Let's modernize

The US economic recovery keeps gathering momentum. Unemployment is down to 8 .7 percent. The money supply is growing modestly. Thus, there is no immediate pressure on the Federal Reserve Board to change monetary policy and tighten credit. The stock market, during the past few days, has been climbing. Factory production is up. But the best news may well be that businesses are now investing in capital goods -- that is, spending for new plant and equipment.

Analysts have been waiting for a resurgence in capital outlays for months. In faact, one of the original justifications for the Reagan tax-cut plan was to encourage savings, which in turn would be tapped by companies for new capital projects. Ironically, despite all the fanfare about the tax cut, that expected investment in new plant and equipment never took place. Why not? Looking back, it is clear that many companies were already deep in debt because of borrowings at historically high interest rates duuring the late 1970s. And of course, firms don't make capital improvements when plant capacityis down, as it was during the recession.

But now, at last, capital spending is taking place -- and at a pace twice as fast as in the average postwar recovery.

It is also occurring much earlier than usual during an upturn.

Granted, most of that spending is for new equipment, including such cost-cutting machinery as robotics and computers, rather than for new factories.

The fact that only a small percentage of total capital outlays is now going into plants is worrisome to some economists, who fret that the United States will not refurbish its industrial base enough to keep up with overseas competition. Businesses, for their part, foCus on the string of massive federal budget deficits projected for the next few years -- which could eventually mean higher interest rates as the government and private sector compete for loans. So they prefer shorter-term debt (such as for equipment), rather than long-term commitments and the possibility of higher borrowing costs down the road. Obviously, Congress and the administration need to get those deficits down.

Still, after the sharp downturn in capital investment during the past few days, the current spurt in outlays for new equipment is welcome. Businesses, according to McGraw-Hill, plan to spend $304 billion on capital outlays for all of this year, and $333 billion more next year. The important point is that each new piece of machinery, each new cost-cutting technology, means another boost forward for the entire economy -- and could evenutally promote investment in new plants.

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