Government investment?

The Reality-Based Community

Bill Clinton tried this in 1992, talking of new government investments, and was ridiculed by Republicans saying he just wanted to spend. But of course we all know that there is a big difference between using $50,000 to go on a vacation and using it to pay for a couple of years of college. Similarly, there is a big difference between investing in a nationwide broadband capacity or high-speed rail, and, say, spending a half trillion dollars in Iraq.

How could budget policy be changed to do this and do it right–and get the public to understand it?

People have been talking about this for 20 or 30 years, and it’s a hard problem. The sense I’ve gotten over the decades (and it may well be superficial) is that cash accounting for the government is like democracy: the worst possible system except for all the others.

The fundamental conundrum is that all government spending is in theory investment. You wouldn’t be doing it if you didn’t think it would improve the common weal. (Sometimes measured in dollars of tax revenue, sometimes not, but that’s a bad metric to get started on.) Social Security is an investment in not having seniors starving to death (and also not having seniors be a terrible drag on individual progeny whose economic activity would be curtailed). Interest on the national debt is an investment in preserving the government’s ability to borrow in the future. AFDC is an investment in the coming generation (and in not having trillions of dollars worth of infrastructure burned down every 20-30 years.) Defense is an investment in avoiding the costs of a full-scale war, and so on. That’s before you even get to “real” investments like education or research or highways, rail lines and power and telecommunications grids.

And among the “real” investments, there are some that will pay off, and others that will be make-work, like the Access Road to the nonexistent Bridge to Nowhere. In a lot of cases you’ll only be able to tell the difference 20 years later, or after your economic models get revised to tease out what contributes to what.

Figuring out some kind of model that distinguishes stuff that will pay off in increased GDP from stuff that won’t is technically difficult even in hindsight, and probably technically and politically intractable as a forecasting/budgeting tool. (Just look at the arguments over the high, low and middle scenarios for social security.)

But wait, it gets worse. As with the Bridge to Nowhere, once certain classes of government expenditure get treated as “investment” there will be huge incentives to shoehorn everything possible into those categories (think of the way that security-synthesizers gamed the bond-rating system, or the way that tax advisors game the IRS code). So the models would have to be adjusted on an almost continual basis, which is even less politically or technically tractable than agreeing on a model in the first place.

This reminds me a little of what some people at the Federal Reserve once said about their forecasting tools: if some index turns out to be really accurate at predicting inflation or recessions, it will shortly thereafter stop being accurate because the Fed will use the index to do its job and prevent the inflations or recessions from happening.

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