Magazine article The American Prospect

Invest It

Magazine article The American Prospect

Invest It

Article excerpt

With the federal budget deficit under control, we can at last focus on the other rising deficit--of public investment. There is a proven correlation between public outlay on physical and human capital and a country's productive capacity. Yet over the last two decades in the United States, public investment in almost all areas has declined precipitously. Since peaking in the late 1970s, federal spending on public investment, measured as a share of total economic out put, has fallen by more than a third. If current budget trends hold, it will fall another 35 percent over the next ten years. These investment declines could significantly impede economic growth in the next century.

In orthodox thinking, deficit reduction reduces interest rates and thereby allows for more private-sector investment. This in turn boosts productivity growth and long-term economic growth. The current rosy economy is often attributed to deficit reduction. Certainly, one can cheer aspects of the current economic situation. The unemployment rate has fallen to its lowest level since the early 1970s, and real wages have begun to rise. But while the economy's growth rate has been respectable, it is virtually identical to the path projected before the President's deficit reduction plan was implemented in 1993.

And while the deficit has fallen faster than anyone had anticipated, the impact on real interest rates has been limited. The average real (inflation-adjusted) rate over this period has been 3.9 percent, only slightly higher than the 3.8 percent projected by the Congressional Budget Office (CBO) prior to the passage of the Clinton budget.

Contrary to widespread belief, the investment share of GDP in 1997 was the same as in the last business cycle peak in 1989--percent, which is far below its 1979 peak. Thus the decline in the deficit did not increase investment share or productivity growth. The rate of productivity growth over the current cycle is nearly the same as the 1980s rate and considerably lower than the rates in both the 1960s and 1970s. While there was strong productivity growth in the first three quarters of 1997, this more rapid growth would have to continue for a considerable time to offset the slow growth earlier in the decade. So deficit reduction has not met expectations in terms of spurring overall growth, private-sector investment, or productivity growth.

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INVESTING LESS AND LESS

Economists agree that what has contributed significantly to economic growth over the last half century is public investment. Some studies suggest that expenditures on public investment actually affect productivity more than private investments do. But even if the impact of public and private investment on productivity is roughly comparable, recent trends are alarming because the decline in public investment has not been offset by increases in the private sector.

This decline in total investment bodes ill for our future. As we enter the twenty-first century, we need to educate and train our workers, upgrade our infrastructure to support new technologies, and give basic science the means to sustain innovation and technological advance. But we may not be able to make these crucial investments.

Human capital. Outlays on education, training, and early childhood needs are sound investments because they increase the economy's productive capacity in the future. But spending on education and training, after rising throughout the 1960s and 1970s, has fallen by about 50 percent since 1976. Spending fell steeply in the early Reagan years, increased slightly under the Bush administration, and then continued to decline under Clinton. This area of spending is projected to experience further cutbacks over the next ten years.

Physical capital. Public expenditures on physical capital provide the basic infrastructure that the economy needs to sustain itself--the roads, bridges, highways, and airports that support the transportation of people and goods. …

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