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Capital Idea

It was 70F in St Paul today, and my mind is on other things.  This repeat from 2013 is still good, but the numbers have changed slightly since it was written.

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.

Balancing the budget isn't actually in the Constitution.

Balancing the budget isn’t actually in the Constitution.

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.

Construction Jobs are always a good thing.  There's stuff to build.

Construction Jobs are always a good thing. There’s stuff to build.

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.

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27 thoughts on “Capital Idea

  1. It seems that the major concern is over who controls the purse as opposed to what is being spent out of the purse and how it is being spent. It seems that we scale back on defense spending a little and then turn around and boost it up again, while areas such as research, education and infrastructure are lagging behind. I think we can maintain the defense spending where it is or at least reduce it some in order to free up some money for the areas that could ignite economic growth on all levels.

  2. The other positive from people working is that the state isn’t being spent on automatic stabilisers, like welfare and gaining tax receipts (thus the initial outlay is a self-fulfilling. Although, it has to be done at a sustainable pace.

    The problem with infrastructure/education spending is that the results are realised in the long-run and to quote Keynes “in the long-run, we’re all dead.” Keynes, in his general theory, merely suggested pay one person to dig a hole and pay someone else to fill the hole in.

    • Exactly! A stable source of work that, if anything, is a bit counter-cyclical would help us all tremendously. And there’s no reason why we can’t do that if we keep our capital budget separate.

  3. It has been obvious for a long time that the US is dissipating its wealth in foreign wars and other non-productive, if not actively harmful, spending. And yes, the distinction between capital expenditures and operating expenses has become vague if recognized at all. But one should not assume that capital spending is automatically good and government operating costs are wasted. Spending on, say, jails and football stadia is, I would argue, far less productive than, say, enforcing environmental laws or social programs. (Not to mention that many people are in jails and other institutions are a result of chemical pollution and or an abused childhood….) We don’t seem to know how to let go of ideology enough to think clearly about what spending is helpful and what is not.

    • We do spend a lot on harmful things, yes. Your example of a football stadium is at least relatively neutral! If that was what we were fighting about, unalloyed good versus feel-good extravagance, I’d be happy.
      But yes, there is another component to this. For now, I would be happy separating out what we really spend on capital and, yes, insisting that the expenses (including interest) are indeed balanced. It seems only reasonable.
      But at some point a good discussion of what we get for the money is essential. As for jails – we need some, sure, but how many? When does it become the mark of a police state? It would be easier to highlight some of these costs if they were spun out, too. And if the major infrastructure cost is indeed roads it points to more gasoline tax, etc. The beauty of a good budget is that it visibly shows priorities – but our budget today is so confusing we can’t see a damned thing.

    • States are required to be in balance at all times and are subject to more pressure from the bond market. Only the Feds could really be counter-cyclical, although they should work with states to do it.

  4. GAAP accounting is made out to be so mysterious & few people seem to really get it. It’s not that hard. You could explain it a little better but this is a good start. Every single business and other government uses something like GAAP with a few small changes except the federal government. Even the federal reserve does. There is no excuse for not doing this. Our government would fail a basic audit in so many ways its not funny.

  5. The sky is blue. The earth is round. Evolution is true. Vaccines work. South Minneapolis is the best.

  6. This year being 2015…

    It is good to remember that the civil war was coming to a close in 1865. We can remember that on April 4, 1865, two days after Confederate forces evacuated Richmond, President Abraham Lincoln and his son Tad visited the still smoldering ruins of the South’s former Capital. Several months earlier General Sherman stated that he intended “to make Georgia howl.” One of Gen. Sherman’s orders in Georgia was as follows:

    “…V. To army corps commanders alone is entrusted the power to destroy mills, houses, cotton-gins, &c., and for them this general principle is laid down: In districts and neighborhoods where the army is unmolested no destruction of such property should be permitted; but should guerrillas or bushwhackers molest our march, or should the inhabitants burn bridges, obstruct roads, or otherwise manifest local hostility, then army commanders should order and enforce a devastation more or less relentless according to the measure of such hostility…”

    Then we fast forward to VE day and VJ day in 1945.

    The United Nations was founded in 1945.

    “The United Nations did not come into existence at the signing of the Charter. In many countries the Charter had to be approved by their congresses or parliaments. It had therefore been provided that the Charter would come into force when the Governments of China, France, Great Britain, the Soviet Union and the United States and a majority of the other signatory states had ratified it and deposited notification to this effect with the State Department of the United States. On October 24, 1945, this condition was fulfilled and the United Nations came into existence.”

    Add another 20 years and President Johnson was signing the Voting Rights Act of 1965. He also signed into law Medicare and the Immigration Act of 1965.

    Also Malcolm X was assassinated in February 1965.

  7. Pingback: A Holiday, Together | Barataria - The work of Erik Hare

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