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

7 responses to “The Crippling Politics of Public Investment

  1. Dan – – –

    A very worthwhile discussion. While I am critical of the lack of financial, economic and monetary acumen of the Obama administration, I also think that the path he has followed was not necessarily entirely of his own choosing but was forced on him by political reality. Politically he had to try to walk the thin line between “Austerians” and “Keynsians” or risk substantial rejection by voters who are largely ignorant about anything but slogans and sound bite talking points.

    The net result of this political path has been that he appears to have been captured by the banking oligarchy, to have been trapped into a health care law that was substantially written by insurance company lobbyists and a financial reform law that has so many minutiae that lobbyists have a open season on tearing away many significant improvements that might have gained some traction against what still appears to be an uncontrolled parasite feasting on the body of the republic. (Visions of Matt Taibbi’s simile here.)

    The public investment voices have indeed been cashiered, as you said. And it is not clear that anything short of another financial crisis is likely to change that. And there is still a possibility that political charlatans can succeed in blaming that new collapse on “too much government regulation” and “out of control government spending”. Such a day would be the one that disproves the adage that “ignorance is bliss”.

    • John, I don’t think that in 2008 and early 2009 there really were that many austerians on the left, center-left, middle or even the center-right – at least not as far as popular opinion went. People were open and prepared for an FDR-like response to the crisis. Obama helped create the austerity wave by shifting the focus to the budget.

      I honestly don’t think that an aggressive program promising aiming at full employment, mortgage relief, middle class income support and sustained public investment would have been rejected by the voters. It would have been rejected, however, by the plutocratic elite whom Obama looks to as the source of sound policy.

  2. I see an administration that tries to make policy based on poll-tested talking points rather than a coherent set of ideas that will work. Yes, we need stimulus, but deficits are bad, bad. Therefore, we will do both — except, of course, that you can’t. Sure, Obama has proposed infrastructure investments, but then he stops talking about it as soon as he’s done his pro forma town hall with the Karl Rove innovation of nodding people (sometimes nodding off) in the background. I see no effort whatsoever to make opponents pay a serious political price.

    On “Crooked Timber” today, a contributor (Henry) quotes Albert Hirschman: “[Keynes] frequently presented his propositions as counterintuitive rather than as confirming common sense: for example, instead of telling his readers that converging individual decisions to cut consumption can set off an economic decline (common sense), he dwelt on the equivalent but counterintuitive proposition that a spurt of individual decisions to save more will fail to increase aggregate savings.”

    That quote was new to me, but I have long thought there could be huge political gain by changing the dialogue — and that the President could have changed the dialogue by emphasizing the common sense notion that having the world’s biggest customer cutting back on its purchases of goods and services will cost us millions of jobs and is the stupidest thing you can do right now. Millions of jobs will be better for everyone, because it will make it easier to find a new job if you lose yours and it will push everyone’s wages up. Over-worrying about deficits is wrong when unemployment is so high, because we’ve had worse deficits before and got out of them easily with a strong economy. (“Nothing to fear but fear itself” and all that.) But you can’t have a strong economy without full employment.

    Starting in November, 2008, with continuing emphasis on this commons sense in every State of the Union, every press conference and on every Sunday talk show, with quantification in terms of the number of jobs Republicans are costing us as well as a deteriorating infrastructure, could have changed the dialogue by now. But with no push-back, the conventional wisdom, stupid as it is, continues to prevail. Democrats just don’t know how to do common sense.

    Let’s see: 5% (historical) vs 3.6% today is a shortfall of 1.4% of GDP, or about $250 billion a year that should have been spent on public investment. 1.4% of 144 million jobs is about 2 million direct jobs from the spending. Apply a multiplier there (in the current environment) and we have, what, about a 5 million job shortfall? Or even bigger? With so much neglect, a lot of ground to make up that should be done now when unemployment is so high.

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  4. spot on and brillianly written as usual Dan.

  5. This documentary has interesting segment on the investment during WW2:

    That sort of activity lead to growth rates nearly 20% a year. This anecdotal evidence seems to suggest that economic growth is more dependant on capital investment than technological development. It also demonstrates superiority of command economy over laizzez-faire one.

  6. Charles Fasola

    What makes you believe that tweaking the current system will result in the very major changes to our criminal, FIRE sector dominated government that are necessary for revitalizing our economy? What makes you believe that without substantial reforms to our private banking dominated monetary system government will miraculously begin serving the interests of the real economy? The entity which controls the creation of money holds the real power and forever has. At present no government agency holds that power; in spite of protestations otherwise. though I wish it were not so. Presently it is the ones who bribe those you wish will help the public have neither the desire or will to do so. Those you seem to want to put your trust in wish you to accept the fact that you are all Bangladeshi’s now.