AS THE QUARREL over budget deficits goes roaring along, it's useful to take a step back from it and try to remember how the country got into this mess. The endless deficits now stretching ahead are largely the result of that huge tax cut last summer, and the huge tax cut was intended to generate capital investment in the American economy. It was based on the view that the economy's mediocre performance in the late 1970s was the effect of capital starvation.
There's no evidence so far that the tax cut has affected the rates at which people are saving and investing. But there's a larger question that Americans need to consider as they listen to this debate. Exactly how important is capital investment, in relation to the other things that contribute to economic growth? And what are those other contributors?
Edward F. Denison of the Brookings Institution began looking into those questions more than 20 years ago when John F. Kennedy, running for the presidency, raised the charge that the United States had the lowest growth rate among all the industrial countries. Mr. Denison has done most of his work on the period 1948-1973, which everyone now cites as the happy days of high growth to which the country longs to return. He concludes that capital was certainly important to that growth rate, being responsible for about one-sixth of it.
But that's smaller than the contribution made by the improvement in the level of formal education in those years. That raises a question of policy. Since education makes the larger difference, how sensible is it to legislate tax and budget cuts promoting capital investment at the expense of the schools and universities?
Many influences affect the growth rate, Mr. Denison found, but by far the largest is one that he calls, in a special meaning of the word, knowledge. That refers not only to the new technology developed in conventional research and development work. More broadly it's the society's ability to generate ideas, absorb information and put them to work rapidly. In considering the economy's lower growth rates since 1973, Mr. Denison concludes that the rise in oil prices has little to do with it--nor does a shortage of capital. The biggest drop appears to have been in that subtle and mysterious process by which Americans develop knowledge and begin to use it in their businesses and daily lives.
Increased capital investment can help lift productivity and economic growth rates, if other factors remain equal. But it will do more harm than good if it is achieved only by plundering public budgets at the cost of schools, laboratories and libraries. Tax cuts aren't a formula for growth in an advanced industrial democracy if they eliminate the funds for student aid and job training. For the past year, the federal government has been in the grip of the conviction that severely reduced budgets are essential to healthy economic growth. But current experience fortifies all the familiar reasons for thinking that precisely the opposite is true.