The rush to stimulate consumption in order to jump-start the economy has propelled the President up and down department-store escalators exhorting Christmas shoppers to pry open their wallets. The rash of tax-cut proposals from Capitol Hill has a similar purpose. But consumer spending has fallen because there is less and less economic growth, causing family incomes to dry up. That won't change until there is a greater willingness to invest in the U.S. economy. There can be no sustained increase in consumption unless higher investment spurs real income to grow faster. Asking the consumer to take on a higher debt burden is no solution.
The U.S. has an investment deficit, not a consumption deficit -- as the low savings rate clearly shows. So the real way to get this economy back on track is through an investment package covering both private and public investment. On the private side, an investment tax credit would stimulate investment directly and far more effectively than a capital-gains tax cut ever could. Such an ITC must, as usual, be limited to investment in capital equipment. And it should continue to be linked to accelerated depreciation on new facilities needed to house new equipment. The public investment program should be a sweeping one aimed at modernizing the nation's crumbling infrastructure, enhancing productivity at the same time it injects funds directly into the domestic economy.
Congress is going to have to face up to the task of promoting an investment-led turnaround -- and to the futility of a consumer-led fast fix.