THERE WAS bad news from the supply side of
the economy the other day. A Commerce Department survey revealed that businessmen have been cutting back sharply on their plans for buying new plants and equipment. Businesses now plan to spend about 2.4 percent less--after adjusting for inflation--for investment than they did a year ago, and many analysts think that forecast is optimistic.
From a supply-sider's perspective, this is pretty ungrateful behavior by the business sector. The whole idea behind last year's massive tax cut was that it would unleash incentives for productive work and saving. Private economists and financial analysts worried about the pressure that the large federal deficits resulting from the tax cuts would put on financial markets, but such matters did not concern the official makers of economic policy. According to their view, the tax cuts would so reinvigorate productive forces that the economy would embark promptly on a period of sustained, non-inflationary growth.
It hasn't happened. The business tax cuts--since they were made retroactive--have been in effect for a year and a half now. Figuring out the value of these cuts didn't take the average businessman any longer than it takes to say "tax accountant." Tax-leasing deals, for example, were cooking before the tax bill was signed into law. But investment hasn't taken off, not because businessmen are ungrateful, but because the interest rates are still very high, the economy is in a bad slump and the outlook is, at best, uncertain.
There is, however, some cheerier news from the demand side of the economy. You remember demand. It's what economists used to think businessmen looked for before they decided to supply. Well, the demanders of the world--more generally known as consumers--have been doing their bit to prop up the sagging economy. Last month, retail sales rose by a healthy 1.5 percent on top of a smaller, but still significant, increase in April.
The rise in retail sales has been hailed by administration economists, who are now talking about a "consumer-oriented" recovery. Such a recovery, it is hoped, will be further stimulated by two--if you will pardon the expression--Keynesian interventions scheduled for July. These are the boost in Social Security benefits and the middle-income-oriented tax cuts. Together these will put about $45 billion in consumers' pockets.
This is not to say that the economy has returned to a state where the old-time remedies of tax cuts and spending increases can save the day. Already there are warning signs in the uptick in interest rates that the financial markets are anticipating the inflationary effect of the coming tax cuts and benefit increases. And no one is predicting a quick drop in interest rates anymore. Still, it is heartening to note that the administration has rediscovered that there are two sides to every marketplace--you can't sell if no one is able to buy.