ECONOMIC

3. Economic initiatives should be balanced between measures to stimulateconsumption and those designed to increase business investment. We notedabove that investment must grow somewhat faster than GNP for someyears to achieve long-run goals of employment and income growth. It istherefore essential that economic policy create an environment which willencourage business investment. Clearly, investment spending will be stimulatedby substantial increases in final sales, which tend to reduce excesscapacity and increase expected profitability. A cut in personal income taxeswhich sustains real consumption growth will thus encourage investment.However, in the current economic environment we believe this consumption-inducedinvestment growth can usefully be augmented by direct stimulusto private investment. Consumption-oriented growth in demand willnot necessarily bring aggregate investment to the levels needed to offset theinadequate investment of the past few years. On the contrary, direct stimulusmay be necessary to counteract forces which have deterred investment.Chart 1 shows that business fixed investment currently accounts for arelatively low proportion of GNP, approximating the percentage of the early1960s. Even with substantial increases in business fixed investment nextyear this ratio will remain under 10 percent and far below the ratios webelieve are desirable. Furthermore the slow growth of labor productivity,analyzed later in this chapter, does not suggest that productive capital hasbecome relatively more abundant over the last decade. The policy responseto comparable problems in the early 1960s was to stimulate investmentdirectly with such measures as a reduction in corporate tax rates.Chart 1Relation of Real Business FixedInvestment to Real GNPPERCENT OF REAL GNP11.511.0 hI 1 T i l l I I 1 I1960 1962 1964 1966 1968 1970 1972 1974 1976SOURCE: DEPARTMENT OF COMMERCE.27