[From the Washington Star, May 10, 1977]

EXHIBIT B

THE DIVIDENDS NDP PROMISES

(By Michael Novak)

There is a Puritan streak in Jimmy Carter's energy plan that will get him, and all of us, into eventual trouble. The President stresses "conservation." He insists upon "the limits" the nation must face. The problem is that a society geared for limits, steeling itself for austerity, inexorably becomes more and more conservative.

This is the trap that liberals, including not a few liberal senators and consumer advocates, have not fully grasped. A "no-growth" economy permits no new funds for social activism. As energy prices go up, the public will scream for lower taxes.

As it happens, there is a brilliant idea for reducing the tax load on individuals. When proposals to simplify the tax laws are considered, this plan will look better and better. It successfully integrates several tax purposes. Above all, in order to administer it, no new bureaucracy would have to be created.

I mean the National Dividend Plan. Recently, at a panel discussion at the Harvard Business School on this proposal, intense questioning by the students demonstrated that this plan has compelling merit. Shocking at first, stimulating skepticism, it grows on you.

The basic idea is that the corporate taxes which represent growth will be paid out in dividends to the public. This tax-free dividend would (a) constitute a substantial relief for families; and (b) provide a just return from corporate earnings to the citizens whose taxes, after all, built the roads, airports and other facilities without which corporate profits would not exist.

From a conservative point of view, the national dividend-rising and falling with corporate profits-would give every citizen a share in the experience of enterprise. It would come only from earned income, not from deficit spending by government.

From a liberal point of view, this dividend would be a substantial tool for redistributing wealth. Experts have concluded that, phased in over five years, the dividend would amount to $750 for every citizen of voting age. For a man and wife, this $1,500 increment in income would constitute substantial tax relief. Many families would move out of poverty, and others beyond the need for welfare.

In addition, as sons and daughters came of voting age, they too would receive the dividend, in time for the rising expenses of college.

As a mechanism for distribution, voting registration lists would be used. The honesty of the voters' lists and of the dividend list could be checked at one source. Incidentally, this adds a real incentive for registering to vote.

In some respects, the National Dividend Plan is like the Family Assistance Plans of the past. It puts money directly into the hands of people.

Spiritually, however, the money would be directly linked to the productivity and earned income of the corporations for which so many citizens work. For the first time, a form of national profit sharing would be realized.

The National Dividend Plan was first developed by John Perry in 1964. It has been modified often, and its economic validity and ramifications costed through by Lionel B. Edie, certain government tax lawyers, and others. It is a quiet, simple idea-too simple, at first, to believe-whose star is rising. Treasury Secretary Simon put men to work on it before he left office. Bert Lance in the President's cabinet knows of it.

The NDP offers a neat compromise between those who recognize that a better life for all must be paid for out of earned income, not out of printing press money-and those who recognize that limits must be set on government activities. And it manages to short-circuit the bureaucracy and put cash in the hands of citizens.

Bureaucrats would be its foremost enemy-if many government bureaucrats were not themselves sick at heart with the government's increasing incompetence. A new form of liberalism is being born. This plan helps it along.

STATEMENT OF AMERICAN FEDERATION OF LABOR AND

CONGRESS OF INDUSTRIAL ORGANIZATIONS

The AFL-CIO finds the available evidence fails to support the contention that the economy is suffering from a capital shortage now or that one is likely to exist in the future. The major problems of the economy, including the lag in business investment, stem from the economic instability that characterized the 1970's. Government policies addressed primarily to inflation fighting in that period resulted in high interest rates, high unemployment, huge losses in output and continued inflation.

The deep recession which began at the end of 1973 touched off two successive years of decline in the nation's real output of goods and services. The percentage of productive capacity used in manufacturing dropped to the lowest level recorded by the Federal Reserve Board figures which go back to 1948. Unemployment rose to 9.0 percent, the highest level since the depression of the 1930's.

The drop in production and the huge increase in idle capacity meant there was little intent for new investment. The reluctance of the Ford Administration to stimulate the economy, and the tight money policies of the Federal Reserve Board diminished business confidence. There was little reason to expect that there would be customers for added capacity.

As the economy declined, private fixed investment spending, after accounting for inflation, declined from $191 billion in 1973 to $150 billion in 1975. Real business investment in plant and equipment (excluding housing) dropped from $131 billion to $111 billion in the same period. In 1976 as the economy slowly turned upward real business fixed investment increased by $13 billion and by another $11.1 billion (annual rate) in the first quarter of 1977. Both the level of investment and the share of GNP devoted to investment increased as the nation's output rose.

Business investment is a key factor in returning the economy to a path of growth in output and increasing productivity. However, a policy to increase investment must recognize that the principal determinant of new investment is a healthy growing economy.

The essential condition for the expansion of investment is a volume of consumer demand large enough to more fully utilize existing plant and equipment. A second condition is the expectation by investors that consumer demand will be sustained so that investors know that new additions to productive capacity will be profitable.

Advocates of business tax cuts to spur business investment claim that business investment will be significantly increased even though the demand for consumer goods is too weak to enable business to use more than about 83 percent of their present capacity to produce. The record of the investment tax credit, one of the most frequently used devices to stimulate business investment when the economy is weak, illustrates the fallacy of the point. Experience with the credit shows that it is contracyclical-businessmen tend to take advantage of the tax break only after the economy has already picked up. The result is that this tax-induced business spending takes place when overall demand is high, fueling inflation and contributing to investment booms, and excess capacity followed by job and purchasing power losses and recession.

The attached tables based on official Department of Commerce data show conclusively, in our view, that: (1) there is no underlying trend of decline in the share of the economy going to business investment capital. In fact, the opposite is true; (2) There is no cause for future concern provided the economy can avoid sharp cyclical swings, and (3) there is no justification for tilting the shares of the economy through tax policies geared to reducing consumption and increasing private business investment in plant, machinery and equipment.

Table I shows that corporate cash flow-the key measure of funds available to replace old equipment and invest in new equipment totaled $164 billion in 1976that's more than double the 1970 level.

Table II shows that profits after tax plus net interest payments in 1976 were a higher share of GNP than in any year since 1950. This is the most significant indicator of the return to investors. It consists of profits after taxes plus the net interest payments made to investors in the debt of these corporations.

Significantly, the return to investors continued high despite the 7.7 percent unemployment rate for 1976. The return to corporate capital does fluctuate with the business cycle. A greater share of GNP is returned to corporate investors when the economy is healthy than when the economy is suffering from a reces

sion. As the economy recovers, the return to corporate capital increases as a percent of GNP. More optimal use of plant and equipment causes profits to rise faster than costs as the output increases.

Inflationary periods do create measurement problems. "Inventory profits" for example result during periods of rapid inflation since firms buy goods at relatively low prices and sell them at much higher prices. These profits are real but, at the same time, corporations do face higher inventory replacement costs.

Also, there are substantial difficulties in measuring depreciation. Depreciation should be based on the original or historical cost of the equipment wearing out, since the relevant consideration is profits made on actual money invested. It's impossible to accurately calculate actual depreciation on an economy-wide scale but since the Commerce Department uses tax depreciation formulas which are considerably higher than historical cost of depreciation, the Commerce Department figures understate the return on investment in recent years.

Advocates of higher or "replacement" cost depreciation accounting methods cite the higher cost of new equipment but fail to point out that inflation also reduces the real value of corporate debt and the cost of paying off that debt which offsets the higher cost of replacing new plant and equipment. And, the tax provisions of recent years (The Investment Credit and ADR) have also "corrected" for inflation.

Table III shows the effect of subtracting inventory profits from the return to investors in non-financial corporations. Inventory profits are higher during inflation and were particularly large in 1973 and 1974.

Table IV shows the most conservative measure of return to investors-profits after tax plus net interest after subtracting inventory profits and depreciation at replacement rather than original cost.

Even by using this extremely conservative measure, the return to investors is higher in 1976 than in 15 of the previous 26 years and there is no downward trend.

Table V presents the key indicator of the vitality of business investmentnon-residential plant and equipment.

Again, the share of GNP devoted to such investment falls during recessions and rises when the economy is healthy. The share of GNP invested in plant and equipment in 1976 is lower than the growth years of the 1960's and the recovery years of 1972 and 1973, but is higher than most of the years since 1950.

The share of GNP invested in equipment is more closely related to productivity since technological change is more likely to be embodied in equipment than in structures. The share of GNP invested in equipment has a more discernible upward trend than equipment plus plant. The 6.2 percent share in 1976 was higher than most of the years since 1950, and particularly high in view of the depth of the 1973-75 recession and the slow moving recovery. Investment in plant and equipment is reported at 9.7 percent of GNP for the first quarter of 1977 and 6.5 percent of GNP for equipment, an increase in line with the improvement in GNP.

The stock of producers durable equipment is another indicator of the vitality of investment. The growth in producers durable equipment per employee was only slightly less in the 1966–73 period compared to 1947-66 according to the Bureau of Labor Statistics. BLS data shows that the slowdown virtually disappears if employment is translated to manhours because the annual hours per employee has been declining.

The growth in structures (plant) has not kept pace with equipment, but this does not necessarily imply a productivity problem. BLS points out that "because plant lasts longer than equipment, the total capital stock has grown more slowly than equipment."

Table VI shows the savings share of GNP has been very stable from 1950-1976. Gross private savings has fluctuated between 14.5 percent and 16.9 percent of GNP with a slight upward trend.

There is no question that the volume of savings available for investment is more than adequate at the present time as evidenced by large bank reserves, and low demand for loans. The Commerce Department data for savings does not give any evidence to support the contention that the economy is over consuming and undersaving.

Fears of federal deficits "crowding out" funds for private business investment are also without justification in view of the present and likely performance of the economy.

As recessions deepen, tax revenues fall, government spending on social welfare programs increase, and the Federal deficit automatically increases. As the economy improves the reverse occurs. The deficit goes down about $20-22 billion with a 1 percent drop in unemployment.

Maintaining or increasing government spending during a recession provides an automatic stabilizing effect by putting into the spending stream savings that would otherwise go unused. If government spending were not maintained, the economy would sink more deeply into recession and investment would sink along with the decline in consumer demand.

Thus, no evidence of impending "capital shortages" can be found in the data on profitability of investments, the volume of private investment, or savings. In fact, the upward trend in investment and savings indicates that the economy has the potential for more investment in the future, provided that fiscal and monetary policies geared to a balanced fully employed economy are pursued. Past business tax cuts have given larger corporations substantial advantages in obtaining capital at the expense of needed public investments, consumer spending, and housing. The share of federal income taxes paid by corporations has fallen from 35 percent in 1967 to 23 percent in 1976. As a share of total federal budget receipts the decline is from 24 percent to 14 percent.

Discussions of private capital formation issues frequently overlook the fact that a large part of government spending is investment which includes schools, hospitals, water and sewer systems, transportation systems, and police and fire stations. These investments provide an increase in the delivery of vital public services for many years after the investments are made.

Some of what is called consumer spending is also investment spending. Expenditures made by individuals on education and health increase the individual's productivity as well as his well being. The importance to the economy of public investment and consumer expenditures on education has been pointed out in a study by Edward Denison who has demonstrated roughly half of the rise in productivity and one-third of the rise in total output came from advances in knowledge.

The need for more investment in the public sector is indicated by the data showing a decline in state and local government construction. According to the Commerce Department in every year but one since 1967, the real volume of outlays for state and local construction has declined. In 1976, state and local governments spent $32.1 billion on public construction (including federal aid). After adjusting for inflation, this represents a rate almost 30 percent below 1967 levels. In real terms, on a per person basis, these figures show that public construction represented $155 per capita in 1967, compared to only $102 last year. Moreover, during 1976 state and local public construction spending after seasonal adjustment, plunged by $3.9 billion. The annual rate in January 1976 was $31.2 billion, by December the level was down to $27.3 billion-a 12 percent drop in a year considered as a "recovery" period.

In a recent Wall Street Journal article, Paul W. McCracken, chairman of the Council of Economic Advisers during the first Nixon Administration and a staunch opponent of government spending programs that might have any inflationary impact, said:

"There is, however, a case for stepped-up public works, and that case is quite simply that public works outlays have been lagging. The volume of public construction is now, in real terms, about 25 percent lower than a decade ago-in an economy that, in real terms, is 30 percent larger. Public construction is now so low, in fact, that the real value of public capital is probably not being maintained."

Housing construction has also suffered as a result of the emphasis on corporate investment in plant and equipment. Housing construction has been mer

curial with a downward trend in the share of the Gross National Product invested in new housing. The share of GNP devoted to new private housing in 1976 was lower only in 1975 and three other years over the last 27 years.

The evidence shows that regardless of the economy's position on the business cycle, business investment maintains a relatively large share of Gross National Product. Total investment suffers larger cyclical swings because housing is squeezed out by business investment.

Thus, the AFL-CIO believes that the major over-all problems concerning business investment in plants and machines, in recent years, have not been a lack of funds but the adverse effects of high interest rates and the economy's instability. A relatively steady expansion of business investment, in relation to growing demand for goods and services, would generate appropriate, balanced and sustainable levels of investment in plants and machines. The only sound incentive for increasing business investment is expanding demand and high rates of capacity utilization. Business investment takes place when sales rise enough to boost industry's operating rate substantially and business executives are confident that there will be customers for the expanded output of new plants and machines.

It is possible that some special problems may develop in particular industries— most likely associated with capital needed for meeting environmental considerations, and energy conservation. Such selective problems, however, do not call for permanent across-the-board measures to change the division of the economic pie for still more private investment and even less consumption.

The relevant consideration in a tax reform program is the elimination of a variety of existing investment "incentives" which contribute to overall economic imbalance and encourage capital to flow into investments that "pay-off" in tax relief rather than additions to the nation's productive capacity--such as the investment tax credit, the depreciation speed-up and the tax provisions applying to foreign source income which encourage and subsidize the export of American jobs, and investment capital.