For nearly two decades, the Review has argued that government operating and capital budgets should be handled differently. During this time, we haven't noticed hardly any mainstream publication mention this possibility until this article:
Ezra Klein, Vox - The federal budget makes no distinction between money the government spends and money it invests. A dollar spent on Social Security is a dollar that the federal government no longer has. That's different from a dollar spent building, say, a federal courthouse, where the government trades a dollar worth of currency for a dollar worth of courthouse. These kinds of spending are not the same, and the government shouldn't treat them as if they are.
Treating investment and spending as identical can lead to some really dumb decisions. If the government cuts spending on Social Security by $10 billion then it really has saved $10 billion. But if the government cuts spending on infrastructure repairs by $10 billion then it looks like it's saved $10 billion, but really it's just pushed $10 billion worth of infrastructure repairs into the future — and because the bridges may crumble and the water pipes might break, deferring that $10 billion in spending might mean the government has to spend $20 billion instead.
Enter a capital budget: the idea that the federal budget should treat capital investments differently than other kinds of spending.
This isn't some crazed concept dreamed up by FDR nostalgics. It's how most businesses run their budgets, too. They keep an eye on annual cash flow, which is basically what the federal budget tracks now, but they're interested in more than that: they're interested in future profits and losses, and so they try, as best they can, to break out the investments that are meant to generate those future profits and stem those future losses.
The hard part there is they also estimate how much value their capital assets are losing each year, and they treat that, correctly, like a hit to the company's value. You don't lose money when you initially buy a machine for your company — after all, that was simply an exchange of money for machine, and the machine was presumably worth the money you paid for it. You lose money when the machine stops working, because then you don't have the money or the machine.
So, to use the government as an example, capital budgeting would make clear that if our roads are degrading to the tune of $20 billion a year, then we need to be spending $20 billion a year on repairs just to stay even. Spending nothing means losing $20 billion in value, not holding even.
SAM SMITH' GREAT AMERICAN POLITICAL REPAIR MANUAL, 1997 - In the early 19th century, the little British Channel island of Guernsey faced a problem. Its sea walls were crumbling. its roads were too narrow, and it was already heavily in debt. There was little employment and people were leaving for elsewhere.
Instead of going still further into debt, the island government simply issued 4,000 pounds in state notes to start repairs on the sea walls as well as for other needed public works. More issues followed and twenty years later the island had, in effect, printed nearly 50,000 pounds. Guernsey had more than doubled its money supply without inflation.
A report of the island's States Office in June 1946 noted that island leaders frequently commented that these public works could not have been carried out without the issues, that they had been accomplished without interest costs, and that as a result "the influx of visitors was increased, commerce was stimulated, and the prosperity of the Island vastly improved." By 1943, nearly a half million pounds worth of notes belonged to the public and was so valued that much of it was being hoarded in people's homes, awaiting the island's liberation from the Germans.
About the same time that Guernsey started to fix its sea walls the town of Glasgow, Scotland, borrowed 60,000 pounds to build a fruit market. The Guernsey sea walls were repaid in ten years, the fruit market loan took 139. In the first part of the 20th century, Glasgow paid over a quarter million pounds in interest alone on this ancient project.
How did Guernsey avoid the fiscal disaster that conventional economics prescribed for it? First and foremost by understanding that when you build roads or sea walls or colleges or houses, you are not reducing your society's wealth. In fact, if you do it right, you are creating something that will add to its wealth. The money that was created was simply backed by public works rather than gold or "full faith and credit." It was, in fact, based on something more solid than the dollar bills in our wallets today. In contrast, tacking on an interest charge to public works -- as we do in the US -- creates no new wealth, but merely transfers claims on existing wealth from debtors to creditors.
3 comments:
Not So Dept: capital budgeting makes good sense but if Ezra "Punch Line" Klein is the one taking it mainstream, while ignoring the war 'n' empire budget and taking a swipe at Social Security, then we don't need friends like that. He's using capital budgeting as a back door to more attacks on the commons.
Plus, the example of a federal courthouse, choked with Drug War and related makework, not an overdue conga line of corporate and white-collar felons, isn't an asset, as the term is generally understood.
The NZ Government has accounted for its spending in accordance with standard accounting practice - across the board i.e. every piece of income & expense is classified either capital or revenue - and we keep a Balance Sheet for the Government as a whole including accounting for contingent liabilities and statutory obligations which we can forecast (i.e. medicare).
The process of moving to this way of reporting started in the mid 1980s and was pretty much complete by the early 1990s when we added an additional piece of legislation "The Fiscal Responsibility Act" which makes the Government provide short term, medium term and long term forecasts which are then measured against actual performance.
As a result it is in most cases no longer possible to argue about the financial facts. And policy discussion is all based around the "additional" impact of policy decisions on the model.
I have to agree with Anonymous, but without denying that "capital budgeting" is important. Investment in schools, education (through grants, e.g.),...etc. are all investments in human capital. Is Social Security an exception? Possibly, if it were a government expenditure instead of government disbursement of a trust fund with monies contributed over the years by the people receiving it. This is pretty much a 1-to-1 deal for most of the elderly, while Medicare isn't--the amount disbursed is significantly greater than the amount contributed. But consider the great relief offered to "consumers" or whatever you want to consider the children of those who are greatly helped by Medicare. This relief frees monies for consumption and investment and can't be so easily regarded as an "expenditure."
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