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Steven Cohen

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America Needs To Remember How To Invest in the Future

Posted: 05/23/11 10:57 AM ET

For those of us with college age children and for the young adults coming of age today, this is a time of declining confidence in the future. Many young people do not believe they will have the same level of economic and professional success as their parents, and many of us have the sense that something fundamental is changing here in America. The inability to believe in the future and our unwillingness to invest in the long term is at the heart of this change. During the fake economic boom of the later Clinton and early Bush presidencies, many Americans based their consumption on the imaginary wealth created by their overly-inflated home equity. On Wall Street, a lot of wealth was based on the idea that increases in home prices could never end. Our politicians lack the courage to raise taxes to invest in our children's future and we have allowed our wealthiest citizens to get even wealthier without asking them to contribute their fair share.

The other night I watched an old Ken Burns documentary about New York that included a depiction of the construction of the Erie Canal. He shows DeWitt Clinton, then governor of New York, inventing a new kind of public-private partnership to build the canal. When the federal government refused to invest, New York State built the canal without federal funding. Burns shows New York City becoming a commercial powerhouse when it was able to cheaply ship the wealth of America's agriculture and natural resources through the canal and the port of New York. The canal was finished ahead of schedule and under budget. It had a transformative effect on New York's economy.

Today, we are cutting back spending on schools, allowing our roads and airports to deteriorate, and making the space shuttle into a tourist attraction while we disinvest in space exploration. The demise of the space shuttle program is a symbolic but graphic indicator of our unwillingness to invest in the future. Governors reject federal funds for high speed rail, and our interest in the future seems limited to worrying about the size of the federal deficit. The deficit is a problem, but it is not simply an expenditure problem, it's a revenue crisis too. As I have written previously, America is under-taxed. And another problem with the federal deficit is that it doesn't distinguish investment from over-spending. One part of our deficit problem is a problem of accounting.

Unlike state, local and even family budgets, the federal government has no capital budget. The federal deficit includes everything the federal government spends money on that is paid out of borrowed funds. It does not matter if the funds are used to build a road that will last a decade or for food that will last a month because it is counted in the same way. By lumping long term expenditures with short term spending we discourage investment in the future. In New York City we manage our capital expenditures by thinking about our debt service as a portion of our annual budget. If it gets too high, we cut the capital budget. If we can handle more debt service, we are encouraged to invest additional borrowed funds in infrastructure that builds our future. American families do the same thing. It is one thing to pay off a car or a house over time, quite another to use your credit card to finance the weekly groceries.

We need to develop public policy mechanisms that stimulate public investment in infrastructure. To compete globally, state and local finance will not suffice. We need to bring the federal government and the financial muscle that derives from its sheer size, into the mix. Of course, establishing a federal capital budget would not be easy. In 1999, a Clinton era Federal Commission on Capital budgeting concluded that:

A majority of the members of the commission does not support, at this time, adopting a budget procedure that would impose a separate cap on capital spending... At the same time, we have concluded... that the existing federal budget process -- as it affects decision-making about capital expenditures as well as other types of spending -- has significant weaknesses. Insufficient attention is paid to the long-run consequences of budget decisions. Capital spending in particular is inefficiently allocated among projects.
Testifying to the Commission In 1998, former federal budget director and chairman of the United States Council of Economic Advisers Charles Schultze, then at the Brookings Institution, wrote: "Most state governments have long operated under capital budgets. If it has worked for them, why not for the federal budget?"

Shultze answered his own question by noting an important distinction between federal and state government finance:

No state has its own Federal Reserve to print money and buy its securities when things get tough. Even in difficult circumstances they have to cover their debt service from current revenues. But the U.S. federal government has the Federal Reserve as its ultimate backstop. Buyers of Treasury securities know they will never suffer a default. .... Without the backup of a money-creating central bank, the issuance of debt by states and localities is closely policed by the private bond markets.

Schultze, writing in the late 1990s, was concerned that there would be no way to limit over-borrowing by the federal government and that we would end up with a dangerously large capital budget. Of course, today, the politics of the deficit is a powerful constraint and would provide an effective brake on over-borrowing. More importantly, the growth of the global economy now provides actual or at least potential constraints on the ability of the United States to borrow without limit. In short, economic conditions have changed since the late 1990s. In 2011, we need to provide a way to focus attention on investment in the future, and a capital budget would provide an effective means to do that. It would also make clear the true size of the deficit, information that is essential to effective policy making.

However, capital budget alone will not bring about the discipline needed to invest in the future. We need to collect more revenues and develop a more sophisticated understanding of the role of government in a modern economy. The public and private sectors must work together to build a sustainable American economy. American government and business must develop and then commercialize new technologies. They must finance and build transportation, water, agricultural, waste management and energy infrastructure. The economic powerhouses of the 21st century will be those places that learn how to develop sophisticated partnerships between the public and private sectors. Just as DeWitt Clinton managed to overcome the ideological rigidity of his time, we must do the same in our time. The economic well being of our children depends on our nation's ability to learn how to effectively invest in our future.

 

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