“Investment” and Obama’s First Budget

President-elect Obama’s chief in-house economic advisor Larry Summers suggests in a recent Washington Post piece that the new Administration will put a lot of effort into addressing long-term growth challenges, not just short-term policies that generate consumer spending.  How?  Through “investments.”  To make sure we get the point, Summers uses that word or some variation 12 times.

But the first Obama budget will not be oriented toward investment.  Just as with recent administrations, the words will stress “investment” but the numbers will emphasize “consumption”—not only in the short-term but, more dangerously, in the long-term.  In fairness, this is the budget the new administration inherits.  They gain control of the wheel of a battleship sailing full-steam ahead toward the icebergs.  But by using terms like “down payment” to describe new proposals, Summers hints that no major course correction will be sought.

Consider first the short-term.  If, by the time the recession is over, the government takes on net additional liabilities of, say, $2 trillion and invests even as much as one-fourth of that amount, then its net investment is minus $1.5 trillion.  And that assumes that the investments really are investments.  Believe me, politicians will now be calling every item they favor, even the subsidized importation of tsetse flies, an “investment.”

I’m not suggesting that a faster economic recovery, if achieved, could not bring enormous benefits, eventually including higher private investment and higher government revenues.  But regardless of Summers’ pitch for investment, the means toward that end still rests primarily on financing additional consumption through higher debt.

So the real issue is the long term.  If we consume more temporarily as a means of recovering our economic health while moving toward a path of long-term investment, it’s one thing.  If we’re planning on only increasing our consumption even further down the road, it’s another.

Recently, I led a study sponsored by the Partnership for America’s Economic Success that comprehensively examined total investment policies by the federal government (see http://www.urban.org/UploadedPDF/411539_investing_in_children.pdf).  While we paid special attention to investments in children because of their extraordinary long-term importance and potential high rates of return, we nonetheless reviewed all types of investment.  Because researchers disagree on exactly how to measure investment, especially if counting some forms of social spending, we also used a variety of measures.

No matter how we parsed the numbers, the message was clear: relative to GDP or domestic spending, total federal investment and investment in children fell over the past few decades.  More importantly, overall government investment, and especially investment in children, is declining in relative and sometimes absolute importance.

The cause of the problem: these potential investments are being squeezed out mainly by faster, automatically growing programs that tend to favor consumption.  For instance, while growth in the economy would provide some additional $650 billion in additional domestic spending annually by 2017, the amount going toward education and research would be about zero under current law.  Alternatively, the share going toward kids’ education and research and work supports for families with children and social supports for children would be only about $26 billion, and that number is weakly positive only because of bad news: constantly growing health costs.

Unlike the one-time costs of dealing with a recession, such large numbers would repeat over and over again at ever higher levels each succeeding year.  For almost all purposes, including investment, how we spend hundreds of billions and eventually trillions of dollars of additional revenues year after year swamps in importance how well we allocate stimulus spending meant to be temporary.

Despite several mentions of the long term and a few mentions of children, Summers did not really intend for his Washington Post piece to set out the long-term policies of the Obama administration.  He was more narrowly addressing an ongoing debate, primarily among Democrats, about how to spend new stimulus money made available today.  Should we aim only to get money out to people as quickly as possible to stimulate their demand and consumption?  Or should we determine that if we are going to spend so much money, we ought to get something back for it in the form of “investment.”  That Summers published the piece tells us that his side won the internal debate within the Obama camp.

The issue for many of us is not just about whether we do a little maintenance on the side while we fix the battleship’s leaking hull.  The ship is still heading in the wrong direction—not without potential consequences for both the hull and the battleship as a whole.



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