Too Much of a Good Thing?

Private capital investment--the money industry spends for new plant and equipment--is ordinarily welcomed as an economic vitamin pill. At today's record pace, however, there are increasing worries that such outlays may prove more poisonous than profitable.

Two problems worry Washington. First, a capital-goods boom could add seriously to inflationary pressures in an economy already grappling with shortages of skilled labor and investment money. Second, it might produce overcapacity--followed by falling profits, idle men, and perhaps even a recession.

Signs of Strain. Private spending for new plant and equipment rose 15 1/2% last year to a record $51.8 billion. In January, the President's Council of Economic Advisers predicted that this spending would climb to an annual rate 13.5% higher than in 1965 by the end of June, then level off. This now seems like an underestimate.

Last week the Manhattan investment counseling firm of Lionel D. Edie & Co. reported that U.S. manufacturers plan to spend 32% more on new plant this year than last, double the 16% increase they planned only six months ago. Total business spending for plant and equipment will rise 19% from 1965 to a towering $61.8 billion, the Edie survey asserted.

Many signals indicate the Edie survey is closer to the facts than the Government's latest estimate. Textile makers expect to spend $1 billion this year to boost capacity by 12%. The paper industry is investing $1.3 billion to expand 5%. Last week Owens-Corning Fiberglas announced plans to pour $125 million into new facilities over the next three years. Xerox began arranging to borrow $100 million for expansion. In the largest two-year expansion move in its history, General Motors expects to put $1.4 billion into new plant this year, on top of $1.3 billion in 1965.

All this puts Washington atop a several-horned dilemma. With U.S. factories already humming at 91% of capacity, the Administration had been counting on moderate capital spending to boost manufacturing capacity by 7% this year and so help keep prices from soaring. A 32% jump in plant expansion, as predicted by Edie, would not only absorb labor and materials needed to produce for today's high demand, but would tend to drive up their prices. Though economists disagree over how soon today's splurge could create widespread excess capacity, industry clearly cannot keep on expanding twice as fast as the entire U.S. economy. Expansion rate for industry for 1965 was 15 1/2%, for the U.S. as a whole 7 1/2% .

One-Way Restraint. If the Government's mid-March survey of business expansion plans confirms the Edie findings, some of President Johnson's advisers will urge him to take strong countermeasures. Among the leading possibilities: higher taxes on corporate income, credit rationing, or higher interest rates to throttle private spending. Such restraint, of course, is not yet matched by the Administration's own plans for public spending. These not only involve higher expenditures for everything from hospitals to colleges, from supersonic planes to air pollution control, but $4.7 billion of backdoor deficit financing: the proposed sale of federal financial assets, which will have precisely the same inflationary effect on the economy as a budget deficit.

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