Making the Shift to Investments
Too many Americans are still debating the issues of the 1980s, such as the virtues of smaller versus larger government. Given the huge budget deficits of the recent past, which continue to mount, it is unlikely that Congress will soon approve new real spending programs. (This ignores compulsory financial transfers such as bailouts of savings and loan associations and of commercial banks.)
The more compelling issue of the 1990s is how to allocate the future spending that the federal government does make. Some useful guideposts are available. For example, it has become widely acknowledged that the United States, as a society, saves too little and consumes too much, with the result that a far smaller share of the nation’s economic output is devoted to investment than in many other nations. The basic answer to this problem, of course, is in the private sector, where most of the investment choices are made, as well as related decisions on production, consumption and saving.
However, changes in the structure of government policy do exert important influences on the flow of savings and investment. Thus, there are pressing allocative decisions facing the public sector, where they will be made by default if not design. Over the past decade, federal civilian spending for investment purposes has been squeezed in favor of outlays that involve consumption directly or that encourage consumption in the private sector. The investment portion of the federal budget fell from 10% of total spending in fiscal 1980 to 7% in 1990. Substantially smaller shares of federal disbursements are being devoted to education, training, research and development, and infrastructure, such as rebuilding bridges and constructing airports. In contrast, the growth area of federal spending has been subsidies to agriculture, Social Security, Medicare and other entitlement, and similar short-term-oriented expenditures, including interest on the national debt.
One way for government policy to respond to the inadequacy of national saving without increasing the federal deficit is to focus on changing the priorities that are embedded in the federal budget. After all, financing an expansion of government spending on education by increasing the deficit would be a mixed blessing in terms of overall savings and investment. It would be a case of giving and taking away at the same time, because financing the rising amount of federal red ink via Treasury borrowing would reduce the supply of savings available for productive private investment.
The far more sensible approach is to shift the allocation of the federal budget so that less goes to subsidies and transfer payments and more is devoted to investment-oriented outlays.
A similar problem of imbalance between consumption and investment arose in recent years in the private sector of the American economy and was dealt with by a change in public policy, although not in a fully satisfactory manner. During the 1980s, the United States invested much smaller shares of its national output in new production equipment than did its leading trade competitors. In contrast, much more generous portions of GNP went to commercial and residential buildings, which contribute little to productivity and international competitiveness.
The drafters of the 1986 tax reform law attempted to address this issue. They incorporated in the tax code new provisions that reduced or eliminated many tax advantages for private construction, especially apartment houses and office structures. The changes may have been too swift and arbitrary, contributing in part to the current disaster in real estate. Nevertheless, the direction of change was correct from the viewpoint of fixing the national imbalance between consumption and productive investment. However, a simultaneous reduction in tax incentives for business investment--notably the elimination of the investment tax credit and a large reduction in depreciation allowances--offset much of the beneficial effects and resulted in a substantial net decrease in overall tax incentives to savings and investment.
A comparable, but more carefully considered, shift in policy toward public-sector spending is now required. Unfortunately, the new budget control law gives a virtual free ride to the largest consumption-oriented expenditures, such as the major entitlements, which are financed with “permanent” appropriations not subject to annual budgetary review.
Thus, more than a mere desire to increase the investment orientation of the federal budget is needed. Congress needs to reduce the many legislative obstacles to an improved allocation of federal outlays. First and foremost, Congress and the Bush Administrtion both have to abandon the silly notion that good budgeting can be achieved by keeping the largest spending items away from the pruning knife. All of the spending programs--military and civilian, entitlements and subsidies--should be subject to the detailed scrutiny of the annual budget process. Such a change will require altering the many substantive statutes that exempt specific programs from yearly appropriation reviews.
No sacred cows should be allowed in a true zero-based budgeting process. When he served on the Senate Appropriations Committee, Harry Truman used to say that he never saw a budget that could not be cut. In the current case, a simple meat-ax approach--cutting all federal spending across-the-board--is not the answer. To the contrary, the nation would benefit from a careful reappraisal, from the ground up, of each item of government outlay, with a view to cutting back low-yield, consumption-oriented programs and shifting some of the savings to investments in the future of American society.
Such a tough-minded reappraisal of priorities within the budget would demonstrate our ability to make substantial progress in public policy despite the inhibitions of those awesome budget deficits.
