THE WHITE HOUSE Conference on Productivity produced a great deal of unanimity on two key points: investment, as commonly understood, is only weakly linked to productivity improvement. And government policies that purport to stimulate efficient investment frequently impede it.
As economist Robert Eisner of Northwestern University observed, gross fixed investment has increased steadily in relation to output over the last three decades, with no consistent relation between that growth and either the rate of taxation or of inflation. Moreover, much "good" investment is ignored in such measurement because it is made by governments or invested in human capital. Universities, roads, airports and even social insurance systems have made enormous contributions to economic growth, but they are normally treated as mere competitors to business investment, which is assumed to be more productive.
Meanwhile, much of what commonly gets counted as investment is "bad" in the sense that it does not contribute to efficient economic growth. If a clerk already has a calculator, Prof. Eisner observed, and his firm decides to buy him another one because the federal tax code subsidizes the purchase, that doesn't add to productivity, it subtracts from it. In fact, argued Paul W. McAvoy, economic adviser to President Ford, the American capital markets are generally so efficient that any government attempt to favor one type of investment over another will inevitably take money from more efficient investments.
Government interferes with capital markets in a multitude of ways--regulations, tariffs, direct subsidies, rate controls, stockpiles and procurements. But, it was almost uniformly agreed, there is no more pervasive source of interference than the federal tax code. Thanks to the 1981 tax bill, the code has become still more meddlesome, distorting investment decisions in ways that are downright weird. As a result, much otherwise productive investment is mischanneled, and enormous resources are consumed by the "cottage industry" that, as former IRS Commissioner Donald Alexander observed, is now devoted to beating the tax code.
If government really wants to stimulate efficient capital formation, it could start with a suggestion made by Prof. McAvoy. Instead of adding new tax frills, subsidies and regulations to counteract those already in place, why not simply eliminate the existing distortions?