At Election Time, Washington Skirts Fundamental Issues

By , H. Erich Heinemann is chief economist of Ladenburg, Thalmann & Co., investment bankers in New York.

THE grab bag of election year tax goodies that Washington is now assembling may make voters feel better (assuming they don't look too closely at its contents), but it won't solve any fundamental problems.

The average real income per worker in the United States is more than 30 percent below where it would have been had the US maintained the growth trend of the quarter-century after World War II. Real income per worker is a proxy for productivity and for the standard of living.

Gains in US living standards have little to do with protecting jobs in privileged industries - even those as big and powerful as autos. Rather, the key is to provide blue-collar workers with adequate tools to create valuable products that other people want to buy.

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Better living requires better tools. Better tools require more investment and more saving. The main source of saving for productive investment is corporate cash flow. The nation has many problems, but none so serious that they cannot be helped with a measure of profits, investment, productivity, and growth.

Corporate profits have represented a progressively smaller share of the economic pie over the postwar period. The shortfall in profits is, in fact, the primary element behind the lag in US investment that dominates Washington's rhetoric, if not its actions.

Federal Reserve chairman Alan Greenspan regularly tells Congress that "the lack of saving and investment is the most fundamental shortcoming of our economy. Bolstering the supply of saving available to support productive private investment must be a priority for fiscal policy."

Of course, the White House and Congress regularly ignore such advice. The administration has confirmed that the budget deficit will hit $400 billion this year, which won't help saving and investment. Moreover, official Washington, including Mr. Greenspan, is mostly silent on measures that would increase profits as a share of national income.

Saving and investment were very weak in the 1980s, largely owing to growth in the federal budget, which is an engine of consumption. The personal saving rate fell to 3.1 percent in the spring of 1987, a record low on present data. The savings rate has since recovered to about 5.4 percent, but it remains well below its postwar norm.

This is only one part of the story. Far more insidious for US living standards is the erosion in corporate profits (and cash flow). The sustained shortfall in corporate profits coincides with the slowdown in growth of productivity and the near stall in the growth of real income per worker.

Substandard rates of return help account for the perverse tendency of managers in the 1980s to prefer partial liquidation and retrenchment to reinvestment, expansion, and growth. Dividend payments are out of line; despite the crash in profits in the recession, payouts increased. The Commerce Department says dividend payments of nonfinancial companies based in the US peaked at 103 percent of after-tax profits in the first quarter of 1991. Payouts dropped to 94.2 percent last summer, but they remain far ab ove the norm of about 52.5 percent.

Washington played a big role in eroding profits. Congress boosted corporate taxes by $120 billion in 1986. At the same time, implicit corporate taxes (mandated expenditures) have also gone up. The Clean Air Act alone may cost as much as $50 billion annually.

The issue is not whether such expenditures are desirable, but rather whether hidden corporate taxes are the best way to finance them. The primary challenge facing policymakers in the 1990s will be to reverse the slow growth in US living standards over the last two decades. Growth will not accelerate over the long run without a jump in saving and investment. In turn, higher levels of saving and investment depend, in part, on sustained improvement in corporate profits.

Congress can help recharge the economic batteries by shifting the burden of federal taxes from investment to consumption. Taxes should be fair. But fairness is not, or should not, be the main issue. Growth is the goal. Fiscal policy should support that goal.

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