Don’t Blame Congress for Cutbacks in Public Investment

(Originally published here.)

It’s easy to criticize the economic policy choices of the U.S. Congress, so you could be forgiven for believing the Financial Times that the U.S.’s legislators are “threatening future growth” by cutting spending on “federal investments that boost output, rather than transfers such as pensions and health care for the elderly.”

Matt O’Brien at The Atlantic went further, saying that he hopes “you like the taste of seed corn, because that’s what our policymakers keep putting on the menu.” These complaints are misleading.

First, it’s important to understand what “public investment” actually means when looking at the national accounts. According to the Bureau of Economic Analysis, which measures these things, investment consists of spending on reusable assetsincluding fixed structures, equipment and vehicles, software licenses and research.

This definition sacrifices accuracy for the sake of precision. If a local school board decides to hire better teachers and pay them commensurate with the value they create, the BEA would count that as consumption rather than investment. Yet when the federal government wastes who knows how much on boondoggles for the military, the BEA calls that investment rather than consumption.

These distinctions matter. The FT reports that gross public investment as a share of gross domestic product is now 1.4 percentage points lower than its postwar average of 5 percent, but that figure has been heavily distorted by volatility in military spending. Investment spending by the U.S. Defense Department has fallen to 1 percent of GDP this year from 1.2 percent in 2008. It was 2.4 percent of GDP in 1986 and about 3.5 percent in the early 1960s.

Civilian government investment is currently worth about 2.7 percent of GDP, compared with an average of 3.1 percent since 1947. There certainly have been cutbacks, but they are far smaller than scaremongers would have you believe.

Besides, the federal government isn’t even the right entity to blame. Federal civilian investment as a share of GDP has been held almost constant as a share of GDP (about 0.75 percent) for almost 20 years. That level also happens to be very close to the long-term average since 1947 (about 0.8 percent of GDP).

The much narrower category of federal civilian research and development spending has held steady at about 0.45 percent of GDP since the mid-1980s. The share of GDP going to federal research spending is actually higher now than it was in 2006.

If you have a problem with the amount of taxpayer resources devoted to roads, bridges and school buildings, you shouldn’t whine about Republicans in Congress but local governments across the entire country. They have cut investment spending by about 11 percent since the peak in early 2009.

But this could just as easily be unfortunate timing rather than unusually short-sighted public policy. Spending net of depreciation has been falling steadily in real terms for a little more than 10 years after soaring in the late 1990s.

Nonfederal public investment is currently worth about 2 percent of GDP — well within the narrow range of 1.8 percent to 2.3 percent that persisted from the early 1980s through the late 1990s. It’s entirely possible that policymakers are correcting past excesses rather than failing to spend enough on investments right now.

This isn’t to say that the government should continue to cut spending, much less raise taxes. Even wasteful investments put money in people’s pockets today. That’s helpful when many are still worried about repaying their debts and accumulating savings to help them out in emergencies. Of course, useful investments would be even better, but the big shortfall is due to the reticence of the private sector, not the government.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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