Investment in research lags behind US economy

One of the unfortunate side effects of continuous productivity gains such as we have enjoyed for much of the past quarter century is that nations grow accustomed to living beyond their means. When productivity rises more slowly than anticipated, governments and individuals tend to continue to act as if productivity were rising faster than it actually is. Wage demands become keyed to cost of living instead of real productivity increases. And governments continue to spend as if there were no tomorrow -- since their debts can be stretched and stretched out into the future, to be repaid in currency that is worth less and less. If this is happening here in the US, the "ghost" of our past productivity could well be returning to haunt us with inflationary bad dreams.

Government expenditures -- federal, state, and local -- have risen regardless of the party in power, from one-tenth of GNP(gross national product) in the 1930 s to over one-third last year, and will pass 50 percent in the 1980s if present trends continue. Meanwhile, real spendable income has declined by as much as 2 percent for most working households --cost of living.

As a consequence, Americans are now saving a smaller proportion of their income -- a mere 4.1 percent of GNP in the third quarter of 1979, according to some estimates -- than at any time since the early 1950s. For the last 25 years America's investment in capital equipment has been a lower percent of GNP than any other industrial nation's, with the possible exception of Great Britain's. These two not entirely unrelated facts can be explained in many ways. The current fashion is to blame energy and inflation, and certainly these have played a significant role recently. But it may be salutary to examine the track records of other countries, who live in the same world and face more or less the same problems.

In 1978 the Japanese saved 20 percent of their personal income, the French 18 percent, the Germans and British 14 percent, the Canadians 10 percent. The rates of investment in new plant and equipment are almost identical with the rates of saving: The Japanese were investing 20 percent of their GNP in industrial plant and equipment and the Germans 15 percent. The US figure, boosted by reinvested business earnings, was 10 percent.

These figures were reflected in gains in productivity. Manufacturing productivity rose by 8 percent in Japan, 5 percent in France, 4 percent in Germany and Canada, and 3 percent in Italy.

More significant for us is the long-term decline of productivity in the US. From the end of World War II through 1964 US labor productivity in the private business economy increased at an annual rate of over 3 percent. But for the past decade the average annual productivity growth has been only 1.5 percent, and, more recently, it has approached a zero growth rate.

Investment in new technology, a key factor in improved productivity, follows much the same pattern. Over the past 15 years expenditures for research and development in the US have not kept pace with the growth of the economy. In proportion to the gross national product, R&D (research and development) spending has declined 25 percent since 1964. Recent increases in federal R&D spending -- while encouraging -- have barely kept pace with inflation.

In the meantime, many other industrial nations, including Japan and West Germany, have been increasing the share of their GNP spent on R&D. In the European Community French and German research managers now have budgets, that combined, are just a touch behind what the US spends. And they are thinking big -- from breeder reactors to next generation aircraft.

However, talks with US technology managers lead to the conclusion that it is not the rate of spending for R&D, but the rate of plant and equipment spending to diffuse the new technology throughout the economy, that is the current problem. Policies to reverse the decline in innovation and productivity cannot be directed at R&D alone, but must address the larger problem of declining business confidence and investment.

A recent study by the Committee for Economic Development (CED) of US technology policy finds that the climate needed to encourage adequate long-term investment has deteriorated seriously over the past several years. High taxes on capital gains; inflation with inflexible depreciation of fixed assets below replacement costs; and rapid proliferation of government regulations, with escalation of compliance costs, have been placing an increasingly heavy hand on productive investments.

An overriding concern, expressed by many of the 30 chief executive officers of leading corporations and university presidents who served on the panel, was the lack of business confidence in the ability and will of government to frame and implement policies that address the problem.

The translation of R&D into innovative new products and services is an extremely complex and inherently risky operation. The downstream investment in development and testing, new plant and equipment, market development, and employee training is at least 10 to 1 over original research. When unpredictable regulatory decisions and uncertain energy and economic policies greatly increase the risk, and when tax policies and inability to control inflation greatly decrease the potential rewards, the businessman is forced to pull his chips and get into another game, with chances of a quicker payback.

And that is exactly what has happened. Technology managers tell us they are placing more emphasis on evolutionary fast payback improvements, regulatory compliance, etc., than on longer-term more revolutionary advances.

The significance of this for our future economic growth and employment is great. A recent study shows that in the last quarter century, output her employee grew three times as fast, and employment grew nine times as fast, in high technology industry as in low.

All of these trends seem to lead to the conclusion that the US economy is in incipient decline. But that would be the wrong conclusion. Trend is not necessarily destiny -- if we take appropriate steps, in time.

Where to begin? The CED study I have cited suggests that we begin where the shoe pinches tightest, by improving the climate for investment in new productive facilities. If we can raise the level of investment in plant and equipment, we will increase immediately the rate of diffusion of new technology into the economy and improve the rate of productivity growth.

Their first priority in accomplishing this objective is to begin to reduce existing tax disincentives to productive investment and to eliminate unnecessary and noncost effective regulatory constraints and uncertainties.

This, they believe, would provide the structural changes that are needed for a more lasting improvement in productivity and help create a climate in which investments in all phases of technological innovation would be increased as a natural result of the entrepreneurial process.

There are those who maintain the growth era is over for the US. They cite such things as the energy problem, our failure to control inflation, and the profound changes in American life introduced by the counterculture movement in the '60s. They feel that such changes have seriously damaged America's confidence and affected our national productivity.

I believe that the problems of declining productivity are structural not cultural -- and are rooted in the specifics I have cited. One basis for this is the revival in venture capital we saw following last year's reduction in capital gains tax rates. To be sure, these are very few straws in the wind, but they do indicate that the economy still responds to incentives and is not in the clutches of some inexorable process.

I am also convinced that given the alternatives, the great majority of Americans would opt for growth over nongrowth and recession.The restoration of that confidence which would contribute to economic vigor will not come because we are exhorted to become more confident, but only through specific steps to remove the disincentives that prevent the US economy from performing as it should. Once the steps are made plain, and the alternatives are made clear, I am convinced we will once more be well on the way in America, not only to a restoration of our confidence, but also to an augmentation of our long-term economic gains and social progress.

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