Made in USA; Is American competitiveness slipping?

The things America has made are wonders. Two hundred five years of effort have transformed the nation's vast natural resources into a dazzling stream of goods -- flom clipper ships to tough Model T's to microcomputers that shrink a room's worth of electronics onto a single chip.

We have come to expect the tide of prosperity to rise, to believe that time will enable us to buy more from the always-growing national stock of goods and services.

Now that wonderful stream of goods has faltered. Some proud American industries have marched off, one by one, to the old corporate boneyard, while stern competition swoops in from overseas. And as productivity growth slows, our income stagnates. Over the last five years, while the steel industry cooled and Chrysler skidded toward the brink, the real hourly earnings of the American work went down 5 percent.

To the hardscrabble poor of the world, America is still a place of economic promise "where the streets of Los Angeles are littered with jobs and you meet the Six Million Dollar Man every day," in the words of a social worker from the Middle East.

But americans are used to the promise of more. Will our children be better off than we are? Or will foreign competitors, turning out cheaper goods, outproduce American industry and stop the rise in our standard of living dead in its tracks? The problem: productivity

Most of us would like to be richer. If the economy were stagnant, our gain would be someone else's loss, a situation economist Lester Thurow has labeled a "zero-sum economy." American workers would elbow each other as they reached for a static amount of goods and services, like shoppers at a first-come bargain basement sale.

For everyone to be better off, the economy must grow. Workers would share in a growing output of goods and services, so they wouldn't have to shove each other aside to be first at the pay counter.

The key to economic growth is productivity, a buzzword officially defined as the value of goods and services produced per hour of work. Roughly, it is a measure of how efficient the American economic machine is. For a nation to get more, it has to work better.

"Two-thirds to three-fourths of the growth in any nation's economy occurs with productivity improvement," says C. Jackson Grayson Jr., chairman of the American Productivity Center. "Productivity growth is absolutely essential to deal with a stagnant economy.

From the end of World War II to 1965, productivity growth averaged about 3 percent annually. That means the typical American worker was increasing his output 3 percent each succeeding year.

The rate of growth slowed to a walk, and then to a crawl. In 1979 it began sliding backward, declining almost 1 percent. Figures released early this month showed a further productivity drop of 0.4 percent for 1980, a recession year. That means the average American worker produced a bit less last year than he did the year before.

The US is still the most productive economic machine in the world. But other nations are fast closing this efficiency gap. Between 1965 and 1973, productivity growth was five times higher in Japan than in the US. West German productivity growth was twice that of America's. These two nations, fiercest of our trading competitors, currently average productivity growth of between 4 and 5 percent -- which means they're becoming better producers while the united States is sliding backward.

What went wrong?

The productivity slowdown has prodded government, business, and labor groups to point accusing fingers at each other. The truth seems to be that the problem is the sum of many unfortunate decisions -- what economist Thurow calls "death by a thousand cuts."

A just-released Congressional Budget Office study lists three major influences on productivity growth:

1. The quality of the labor force.

Productivity has not declined because workers have gone soft, preferring a nap behind the soda machine to old-fashioned knuckle-grinding effort. Changing demographics have made workers as a whole less efficient. Children of the baby boom, now young adults, have flooded the job market since the mid-1960s; and they are less productive than their experienced elders.

2. The capital/labor ratio.

If you're using a penknife and the other fellow has a chain saw, it's hard to cut down more trees than he does. Given more and better tools, the average worker can produce more with the same amount of effort. Yet in the US the average plant is 20 years old, while in West Germany it is 12, and in Japan less than 10.

3. The pace of technological change.

The exotic play of scientific research is the cutting edge of productivity growth, providing the (sometimes accidental) discoveries that lead to new and better ways for producing things. Research and development (R&D) spending in the United States was 3 percent of gross national product in 1964; now it is 2.2 percent and falling. West Germany spends the same percentage. Japan is getting close.

Other economists can reel off a host of subsidiary causes: rising energy prices, government regulations, the ever-present bogeyman of inflation.

What can be done to jump-start America's stalled productivity growth? Perhaps more importantly, what ism being done, and will it work? Reagan's solutions: the supply side strikes back

Standing on the Capitol steps, Ronald Reagan at his inauguration faced westward and vowed to "foster productivity, not stifle it" through a new economic program. In front of him stretched the Mall, with its glistening and huge monuments to our national heroes. At his back, on the down side of Capitol Hill, were the slums of southeast Washington And Anacostia, districts not even printed on most tourist maps. The metaphor was irresistable. Depending on your point of view, the new President was either ignoring the problem or trying to point everyone in the right direction.

A month later President Reagan dropped the other Gucci shoe, presenting his comprehensive economic program for "A New Beginning." Addressed to a broad range of economic ills, the plan would spur productivity by unshackling industry, loosening tax laws, and cutting government regulations. In the words of supply-side guru George Gilder, it is a program designed to "let capitalists be capitalists" -- counting on the get up and go of American businessmen to get up and drive American productivity forward.

The parts of Reagan's program that directly address productivity are:

* Regulatory reform.

One of Mr. Reagan's first directives as President formed a task force on regulatory relief, headed by Vice-President George Bush. Murray Weidenbaum, now chairman of the President's Council of Economic Advisers, has estimated that nagging government regulations cost American business $100 billion annually. Other economists believe the figure is lower and point out that regulations often provide a benefit difficult to measure in dollars, such as clean air.

* Tax breaks for investment.

The accelerated cost recovery system, popularly known as 10-5-3, would establish faster tax write-offs for capital investment. Buildings would be deducted over 10 years; machinery and equipment over five; and cars, light trucks, and research and development equipment over three. In general, the new categories would be much shorter than current ones -- particularly benefiting heavy industries like steel that sink their cash into many long-term projects.

* Tax cuts for individuals.

The famous Kemp-Roth tax bill would cut personal income taxes 10 percent a year over the next three years, contributing "to increased investments that will expand the productive base of the economy and create more jobs," in the words of the President's economic plan. Treasury Secretary Donald Regan has said that most of the cut will be saved, trickling into banks and other financial institutions to form pools of capital, which will flow out to business as increased investment in new plant and equipment.

Productivity would increase, industry would surge forward, and tax revenues would actually be higher because of the stepped-up pace of the economy. This is the Latter effect -- a basic tenet of supply-side economics. It is a crucial part of the President's plan -- and a controversial theory that some think won't help American industry at all.

Rep. Thomas J. Downey (D) of New York called the administration's belief that most of the Kemp-Roth tax cut would be saved "hallucinogenic' to Treasury Secretary Regan's face -- earning a machinegun burst of ire from a Cabinet member who previously had hacked his way to the top of the Wall Street jungle.

"In the long run, these tax cuts will not materially affect the savings rate, " says economist Henry Aaron of the Brookings Institution.

While they applaud Regan's program as a positive step after years of government regression, business leaders are grumbling that the package should focus less on personal cuts and more on spurring savings and investment.

"We estimate that people will save 40 percent of the Kemp-Roth personal cut," says Dr. Richard Rahn, chief economist of the Chamber of Commerce of the United States. But he adds that productivity growth depends on corporate savings as well.

A study commissioned by the New York Stock Exchange claims that the high taxation of investment income has significantly affected capital formation. A cut in investment tax rates was considered for the President's economic plan, but was scrapped -- reportedly for political reasons.

Overall, the administration's economic scenario sees investment in new plant and equipment up 11 percent a year. Productivity is expected to rise 1.8 percent in 1982 and 2.3 percent in 1983.

David Stockman, director of the Office of Management and Budget, says the administration's figures are not a formal economic forecast.Instead, he calls them "quantitative signposts."

Critics contend the administration's numbers are nothing but smoke and mirrors.

"It's a creative use of the language which one can only admire," says Henry Aaron of Brookings. "But policy should be based on the events one has experienced -- not on the events one prays for."

A series of private productivity forecasts assembled by the Joint Economic Committee, however, were all within a few tenths of a percent of the administration's "signposts." And the Chamber of Commerce of the US expects productivity growth to hit 3 percent by 1983 if Reagan's tax cuts go through. What else can be done to keep the US competitive?

Much of the squawk and flap about productivity has been caused by an invasion of imports. One way to handle the foreign incursion, of course, would be to erect new trade barriers -- such as the auto import restriction bill introduced in Congress by Sen. John Danforth (R) of Missouri, chairman of the Senate finance Subcommittee on International Trade.

Reportedly, the Japanese are willing to negotiate voluntary auto import limits before Prime Minister Zenko Suzuki's US visit in May.

Another option for the US is to practice the Vince Lombardi school of international economics, which holds that the best defense against imports is a good offense of exports.

The Democrats of the Joint Economic Committee, for instance, recommended government support for exports in their just-released annual report.

The US export competitiveness project at Georgetown University urges review of all regulations that hamper American companies overseas, such as the Foreign Corrupt Practices Act, and an expansion of Export-Import Bank funding. The Reagan budget cuts, however, propose to slash 12 percent from Mr. Carter's proposed Eximbank funding.

But many experts feel that blind trust in government policies led us into the competitiveness and productivity mess in the first place -- and that we shouldn't count on government to lead us out.

"I don't see enough attention to microeconomic policies," C. Jackson Grayson Jr. says.

"It's an example of people waiting for some system, some panacea," says Robert Schaffer, a management consultant and productivity expert. "We've got to start looking at what we can do with what we have in place."

Mr. Schaffer has made steel mills competitive by changing repair procedures, and put an auto parts plant in the black by starting with the workers on one assembly line.

"Managers who are waiting for the government," he says rhetorically, "the time to work on productivity is today."