How We've Budgeted Ourselves Out of Investing in Our Country

Mar 30, 2011Bo Cutter

The way things are going, we'll have scraps -- if anything -- to spend on vital government functions.

While the Republican right carries on its budget antics in the House and the left denies there is any problem, we are allowing the most important part of the public sector to deteriorate into irrelevancy.

Let's start with some numbers, boring as that is. The Federal Government will spend $3.77 trillion in fiscal year 2011; 87% of that total -- $3.27 trillion -- will be spent on defense, the entitlements (Social Security, Medicare, Medicaid, mostly), and interest. That other 13%? The entire rest of the government? $500 billion.

Now jump forward 10 years. The President projects we will spend $5.9 trillion, or $2.2 trillion more. All of the growth will be spent on defense, entitlements, and interest. The entire rest of the government stays constant at $500 billion (no growth for 10 years) and falls to 9% of the total. This is the best overall number I can get for total public sector investment (both hard and soft). Actual infrastructure is a much smaller piece of that.

Almost everything you ever heard of involving the government is in this 13% -- going to 9% -- figure. Green technology, SEC regulation, job training, the Parks Service, the forest service, infrastructure, tsunami warnings, environmental protection, head start, the National Cancer Institute, the State Department, disaster assistance -- just to name a few at random -- are all declining or going away.

Do you think we should invest in a smart grid, or a public jobs program, or infrastructure, or public health, or healthier forests? Well, we're not going to. And my spending numbers are on the high side. The House Republicans will take my numbers down a lot.

One other set of numbers: of this $500 billion, about $190 billion is personnel costs. Over the next 10 years, these costs will grow to $230 billion. (I am assuming no increase in the number of federal employees and a 2% annual increase in pay and benefits.)

So what? This means that the total of all of our non-personnel investments is now $310 billion, or 8% of the total federal budget, and will fall to $270 billion, or 5% of the total budget. (For the record, I have no intention of dismissing the contributions of Federal employees. To the contrary, one of the great strengths of America is the quality of our public service.) G.E. employees in the 1980s called CEO Jack Welch "Neutron Jack" because when he finished fixing a company, the buildings were all there but the people were gone. This is the reverse. The people are all here, but the buildings are gone.

So what? Four questions and then four answers: What do these numbers mean? What are their consequences? Why are we in this corner? How do we get out of it?

1. These numbers mean that we will invest virtually nothing in our economy through the public sector. If you think -- as I do -- that these "rest of the government" expenditures include valuable public sector investments in our economy, then we will invest an average of slightly more than 2% annually -- and steadily falling -- for the next ten years. Just on the face of it, this is crazy. No well-run company in the world could go 10 years investing as trivial an amount as 2% annually. (And that leaves out the terminally boring issue of depreciation: if you think that is real -- I do -- then we are systematically reducing our stock of public capital every year.)

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2. This underinvestment probably means a lower economic growth rate, a poorer, less competitive nation, and higher unemployment. I have always thought that Ben Friedman's book "The Moral Consequences of Economic Growth" should be a central part of the true progressive canon, but unless we are lucky beyond all rational expectations, you don't get growth without investment. And I believe that sustained higher growth in our private sector is in part dependent upon higher public sector investment. But we are planning the opposite. We are planning for lower investment, lower growth of productivity, and a poorer nation. We have maneuvered ourselves into a very tough corner: our public debt and deficit levels are way too high and simultaneously our public investment levels are way too low.

3. We are in this corner because our political system is frozen into a sterile and seemingly permanent quarrel between America's left and right, which long ago departed from reality. I won't waste my energy on the right. It is owned today by a group of nihilists who actively want to wreck the public sector. (For a full description of the new doctrine, read Senator Marco Rubio's piece in the Wall Street Journal, "Why I won't vote to raise the debt limit.") But the left is almost as bad -- less mean, mostly less vicious, less irresponsible but just as empty. The left lacks a coherent economic growth strategy, it is in denial about our debt and deficit levels, and it has no overall perspective on what the role and shape of our public sector ought to be. For both the right and the left, economic and budget policy are derivative. It's what is left after you do whatever is central to your agenda. By definition, this means there is no political energy remaining to do anything hard.

4. We will only get out of this corner when an administration -- it has to be the Obama administration, we can't wait -- puts forward an economic strategy that simultaneously brings our public debt issues under control and commits the federal government to a long-term program of public investment. Doing this requires both new tax revenues and reductions in the growth of entitlements and defense. I would do roughly the following:

(a) Commit to holding public debt -- over the long-run -- to a maximum of 70% of GDP. (I would live with a higher level in the next few years -- we still have a 9% unemployment rate.) This is less onerous than the Simpson-Bowles Commission, but tougher than the administration's current track.

(b) Propose new public investment for the next 10 years of 1% to 2% of GDP annually. This makes the necessary budget policy even harder.

(c) Create a new structure for this new investment so it doesn't turn into pure pork (call it a combination of national foundation and infrastructure bank); track the expenditures and report on them annually.

(d) introduce a 2% to 4% net VAT (value added tax) to pay for the investments, maybe even tied to these investments.

Will we actually do anything remotely like this? The only honest answer is of course not. Congress won't. The two ends of our political system do not inhabit the same universe and regard compromise and bargaining as evil. And there is no center -- although in further demonstration of the triumph of hope over experience, I would love to see the gang of six in the Senate, who are working with Alice Rivlin, come up with something. The only real hope is that President Obama plays the impending government shutdown rope-a-dope perfectly, wins the battle of public opinion, and then, at precisely the right moment, gives the big economic speech I suspect he already has written.

And if not, then as the joke's punch line says, "I'm gonna go find my brother Chester, cause he ain't never seen a train wreck."

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team.

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