Your political antennae ought to go up when you hear President Carter gush about the need for more investment to revitalize the economy. He's probably right, but Carter also wants to assert more government control over specific investment decisions. The danger is that his investments will turn out to be mostly political and, far from revitalizing the economy, the dividends will be mostly political, too.
Carter has touched upon a major issue of the 1980s here: government control of business investment, which reached $255 billion last year. Everyone seems to favor more investment these days, and it's beguiling to imagine that government can direct investment to meet "national needs." In practice, if more power flows toward Washington, more money probably will flow away from its most productive uses.
It's not that the motives of private firms are good and those of Washington politicians and bureaucrats are bad. They're just different. Politicians respond to the pressures of the moment and the flashiest intellectual fads; they measure results in popularity polls. The virtue of private decision-making is not only that firms are greedy -- they have a bias in favor of the most productive use of funds -- but also that the process if fragmented and decentralized. One mistake isn't everyone's.
To be fair to Carter, stronger forces are at work here than the White House's political calculations. Confronted with a squeeze on government spending -- the public is growing weary of both higher taxes and persisting deficits -- a politician naturally reaches for control of spending that doesn't require more taxes or bonds. Through the tax code and government regulations, private investment offers a rich vein of funds to be directed toward constituents: cities, industries and workers.
Carter's inclinations clearly lie strongly in this direction. The $1.5 billion loan guarantee for Chrysler Corp. indicated that big companies with powerful union allies can get their investment funds through the federal Treasury. The new Synthetic Fuels Corp. gives government the power to issue $17.5 billion worth of loan guarantees and price guarantees for synthetic fuel plants.
And Carter's newest economic program offers more of the same. The most ingenious proposal is a "targeted" investment tax credit. The tax laws already allow a company a credit (that is, a direct reduction of tax payments) equal to 10 percent of new investment. Carter proposes adding another 10 percent for investments in areas of high unemployment that receive government "cedrtificates of necessity." Carter set an annual limit of $1 billion in tax credits, which would affect $10 billion of investment.
The political arithmetic is dazzling. A loss of $1 billion in tax revenues (actually, for technical reasons, it's a little less) offers influence over 10 times as much spending.
And there may be more. In his program, the president created an Economic Revitalization Board to make recommendations for an "industrial development authority." The president already has set aside $3 billion for economic development, but much of that may be loan guarantees that don't show up in official government spending.
The lushest source of funds may be the nation's private pensions, with accumulated assets of $321 billion at the end of 1978. Already there's considerable agitation from labor unions and some politicians (notably California Gov. Jerry Brown) to use these funds for "social" investments. Carter's message specifically mentioned pensions, and government easily can influence the flow of these investment funds. It already has rules to protect pension beneficiaries by requiring pension trustees to be "prudent" in making investments. But rules can be changed.
Should they? Would you like your pension reserves invested in Chrysler Corp.? That's an extreme example, but conflict is unavoidable. The pension funds aren't just sitting there; they're already invested, presumably in the highest-yielding securities that satisfy the prudence rule. Pressuring or compelling pension trustees to balance "social return" and "economic return" risks compromising either the safety or the profitability of pension investments.
The argument can be made, of course, that if the government is going to provide more "incentives" for investment, then it ought to control more investment decisions. This sounds sensible, but it misrepresents the justification for the pro-investment measures endorsed by politicians as varied as Carter, Ronald Reagan and Edward M. Kennedy.
All favor, in some form or other, liberalized depreciation rules. But the "liberalization" simply compensates for the depressing effect of inflation on current depreciation allowances. Depreciation is a tax deduction allowed companies to reflect the costs of their aging equipment; the depreciation allowances are supposed to allow firms to generate the cash they need to buy new machinery. The trouble is that existing allowances are based on the original purchase price of the machinery, and inflation has raised replacement costs considerably. Liberalized depreciation would tend to correct this.
Stimulating investment isn't an instant cure-all for the economy. As economist Edward F. Denison has pointed out repeatedly, private saving in this country has remained remarkably stable -- about 15 percent of output. (The "personal savings" figure used in mose newspaper stories represents only about one-fifth of total savings; the remainder comes from business.) Economists aren't sure whether this proportion can be coaxed up a percentage point or two by "incentives," but there is no prospect for much more.
So there are limited savings to finance new housing, business investment or the government deficit (which usually reflects current consumption, not long-term projects). If the government begins meddling in more and more private investment decisions, we may find we're squandering scarce economic capital on dubious, unproductive projects. Political incentives may overwhelm economic incentives.