investment need is the fact that the jobs for today’s and tomorrow’s work force require far more capital than the jobs of yesterday.
The best illustration is America’s most advanced, most nearly automated, most knowledge-intensive and by far the most productive industry: agriculture. The 600,000 commercial farmers of today, who account for more than three quarters of our farm output, produce three to four times as much as the six million commercial farmers of 1940. But the capital investment per commercial farmer in 1940 was less than $35,000 in today’s money. It is close to a quarter of a million today—not counting even the investment in the education of today’s scientific farmer or in the sophisticated extension services, marketing services, and credit services provided to him.
In a modern manufacturing plant of today between $40,000 and $50,000 is invested in the job of a manual worker, or roughly what yesterday’s commercial farmer required. The knowledge worker—the machine operator on the assembly line who moves up to being a machine programer or the technician in the automated hospital lab—needs two to three times as much investment to do his or her job. The secretary in the office works today with $3,000 worth of equipment. Her successor, the information specialist in the office of the future, will command a capital investment of close to $25,000. The productivity gains, as agriculture has proven, are likely to be very great—but this is not the main point. We have really no choice. Our labor supply will increasingly consist of people who are qualified primarily to work as knowledge workers, productive only if equipped with the tools knowledge work requires and supported by the appropriate capital investment. Eight out of every ten young people entering the labor force have finished high school—with four of them continuing school for at least another two years. A majority thus expect to do knowledge work and are, in fact, not qualified to do anything else. Whether we like it or not we will have neither productivity nor full employment unless we create jobs that fit the labor supply and make it productive. And thus a full-investment budget is the only full-employment budget that can work.
A full-investment budget is actually less innovation than adaptation. A growing number, especially of the leading companies—AT&T, for instance, or General Electric—considers investment planning the core of their strategy. These companies have learned that they will obtain the sales and profits they aim for only if they can attract and invest the appropriate capital.
Similarly we need to learn that we will not have the jobs we need unless we make the capital investment they require, but will attain our employment and productivity goals only if capital formation is adequate.
As every first-year student in economics learns, Keynes fifty years ago “repealed ‘Say’s Law,’” according to which savings would automatically create investment. But “Keynes’ Law,” which taught that consumption would automatically create investment has been proven to be even less valid. What is far more nearly true than Say’s Law or Keynes’ Law is that investment produces employment. Indeed everybody—whether conservative or liberal, Keynesian, Friedmanite, or “supply-sider”—accepts this by now. But we do not, so far, have a mechanism to convert this insight into policy and effective action; we do not have, so far, a full-investment budget.
(1981)