COLUMN LEFT / ROBERT B. REICH : Boost Productivity by Investing in People’s Minds and Skills : Reagan’s tax breaks went into wealthy pockets. Clinton’s plan gives priority to human capital.

Bill Clinton’s new economic plan “has been contrived strictly for media consumption,” says Richard G. Darman, the Bush Administration’s budget director. “Strictly analyzed, it is transparently a phony.” Strictly analyzed, Darman’s criticism is transparently a phony.

The Bush Administration, which has amassed the largest budget deficit in history and given us the poorest economic performance of any Administration since that of Herbert Hoover, has continued the disastrous economic strategy launched by Bush’s predecessor. Clinton’s plan aims, in essence, to reverse direction.

The premise of the Reagan-Bush strategy is simple. To increase productivity and thus real wages, each worker needs more and better capital equipment. This requires more private investment, which can be induced by cutting the marginal tax rate on high incomes and giving tax breaks on investment income.

It’s a highly circuitous route toward greater productivity, but it has been sold to the American people on the basis of an implicit bargain: The nation will forgo revenues that the best-off members of society otherwise would have contributed to the common good, on the assumption that this group will invest even greater sums in factories and machinery--and that such investments will, in turn, improve the productivity and the real wages of workers at the lower end. Our essentially egalitarian society, in other words, has accepted a less progressive system of taxation for the sake of widespread gains.

Eleven years later, the results of the Reagan-Bush plan are clear. Only half of the bargain has been kept: The total tax burden has become more unequal. The cut in marginal rates on high incomes, which began in 1981, has provided the richest 1% of Americans with a huge windfall. The next 4% have received a smaller but still significant tax cut. Preferences for investment income have tipped the scales even further, since Americans of moderate means do not have nearly the investment income of wealthy Americans. While the primary asset of the former is themselves--their own labor--that’s not the case for Americans at the top: Today’s richest 1% of American families has an average income of $600,000, of which more than half comes from interest, dividends and capital gains.

Bottom line: If the federal income tax were as progressive as it was in the late 1970s, the top 5% of American earners would have paid about $75 billion more in federal taxes on their 1991 incomes than they in fact did pay.

The other half of the bargain has not been kept. Net business fixed investment fell from 3.6% of net national product in the 1970s to 2.6% since then. Productivity has slowed. The deficit has ballooned. And the wages of the average American have continued to slide, hurting those at the bottom most of all.

The premises of the Reagan-Bush plan are fundamentally flawed. Too many links are missing in the supposed chain of cause-and-effect leading to increased productivity. By and large, rich Americans have not invested their extra wealth in factories, machinery and equipment. They have consumed their windfall, or they have spent it on real estate projects and other speculative endeavors, or they have invested it abroad (cross-border equity investments have risen 20% a year since the plan commenced).

But not even the portion of their windfall that they have invested in capital goods in the United States has substantially boosted productivity. Thus, the other fallacy embedded within the Reagan-Bush plan: an emphasis on capital assets rather than people.

In the emerging global economy, national productivity is uniquely related to the accumulation of human capital. High-tech factories and equipment are worthless without skilled workers able to utilize them effectively. For 15 years, American firms have loaded up on computers, for example, but haven’t reaped the benefits because employees don’t know how to use them to improve output and quality.

Meanwhile, the “knowledge content” of most goods and services has risen. The price of a new pharmaceutical drug mostly reflects research, development, legal and marketing skills. The price of a new computer goes mostly to software development; hardware is becoming a low-priced commodity. A new jet aircraft is largely the result of engineering and manufacturing design, fancy electronics and sophisticated financing. Automobiles are largely styling, engineering and marketing. Robots and computers are doing more and more of the routine, back-straining work within the factory; the key manufacturing assets are the people who program the robots and computer, maintain them in perfect running order and exercise judgment about how they can be utilized for better effect.

Thus, the most direct means of spurring productivity is by investing in people directly: ensuring that infants get adequate nutrition and health care, that preschoolers have adequate day care and Head Start, that kids have good schools, that teen-agers who don’t go on to college get a chance to develop productive skills, that those who are eligible for college can afford to go, that workers can get good on-the-job training, and that all who wish to can upgrade their skills.

In the emerging global economy, the only economic asset still relatively immobile is a nation’s people--their education and skills, and the communications and transportation systems linking them together. It is on this logic that Japan, Germany, France, Italy, Taiwan, Singapore, Malaysia and many other societies have been investing growing portions of their national incomes in human capital and infrastructure.

The Reagan-Bush plan has had the effect of reducing these investments in the United States. Starved of tax revenues, governments at all levels have had little choice but to cut. Federal support for child health, education, training and infrastructure has dropped by a third since 1980. According to the Bush Administration’s own estimates, in fiscal year 1992 Washington will invest less than 7% of the federal budget in human capital and infrastructure.

While some wealthy suburban townships have been able to make up the difference, many American towns and cities are stranded. Largest cities have fared the worst. In 1980, the federal government provided almost 18% of the costs of running the nation’s major cities, and most of these funds went to human capital and infrastructure. Today, even as local tax bases shrivel, the federal contribution is barely over 6%. The result has been a growing disparity in the quality of schools, parks, public health, job training and roads that serve Americans of different incomes. Wealthy Americans are taking less responsibility for the human capital and infrastructure needs of their less affluent compatriots.

The Clinton economic plan terminates the Reagan plan and reverses direction. The tax windfall of those at the top would be ended. The extra resources would be dedicated instead to ensuring that others in our society have an opportunity to fulfill their own potential. That would mean adequate health care and nutrition at an early age, access to better education and training and updated transportation and communications systems.

This shift from “trickle-down” economics premised on financial capital to “grass-roots” economics based on human capital is not just a moral imperative. It is also the best means for getting the national economy to grow. For those who share the American faith in the transformative power of capitalism, there is no better economic strategy.