Tuesday, February 04, 2014

Separate the capital budget to fix infrastructure woes

Miles and I have a new column in Quartz, about the need to fix our infrastructure. Our idea is to do this by separating the capital budget from the regular budget:
We need to rebuild our infrastructure, and now is the perfect time to do it. Interest rates are at historic lows, but they are unlikely to stay there forever... 
But infrastructure budgets have been cut, not expanded. Why? One reason is that in the race to cut the deficit, infrastructure spending has been lumped in with other types of spending. That is a tragic mistake. Unlike government “transfers,” which simply take money from person A and give it to person B, infrastructure leaves us with something that helps the private sector do business, and thus boosts our GDP growth. Infrastructure is a small percentage of overall federal spending, but tends to be a politically easy target. 
One idea to boost infrastructure spending, therefore, is to treat government investments differently from other kinds of government spending by having a separate capital budget... 
[A] capital budget can also be a good way to make sure that America doesn’t underinvest in basic scientific research. However great the importance of better roads and bridges, it makes sense to weigh the benefits of those roads and bridges against the benefits of research that might someday conquer Alzheimer’s disease... 
With proposals like these on the table, we believe there is a chance that Republicans and Democrats could agree to set infrastructure and other legitimate capital spending aside as an issue that should not be a victim of titanic political battles over the deficit...
Both Republicans and Democrats want to govern a country that is as rich and prosperous as possible. America’s businesses need good infrastructure to move their goods from place to place—and there is no question that we need the solid new ideas that research can provide. Economists of all stripes will agree that if a nation is under-spending on infrastructure and other legitimate capital spending—as America is right now —then boosting that spending is a win-win. It’s time to look beyond our fights over how to divide America’s pie, and focus on making the pie bigger.
Miles has a companion post at his blog, in which he describes how the capital budget could be set up in order to minimize the degree to which it is cannibalized by the non-capital budget:
How can the capital budget ever be negative? The capital budget plus the non-capital budget must add up to the total budget. So for a given total budget, a negative capital budget makes the non-capital budget bigger. What is going on is this: regular maintenance is like a quasi-entitlement within the non-capital budget. In any given year, regular maintenance as a component of the non-capital budget is fixed in advance and can’t be altered by the legislature. The only way it changes is that it is gradually reduced if the quantity of capital to be maintained gets lower, or gradually increased if the amount of capital to be maintained gets bigger. 
In this lack of discretion about regular maintenance as a component of the non-capital budget, there is no real tying of the hands of the legislature: they could always choose to have a very negative capital budget, which would increase the non-capital budget enough to cover that maintenance. So if the legislature as a whole acted like a fully rational actor, this principle is not a constraint at all. But as political economy, it makes a difference, and a good one. The legislature can increase the non-capital budget and reduce the capital budget. But what the legislature can’t do is get more funds for other things by letting capital decay without it showing up in the accounting as an increase in the regular budget and reduction in the capital budget
Read the whole thing here!


  1. Anonymous3:47 AM

    Did you get this idea from Japan? Sounds like the FILP (which they are trying to get rid off - no doubt under advice from some wise and highly informed MIT and Chicago economists).

  2. In Germany, they have in the constitution that the government can only run deficits as big as their capital investment. I think it is a good idea.

    1. Anonymous5:34 AM

      This is very similar to the Japanese model. Long term bond issuance was only allowed for capital expenditure during the High Speed Growth Era. And it is not surprising as the Japanese economic development was heavily influenced by German model rather than the English PE model of Marshall, Ricardo etc - unlike the US.

      Since Noah has had an interest in things like this, as well as non-US economics like the Austrian school, perhaps he will look into the German School of Economics - Weber, Marx, List and others, as well.

      It will certainly help him understand the German and Japanese economies.

      Personally I think it has a lot of substance and things to offer in dealing with the world's problems (except Marx which is insightful but does not offer solutions) and devoid of a lot of clutter and artificial construct - like budget lines, indifference curves, 'rational' actors, long run steady states and DSGE model that defines UK/US economics.

      More importantly it offers a different but very plausible explanation of reality which is important for critical reasoning.

  3. Both Republicans and Democrats want to govern a country that is as rich and prosperous as possible.

    At least republicans do more than democrats, the later believe they can create wealth by spreading it around.

  4. Somehow accounting tricks are not needed to fund the military. Compared to Social Security it is totally bankrupt because its fund is at zero (there is no fund). Yet of course there are no issues and it is funded on an as needed basis. Because there is always money for projecting the elite's power around tge globe.

    What is neede are not accounting tricks but some MMT education. Smokescreens aside tge US cannot run out of money for infrastructure or pensions. The only constraint is real resources/inflation.

  5. This is really just a proposal to create a legal structure which favors physical infrastructure construction over other budget priorities. I don't see any reason why that ought to be the overriding concern of the process.

    I'd put education as more important than physical infrastructure, and harder to recover from chronic underfunding. I'd put adequate public health higher. Under vastly different circumstances than the US is currently in increasing Military spending might be more important.

    It's similar to the various proposed and existing limitations on spending or revenue, an effort to win the policy battle in advance by setting the system up to follow a preference by default and resist calls from the people to go another way.

    The proper way to hammer out budgets is by elections, debate, and negotiation. If we are to set up some ridged auto-budgeting system it would need a much grander goal than "make us spend more on infrastructure".

    Now creating an independent fourth branch of government analogous to state auditors who's job it is to report things like infrastructure maintenance deficits and prepare official reports on spending, taxes, etc to the people is a good idea that could help keep politicians honest without favoring some particular policy of the moment.

    1. Anonymous2:01 PM

      Education is funded by state and local governments, not the Federal government.

    2. The federal government provides major funding for college and post-graduate education.

    3. Anonymous6:07 PM

      It does provide some, but the returns on education at the graduate and post-graduate level are largely private, so subsidizing this type of education further makes little sense. But, as a faculty member, I welcome your proposal. I could certainly use another increase in my salary.

  6. Don't assume that either the Democrats or the Republicans want an America that is collectively as rich and prosperous as possible. Their actions make it clear that they all want prosperity for their major donors and core constituencies and everyone else can go fuck themselves.

    The premise of your piece is that politicians are too stupid to understand the importance of long run investment and that if only we changed the way we prepare the country's financial statements they would suddenly understand and act more responsibly.

  7. If I recall correctly, the initial stimulus plans back in 2009 were heavy on infrastructure, but the Administration changed that because most infrastructure workers are male construction workers, and the feminist groups kicked up a big fuss about that. Don't you think the same problem would exist today?

    1. Not that I doubt your honesty, but I do find that allegation hard to believe. Do you perchance have a source?

    2. That is BS. In reality they limited infrastructure investment to projects in the final phase of planning that had passed all the necessary regulatory and cost benefit analysis. The goal was to speed up infrastructure where the work could be done within the next 18 months. The number of programs that were "shovel ready" was limited by the fact that most projects would have taken too long to spend the money that they wantednto spend quickly.

      Of course it may have been more ideal to realize that when the loans you take out on infrastructure investment are at a negative real interest that means that standard cost benefit analysis inherently overrates cost.

  8. I second the proposal! I would support a balanced cyclically adjusted budget excluding public investment.

  9. Many states have separate capital budgets. It can be interesting to see just how so many of them have been able to dodge around the meaning of "capital."

  10. Anonymous5:10 PM

    Noah, I don't follow how a capital budget creates a political economy that disincentivizes allowing capital to waste away. Couldn't a political simply ensure that the capital budget never becomes negative, but rather barely positive. Year 1 the capital budget may be half the total budget, and perhaps 10% of the non-capital budget represents maintenance. Year 2, I simply make the capital budget 10% of the total budget and I now have 40% more to play with on the non-capital side. Seems like the same situation as today?

  11. Anonymous11:01 AM

    "With proposals like these on the table, we believe there is a chance that Republicans and Democrats could agree to set infrastructure and other legitimate capital spending aside as an issue that should not be a victim of titanic political battles over the deficit..."

    Who wrote this, Rip van Winkle? The Republicans will oppose anything the Democrats propose just because the Democrats proposed it; events since at least 2009 prove this beyond doubt. Nor do Republicans care how much this opposition might hurt the country; if they cared about that they wouldn't have opposed fiscal policy to mitigate long-term unemployment, among many other things.

    Nice idea for some alternate reality.

  12. Commented on your proposal at Oregon Economics Blog. http://oregonecon.blogspot.com/2014/02/fred-thompson-is-separate-capital.html