It is a mistake to believe that the strength of the dollar has been the most significant cause of the international competitiveness problem facing U.S. industries. Over the long run, the major culprit has been our poor productivity performance compared with that of our foreign competitors.

Japan, South Korea, Taiwan and Hong Kong have an enormous competitive advantage over the United States because they have equalled or surpassed the productivity levels in many of our manufacturing industries and maintained lower unit labor costs of production.

Imports into U.S. markets increased greatly during the 1970s, despite the dollar's downward trend, even when it fell substantially beteen 1977 and 1979. Throughout the 1970s, imports doubled relative to the new supply of products in such industries as phonograph and TV equipment, industrial c, which were twice those of German workers at the beginning of the period, had by 1970 plunged to 58 percent of German pay scales. The main culprit in Britain's relative decline was low relative productivity growth; British labor productivity grew less than half as much as German productivity.

In making the difficult decisions on reducing federal expenditures, policy makers should be selective. Expenditures for programs likely to contribute to increased productivity (such as funding of basic research and development) should be preserved or expanded, while income-maintenance and subsidy programs for the nonpoor should be curtailed. The huge Social Security Retirement Income program should not be exempt from budget cutting. Most of the beneficiaries of this program are not poor. In fact, in terms of after- tax income and when in-kind programs are taken into account, the poverty rate among the elderly is on average lower than that for the rest of the population. Middle-and upper-income derly Americans should bear their share of pain in reducing the budget deficit.

Similarly, expenditures on nathemicals, semiconductors, photographic equipment, resistors for electronic applications, aircraft engines and machine tools -- not just in the markets for automobiles, steel, footwear and apparel. Substantial productivity growth, not a decline in the value of the dollar, is the only economically desirable solution to our competitiveness problem.

A drop in the value of the U.S. dollar, sufficient to expand total U.S. exports and preserve employment, will eventually result from continuing low growth in U.S. productivity. Unless industries in our high-tech sector increase their productivity, they too will become more and more vulnerable to foreign competititon. The U.S. economy will be forced to concentrate production both for export and for domestic consumption on industries requiring less skilled and less well-paid workers. In many industs the loss of competitiveness will involve substantial social costs in terms of obsolescent skills and redundant equipment.

Budget balancing designed only to reduce the value of the dollar is precisely the wrong way to aid U.S. living standards. A further devaluation of the dollar is equivalent to a huge markdown sale on our export products; simultaneously, it will force us to pay more for our imports. Such an approach to our competitiveness problem will simply reduce U.S. relative income levels and risk eventual loss of our position of economic leadership.

While such a scenario is not inevitable, economic history teaches us that it is possible. For example, from just before the end of the last century until the mid-1970s, Britain increased its exports sevenfold, tripled its living standards and halved the number of hours worked; nevertheless, by the 1920s, Britain had lost its position as the world's economic leader. British rea wagesional defense should not be immune.Yhose who believe that we need further real growth in defense expenditures should remember that our future national security and continued political leadership position depend more on our superior economic performance than on the number of available weapons systems.

If we must raise taxes, the burden should fall far less heavily on saving than on consumption. Tax increases that discourage individual saving and reduce business' ability to invest in new plant and equipment will be counterproductive.

A major constraint on U.S. productivity performance has been our low rate of saving and investment. From the mid-1960s to the mid- 1970s, Japan's rate of capital investment in manufacturing exceeded that of the United States by a factor of four, accounting for most of its superior productivity performance over the past 15 years. To match the investment performance of our foreign rivals, public policies must induce Americans to devote more income to saving and more savings to investment in new plant and equipment rather than to consumer durables, even if this requires initial sacrifices in living standards.

Perhaps some or all of us may be unprepared to make these sacrifices. But if that is so, we should at least recognize that without a much higher rate of productivity growth, the relative standard of living of future generations of Americans will decline, and our economic leadership position in the world will be lost.