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A Capital Idea

Borrowing money isn’t bad.  When it’s used to purchase something big that will last for years, like a house or a car, it often makes sense to do it now and pay the finance charge.  Borrowing to buy equipment or a build to be rented is an investment – as is borrowing money to learn a good trade.

When we look at how the Federal government borrows to keep itself going we can and should be able to ask the same questions – was this an investment?  Did we get anything good for the money?  Unfortunately, the accounting practices used by the Feds lump capital and other investment into the same pot as operational expenses, making it impossible to tease everything out.  It’s a procedure the Founding Fathers would recognize, if you wanna get all Tea Party on the practice.  But it’s still a dangerously stupid way to run things – and totally counter to the way any business or state is run.

As we talk about the need for serious reform in Washingtoon, we should add this to the list.

usedcarThe importance of this separation cannot be over-emphasized.  It’s been a long time since there was a genuine call for a balanced budget, but the forces of austerity are running pretty strong in the US House.  Their point that too much Federal borrowing chokes out investment in the rest of the economy is well founded, if a bit wrong given where we are as we emerge from a Depression.  The massive tab run up was key to the management of this Managed Depression and keeping the worst from happening.

But for those of us who would rather shout down austerity, what can we point to?  As a strong supporter of the Simpson-Bowles framework for deficit reduction I have to say that yes, I would like to see some evidence that our spending is under control – even as a deficit is clearly necessary.  But some spending is clearly more effective than others for getting us through the rough patch, and chief among that is spending on infrastructure.  It has a positive return, promotes equity, and gets money into the hands of people that need it the most to get things moving – working people.

Borrowing to build infrastructure is also something that can easily be justified.  It’s an investment.

The problem is that the budget ,or lack of one after years of continuing resolutions, is a mess.  It’s nearly impossible to tease out the real investment contained within the budget.  The last good analysis I found was from the Brookings Institution in 2008, and it’s rather sickening.  It takes data from the Congressional Budget Office (CBO) that is otherwise really hard to find.

Total “investment” in the budget – including big defense items, infrastructure, research, and support for schools – is about 15.5% of what the Feds spend (now about $3.6T).  The part that is non-defense physical investment is about 3.3%, and infrastructure is a paltry 2.2% – which is currently about $80B.  President Obama has called for more infrastructure spending, but it’s still a pitifully small part of the budget.  That’s even after a small but decent one-time bump of $47B in 2009.

This seems like a really stupid time to call for a budget balancing amendment, and I’m not exactly going that far.  But it seems reasonable that while current expenses can be relatively balanced capital projects are something very different – and we can reasonably borrow many times what we spend now while easily justifying it.  Rates are low, unemployed people can be paid a little less, and costs are generally low.  Why not build like all Hell right now, before it all gets expensive?  That it helps the economy rebound is almost a secondary effect.

But no, we don’t account like that.  And genuine capital improvement languishes at the bottom of the heap, a tiny line item in a very big budget.  That’s when anyone bothers to separate it out at all.

The point is that Simpson-Bowles would be a great start for creating a budgetary system that many of us could actually understand while getting ahold of a dangerous trend towards increasing debt.  But where we could reasonably continue to spend to help end the Depression is both easy to define and very easy to separate out – if only we used accounting techniques used by just about every other organization anyone can think of.  That we don’t do this is a terrible crime and just one of the many ways that our system is hopelessly antiquated.

Yes, let’s keep borrowing money!  But let’s also keep track of what we are getting for it, too.  That’s the compromise that we should be working towards.  It’s the only good answer I can come up with for the dangerous cries for more and more austerity as the only answer to a budget that really is out of control.

10 thoughts on “A Capital Idea

  1. Yes yes and yes! There’s no wonder our government is messed up when they all failed Introduction to Managerial Accounting. How we could even thing it’s possible to run the largest company (or whatever it is) without GAAP totally blows my mind. It’s like they are all a bunch of kids playing at running things. It makes no sense at all. So many things would become much more clearer if they only had a budget that was set up as a blueprint that reflects priorities and values.
    Infrastructure as a need is another thing and I think you have sold me on it but yes, that is how the state pays for it. That is how it has to be done. Reading the ‘budget’ as they have it now just gives me a headache, it’s so stupid.

    • Thanks! But there must be more to it than separating out capital and ordinary expenses. I don’t know if you’ve even tried to make sense of the budget, but are there other practices that you think are necessary?

    • It’s very rare that anyone talks about having a real capital budget. The only thing I could find was that Brookings piece from 2008. So no, it won’t get done at this rate.

  2. I would support a balanced budget amendment especially if you take capital out. You make it so that the budget has to be balanced for expenses with the exception of a declared war. I agree that real capital is different and should not be included. This could give the balanced budget amendment the kick it needs to be passed & we sorely need it!

    • I’m still not really for a balanced budget amendment, but I can imagine one based around this separation, yes. We would still need a procedure for big-ticket expenses such as war, TARP-like situations, and the potential bailout of GM or something (although, if we get stock, it’s easily justified as a capital expense anyway). I could imagine a procedure where a supermajority is needed along with the President’s assent on a separate bill with no other provisions, for example.
      So yes, we could go there. I wasn’t planning on that, however. 🙂

  3. It is a great idea and long past due. That’s why it will never happen. I’ll bet there are a hundred ways the process can and should be improved but they can’t even get a regular budget together let alone change everything.

    • Changing everything may be the key to getting a new budget together, actually. A whole new system is not a bad idea. I can think of a lot of other ways to improve things, including “zero base” or sunsetting everything in rotation every so many years (5?) and examining them closely. And being able to actually, get this, audit the Pentagon. But these all seem like fantasies until someone actually gets in there and starts trying to make a difference.

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