The Crippling Politics of Public Investment

By Dan Kervick

The Financial Times called attention this weekend to one of my favorite themes: the precipitous collapse of US public investment.

Public investment in the US has hit its lowest level since demobilisation after the second world war because of Republican success in stymieing President Barack Obama’s push for more spending on infrastructure, science and education.

Gross capital investment by the public sector has dropped to just 3.6 per cent of US output compared with a postwar average of 5 per cent, according to figures compiled by the Financial Times, as austerity bites in the world’s largest economy.

The Times story dovetails with my recent piece on the postwar history of US consumption and gross investment. I argued in that piece that

The planned economy of WWII was the economic rocket that finally launched the United States out of the depression era and into the prosperous future decades that followed. That period, you might say, was America’s “great leap forward.” Americans in the postwar period, justifiably impressed with the power and success of activist government, kept up very strong levels of government economic participation and agenda-setting. We know the litany: highway programs, educational investment, a space program, and all of the many components of military-industrial complex.

I also argued that the long-term secular decline in US government economic activism and mission-driven public investment, a decline characterizing the neoliberal period, has been responsible for falling rates of US economic growth. Along these lines, I have urged people to listen to the words of Sussex University economist Mariana Mazzucato:

Mazzucato’s central message is that standard accounts of the economic role of the state are incomplete. These accounts focus on the provision of public goods and the state’s role in compensating for negative externalities and other market failures. But Mazzucato believes economists and the public need a better understanding of the role of states in driving economic innovation. She argues that government spending has been most effective when that spending is directed towards large missions, and that missions such as putting a man on the moon or tackling climate change require strong government intervention. Mazzucato builds on her account of mission-oriented investment to explain how to develop public-private partnerships that are symbiotic rather than parasitic.

So it is good to read warnings about this dangerous decline in a prestigious, opinion-leading publication like the Financial Times. Unfortunately, the Times hints at a simplistic partisan analysis of the politics of the public investment failure in America, an analysis which might mislead its readers about what will be required to turn those politics around:

Republicans in the House of Representatives have managed to shrink the US state with their constant demands for spending cuts, even though their uncompromising tactics have exacted a political price, with their approval ratings in Congress at record lows.

Democrats control the White House and the Senate and made no substantial concessions in October’s battle over the government shutdown but Mr Obama is still far from one of the main economic goals of his presidency.

The figures underline how across-the-board budget cuts are threatening future growth, as the axe falls heavily on federal investments that boost output, rather than transfers such as pensions and healthcare for the elderly.

“This is the motivation for the president’s desire to significantly increase public investment,” said Jason Furman, chairman of Mr Obama’s council of economic advisers, and a close aide since the days of his 2008 presidential campaign.

“New authority for federal investment in the 2012 fiscal year was $475bn; you look at our proposal for 2014 and it’s $624.8bn. We are proposing a very large increase and that’s because the country is not investing enough in its infrastructure and it’s not investing enough in R&D.”

Reading these paragraphs, one might get the impression that only the Republicans have been on the side of reducing the US government’s spending footprint on the US economy. But this impression would not be accurate. It’s all very well for Mr. Furman to call for an increase in federal government investment in our economic future, and the administration has indeed put forward the specific increases Furman describes. But these administration goals have been presented in the context of an overarching bipartisan mania for budget austerity and debt reduction that has dominated both terms of the Obama administration. While it is true that the administration has tended to prefer what they see as a “balanced mix” of tax increases and spending cuts on the way to its deficit reduction goals, the dominant motif in the economic policy picture the administration has painted for the public has not been one of an energetic, pro-active government driving innovation and social transformation with an aggressive spending plan, but rather the figure of an abstemious, deficit-conscious country, pinching its pennies and bean-counting its way back to prosperity with a commitment to overall budgetary contraction.

The Times presents to us the image of an administration eagerly pushing for increased public investment and a reversal of the long-term US public investment decline, and now frustrated by the tidal waves of spending cuts that have held the country back:

Reversing such trends was part of Barack Obama’s economic pitch from the moment he started campaigning for the US presidency. In a June 2008 speech at Kettering University in Flint, Michigan, he made investment in innovation, education and infrastructure the main answer to the economic challenges of technology and globalisation.

“Entitlement spending is bound to increase as the Baby Boom generation retires,” said Mr Obama back then. “But the answer to our fiscal problems is not to continue to short-change investments in education, energy, innovation and infrastructure – investments that are vital to long-term growth.”

Public investment picked up at the start of Mr Obama’s term – temporarily rising to its highest level since the early 1990s – because of his fiscal stimulus. But that has been more than reversed by subsequent cuts. The biggest falls are in infrastructure, especially construction of schools and highways by states and municipalities.

Federal funding for research and development has only fallen modestly so far but will decline much further under any budget path that continues sequestration. That threatens a fundamental source of productivity growth for the whole global economy because so many scientific breakthroughs are funded by US bodies such as the National Institutes of Health.

That just adds to the frustration of the Obama administration. “You are missing an opportunity to both create jobs in the short-run and have a stronger basis for productivity growth in the long-run,” Mr Furman said.

Of course, in between that June 2008 Flint, Michigan speech and now, the US experienced its worse economic crisis since the Great Depression. And unfortunately, the Obama administration’s response to the crisis has been less than inspiring. The administration had two basic choices in developing a strategic economic approach to mobilize the country for its post-crisis recovery: a dynamic and bold approach based on growing our way out of the crisis behind strong government leadership, and a modest approach based on managing our way out of the crisis with careful accounting and budgetary conservatism. It chose the latter. Obama has been closer to a Hoover than an FDR. Even his most ambitious policy – the Affordable Care Act – was presented as a budget-neutral modification of the existing private sector system, rather than a transformational reworking of the US health care economy.

The administration has consequently framed its entire economic policy agenda under the guiding light of deficit reduction. This happened very early in the administration: the White House shifted to deficit reduction as an overriding economic goal in February 2009, immediately after passing the stimulus package. They followed this up with the appointment of the Bowles-Simpson Commission in 2010 and the subsequent attempt to engineer a budgetary “grand bargain” in 2011 that would outflank the Republicans in the counterproductive political war for deficit reduction. Obama has also told the public we are “out of money”, and has conveyed the overall impression of a budget in crisis. As a result of the five-year bipartisan obsession with the budget, the size of its deficit, and the ratio of public debt to GDP, Washington has been thoroughly consumed by the politics of budget austerity and the bogey of an exploding public debt. The public investment message, such as it is, really hasn’t gotten out to the public. And to the extent that the administration raises that message, it has been presented as something that must be squeezed in via spending readjustments as part of the more important task of budget contraction. The result: the economy-crushing repression of the fiscal cliff deal and sequestration.

It is of course logically possible to increase public investment while at the same time decreasing spending in other areas and increasing taxes. But it is almost impossible sell government activism and budgetary austerity at the same time. They are two public tastes that simply don’t go well together. If you loudly tell people that the deficit is out of control, they are hardly likely to join in with the quiet calls for more aggressive spending across a large array of public enterprises. Also budgetary austerity is in itself contractionary, however it is engineered, reducing the total level of demand in the economy, tamping down private sector consumption and investment, and inhibiting production and the building of new economic capacity in the private sector. Budgetary austerity is thus an immediate-term anti-growth policy that fights against whatever long-term benefits are created by expanded public investment. The administration should have communicated a much different message to Americans: the message that at this critical point in our history, focusing on deficits is simply beside the point.

Obama has further poisoned the atmosphere for public investment by continuing to hint at the need for entitlement cuts as part of the budget-slashing agenda. So to the extent the public investment message is getting through at all, the public is being told it must pay for those investments with a reduction in Social Security and Medicare benefits. And yet in the background of this debate, corporate and Wall Street lobbyists have succeeded in very publicly advancing the plutocratic assault on homeowners, students, socioeconomic equality, middle class prosperity, financial stability and the rule of law. So middle class Americans are being told they must pay for the investments in the future with benefit cuts, while the predators are being allowed to take bigger bites out of our present and future prosperity.

In the aftermath of the terrifying economic events of 2008 and early 2009, the Obama administration missed the opportunity to focus the country’s attention on jobs, growth, investment and epochal social transformation. Instead it went down a very different road. It told the public to fear active government and fear the budget deficit. It is hardly surprising that the result has been waves of spending reductions, and that most of the voices for increased government spending have been cashiered from the public debate.

Cross-posted from Rugged Egalitarianism

Follow @DanMKervick

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