Last summer President Reagan told Congress that, if only it would pass his tax and spending cuts, the country would experience "the surge in investment we so badly need to rebuild our industrial base."
Congress passed the program, but the investment surge has not occurred. And some economists believe Reagan's policies will keep it from occurring, even if the economy recovers from today's recession.
Despite the sizable business and investment tax cuts voted last year, a government survey published last month showed businessmen now plan to spend less on new plants and equipment in 1982 than in 1981, once inflation is taken into account.
The Commerce Department survey of business intentions, in late January and February, showed that firms expect capital outlays this year to be only 7.3 percent over 1981 levels. Adjusted for price increases this translates into a decline of 1 percent in new investment spending, the department said.
The survey also showed that businessmen had scaled back plans for new spending by $1.3 billion since the end of 1981, from $346.4 billion reported late last year to $345.1 billion.
The businessmen's estimates of how much their firms had spent in 1981 have also slipped. They now put last year's capital spending at $321.5 billion, or about the same in real or inflation-adjusted terms as they spent on plant and equipment in 1980.
The reason for business caution is that the current economic recession means firms cannot sell all the goods they can produce with existing plant and equipment. So they are not rushing to expand.
Reagan, however, predicts the economy will soon recover with aid of this summer's scheduled 10 percent cut in income taxes. And last month Treasury Secretary Donald T. Regan told a congressional committee that the administration's tax program "will promote rapid growth of income, savings, investment and employment for years to come."
Other economists are less optimistic. Many fear the large federal deficits now foreseen, at least in part because of the Reagan tax cuts, will swallow so much of the savings available in the economy that there will be much less left for business than has been in the past.
According to conservative economist William Fellner, "The federal deficit and net private domestic investment each draw upon the same pool of resources," which consists of personal and business saving, surpluses of state and local governments and capital drawn from overseas.
To the extent that the pool is being drained to finance the federal deficit, it cannot pay for investment.
Saving and investment can be measured either on a "gross" or overall basis, or as "net" figures after allowing for depreciation or replacement of worn-out plants and equipment.
Using the gross numbers, Charles Schultze, Council of Economic Advisers chairman in the Carter administration, has calculated that even if Congress approves tax increases and spending cuts large enough to cut the likely 1985 deficit by $150 billion, the share of gross national product available for private investment will be only slightly larger in that year--at 16.7 percent of GNP--than it was in the 1970s.
And he has warned that if Congress fails to approve such tax increases and spending cuts, only 14 percent of GNP will be available for private investment.
During the 1970s, such investment averaged 16 percent of GNP, and during the 1950s and 1960s it averaged about 15 1/2 percent. Although these percentage differences seem small, each 1 percent of GNP is equivalent to more than $30 billion at today's prices.
Schultze's analysis assumes that the economy will expand fairly rapidly between 1982 and 1985, with real growth averaging 4.5 percent, and that inflation will decline to 5 1/2 percent by 1985.
These assumptions are a little less optimistic than the administration's. But the deficit assumption in his worst-case analysis is quite different. He warns that the federal deficit could rise to as much as $230 billion by 1985 if Congress does not raise taxes or cut spending substantially.
With that large a deficit, Schultze testified recently, "the availability of funds for private investment" would be "sharply" reduced to a level "far below any postwar experience," even if Reagan's tax cuts encourage business and individuals to increase savings.
Some Reagan officials agree with this argument, administration sources said this week. However, Regan, who is the president's official economic spokesman, told Congress last month, "We believe there will be ample private sector saving to finance these deficits and strong increases in capital formation."
While net saving "is being diverted to finance government spending at an alarming rate," Regan told the House Banking Committee, it is not happening "so severely as in the recession of 1974-75."
If Congress would only adopt the president's deficit-reducing proposals, the tax cuts will promote sufficient savings to absorb them, Treasury officials argue.
Economist Fellner, however, calculates that even with favorable administration assumptions about deficits and growth, private saving would have to increase dramatically just to allow net investment to reach the same proportion of GNP that it was in 1979. According to the administration's estimate, the federal budget deficit would be equivalent to 1.9 percent of GNP by 1985.
In that case, net private saving would have to be equal to more than 8 percent of GNP to provide funds for investment at the 1979 level in relation to GNP, Fellner says. "This is 50 percent more than it was in 1981 and 35 percent more than it was in 1979," he points out.
High interest rates are the mechanism by which investment is crowded out by government borrowing. For a given monetary policy, a larger budget deficit will tend to raise interest rates as the Treasury competes with other borrowers for funds to finance the deficit, and pays higher rates to persuade people to buy its debt.
If the total GNP is constrained by a tight monetary policy, the existence of large budget deficits will shift resources from interest sensitive sectors, such as housing or business investment, toward the public and private consumption supported by the deficit.
Reagan's mix of tight money policy but expansionary fiscal policy will tend to keep rates high, experts say. The administration's economic forecasts show interest rates at unusually high levels, after allowing for inflation.
According to some analysts, however, there is a chance these high rates will not choke off business investment because they will be largely offset by the president's large tax cuts for business.
Rudolph Penner of the American Enterprise Institute is one of these analysts. He also points out, however, that business investment is likely to flourish only at the expense of other sectors of the economy that the president may be just as reluctant to damage.
Penner thinks the squeeze from high rates will choke off spending on housing, which is counted as part of total investment, and spending on consumer durables, which counts as consumption rather than investment, more than it will crowd out business investment.
To the extent that people spend less on consumer durables, from cars to washing machines, net personal saving increases. Consumer borrowing counts as "dis-saving," and reduces total net personal saving; conversely, a decline in household debt raises total net personal saving and allows more room for financing both the federal debt and new business investment.
Some economists who supported last year's business tax cuts argued that business investment should be encouraged at the expense of housing. However, Penner said, the squeeze on housing has "got out of hand."
Moreover, present high interest rates are taking "resources out of consumer durables and housing with a vengeance that goes far beyond" what was intended, he said. "The auto sector is now so ill that it threatens to destabilize the entire economy and dampening the recovery of that industry to reduce the crowding out of business capital may not be desirable."
Exporting firms and those competing with imports are also particularly affected by the cost of money as high interest rates tend to push up the dollar's value against other currencies and make American-made goods less competitive.
How much does the perverse possible bias in the president's program against investment and other interest-rate sensitive sectors matter?
"Less than the supply-siders think, but more than zero," according to Schultze. He added, it "does seem a shame" that an administration which wanted to raise investment is more likely to end up by depressing it.
Penner, while more optimistic about prospects for business investment, agreed it was "a bit tragic."