Economic Report of the President

iodic tax reductions will be both feasible and necessary in the yearsahead as inflation and economic growth push taxpayers into higherbrackets and raise average effective tax rates.TIPs are novel, and most people are unfamiliar with either the opportunitiesthey present or the difficulties they pose. It is thereforehighly unlikely that a TIP could take effect in 1981. But itwould be useful for the public in general, and the Congress in particular,to begin evaluating the pros and cons of TIPs so that when thetime comes for the next round of Federal tax cuts a TIP program willbe seriously considered.INCREASING INVESTMENT, SUPPLY, AND PRODUCTIVITYEconomic policy must place greater emphasis on supply-orientedmeasures during the decade of the 1980s for a number of reasons.First, an increase in the growth of aggregate supply, and especially inthe growth of productivity, can raise the growth of output and employmentthat is consistent with a steady reduction in inflation.Second, reducing this country's vulnerability to higher oil importbills will require a substantially increased investment in alternativeenergy sources over the next 10 years. Finally, even if inflationwere not a problem, a speedup in the lagging rate of productivitygrowth would be essential to maintain the historic advance in ourstandard of living.The remainder of the chapter summarizes what has been happeningto productivity in the United States and briefly examines some ofthe reasons why the rate of productivity growth has declined. It alsoexamines the need to increase the share of national resources allocatedto capital formation and the Administration's response to thatneed. Finally, it discusses the relationship between demand- andsupply-side policies, and suggests how they must be integrated.PRODUCTIVITYAdvances in productivity are the foundation of advances in ourstandard of living. Increases in output per worker lead to increases inreal income. Healthy increases in productivity can free the fundsneeded to improve the conditions of disadvantaged groups whilelessening the need for sacrifice elsewhere. Thus, when productivitygrowth declines, these other advances also are delayed. But expectationsof a rising living standard persist. They perpetuate demands forreal income gains which can no longer be met and which lead to inflationaryincreases in wages and to growth in government spending.Since the mid-1960s, the growth rate of labor productivity hasbeen declining from its postwar highs. In recent years the decline hasbeen so marked as to pose a major challenge to public policy. Be-68