cent increase by the petroleum industry.

An 11 percent increase in investment in plant and equipment is planned by non-manufacturing industries for 1977. Airlines plan a 34 percent increase after three years of declining investment. Airlines had fewer empty seats on each flight in the past year and had substantial profit gains in 1976 and early 1977.

Gas utilities plan a 26 percent increase in investment and electric utilities a 16 percent increase. Communications firms plan to increase investment spending by 15 percent compared to a 41⁄2 percent increase in 1976.

The substantial increase in investment is taking place without new business tax breaks. The increase is in response to an upturn in sales which has increased the need to expand present facilities. The improvement in the economy has also generated substantially larger profits.

Business spokesmen are trying to build a case for tax cuts by claiming that there is now or will be a "capital shortage." They contend that there is too much spending and not enough saving or investing. They want tax cuts to produce even higher profits.

The major indicator of the vitality of private business investment is the expenditure on plant and equipthe first ment. The share of GNP devoted to such investment falls during recessions and rises when the economy half of is healthy. The share of GNP invested in plant and 1977 equipment in 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.

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The share of GNP invested in equipment is more closely related to improvements in productivity since technological change is more likely to be embodied in equipment than in buildings. The installation of more efficient machines increases a firm's capacity to produce without building a larger plant.

The 6.2 percent share of GNP invested in equipment in 1976 was higher than most of the past 27 years and particularly high in view of the depth of the 1973-75 recession and the slow-moving recovery. Investment in equipment is reported at 6.6 percent of GNP for the first half of 1977, an increase in line with the improvement in GNP.

The growth in plant as well as equipment per employee has been used by some as an indication of an investment problem. However, if the two are separated, a more accurate picture emerges, again showing that there is no cause for special concern about investment. The growth in equipment per employee has been strong, but the growth in structures (plants) has not kept pace. This does not necessarily imply a problem. Structures last longer than equipment, so the total of plant and equipment has grown more slowly than equipment. Also, business can increase its capacity to produce by installing more efficient equipment without building larger buildings.

The average yearly growth in equipment per employee was only slightly less in the 1966-73 period (3.03 percent per year) compared to 1947-66 (3.26

percent per year), according to the Bureau of Labor Statistics.

Business has been spending more in recent years to meet pollution control requirements and standards for occupational health and safety. The data, however, show that these expenditures are small and a declining portion of GNP. Pollution abatement and control expenditures have been about four-tenths of one percent of GNP in each year since 1972, according to Commerce Department figures, while health and safety expenditures declined from two-tenths of one percent of GNP in 1974 to about one-tenth of one percent in 1976, according to McGraw-Hill survey data.

Domestic investment has been undermined by the flow of capital out of the country. Investment funds are diverted from the economy by the growing investment of American firms outside the United States. American companies plan to invest $164 billion in new plant and equipment in 1977, according to the Department of Commerce data. Of that total, a record $29 billion will go for production facilities in other countries, or one out of every six dollars invested.

The $29 billion planned for foreign investment will be an increase of 73 percent over the $16.7 billion spent in 1972. Foreign investment by American firms has been increasing more rapidly than their domestic investment. From 1972 to 1976 investment in plant and equipment by American firms outside the US increased 55 percent while investment in plant and equipment inside the U.S. increased 37 percent

American banks have increased their loans and investments outside the U.S. tremendously in recent years, again diverting investment funds away from the American economy. In January 1977, 22 percent of the assets of American banks were located outside the U.S. according to the Federal Reserve Board data. This was an increase from about 10 percent in January 1972. Bank assets are primarily loans and investments but also include the building and location of the foreign branch offices.

Other advocates of business tax cuts try to build their case on declining corporate incomes, but this case, too, is flawed. Corporate investors have maintained their share of the nation's income in recent years.

Profits after tax, plus net interest payments to corporate bond holders, in 1976 were a higher share of the nation's Gross National Product than in any year since 1950. This measure taken from U S. Commerce Department data, is one of the broadest measures of the return to investors. It includes the return to all investors in stocks and bonds. This return to investors is now taking a bigger share of the total rewards of the economy for producing goods and services.

Significantly, the return to investors continued high despite the 7.7 percent unemployment rate for 1976. The return to corporate capital fluctuates 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 recession. As the economy recovers, the return to corporate investors increases as a percent of GNP. More optimal use of plant and equipment causes profits to rise faster than costs as production increases.

Corporate cash flow-the key measure of funds available to replace old equipment and invest in new equipment-totaled $164 billion in 1976, more than double the 1970 level. This $164 billion is the amount of money that corporations held last year in profits after taxes and in depreciation allowances. About two-thirds of corporate investments are financed from these internally generated funds. The large size of this cash flow is due in part to recent business tax cuts, including the accelerated depreciation allowance allowed to business in the past six years and the investment tax credit reinstituted by Congress in 1971 and increased in 1975.

Inflationary periods do create measurement problems, and there are differences of opinion regarding the ways that tax collectors and economic analysts should measure profits. "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 actual cost of the equipment wearing out, since the relevant consideration is profits made on actual money invested. It's not possible to calculate accurately actual depreciation on an economy-wide scale but since the Commerce Department uses tax depreciation, the Commerce Department figures understate the return on investment in recent years.

Advocates of higher or "replacement" cost depreciation accounting methods are quick to cite the higher cost of new plant and equipment, but at the same time they ignore the fact that inflation also reduces the real burden of corporate debt. Corporate prices and incomes are increasing but their payments on their debts stay the same. The declining debt burden offsets the higher cost of replacing plant and equipment. And the business tax reductions of recent years, such as the investment tax credit and the accelerated depreciation, have also offset the effects of inflation. Studies show that the declining burden of debt and the tax reductions have more than offset the higher cost of replacing plant and equipment.

Even using the most conservative measure of return to investors--that is omitting inventory profits and permitting depreciation writeoffs at replacement cost rather than actual cost-the return to investors is higher in 1976 than in 15 of the previous 26 years. The nation's savings provide the funds which are available for investment. 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 the last two years being at the upper end of that range.

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 provide any evidence to support the contention that the economy is overconsuming and undersaving. In fact, the 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.

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, the 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 in the federal budget geared to full employment goes down about $20 billion with a one 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.

Past business tax cuts have reduced the share of federal income taxes paid by corporations from 35 percent in 1967 to 23 percent in 1976, and as a share of total federal budget receipts the decline is from 24 percent to 14 percent. These tax cuts have given larger corporations substantial advantages in obtaining capital at the expense of needed public investments, consumer spending and housing.

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 increase productivity by providing an increase in the flow of vital public services for many years after the investments are made.

However, state and local governments have been decreasing their real investment during the last decade. 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.

In a Wall Street Journal article early this year, 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."

Some of what is called consumption spending is also investment spending that adds to productivity.

Expenditures made by individuals on education and health increase the individual's productivity, his wellbeing, and the productivity of the nation. The importance to the economy of public investment and consumer expenditures on education has been pointed out in a study by Edward Denison demonstrating that

roughly half of the rise in productivity and one-third of the rise in total output came from advances in knowledge.

Thus, the major over-all problems concerning business investment, in recent years, have not been a lack of funds but the adverse effects of high interest rates, the deep recession of 1975 and the slow recovery. A relatively steady expansion of the economy with a growing demand for goods and services, would generate appropriate, balanced and sustained levels of investment in plant, and equipment.

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 production facilities.