I know I’m getting to this debate a little late, but it’s too good to pass up. As you may have read, the centrist think tank Third Way recently came out with a paper finding that entitlement spending has crowded out public investments, and therefore Democrats who care about children should endorse cutting health and retirement benefits for the poor and/or elderly. Bill Keller then used the paper as the basis for a New York Times column on how the baby boomer generation is greedy. Dylan Matthews and Jamie Galbraith vehemently disagreed.
Let’s state up front that Keller and Third Way’s concern for our currently-low levels of public investment is totally spot on. We’ve written extensively on how public investments act both as a vital driver of economic growth and how they help push against inequality trends, helping us achieve a future where a higher level of prosperity is shared by more people. EPI has been writing about the deficit in public investment for more than two decades.
But there are two intrinsic problems with the Third Way/Keller narrative. The first is that the data do not really support it at all. Below is their central graph, supposedly proving their point:
I’ve redrawn the graph below, lopping off the data after 2011 because, as I understand it, their point is that historically public investments have been crowded out by entitlement spending, so we should only look at historical data. After all, the point is to look at what has already happened, and once you do that, it’s clear that the data do not at all support Third Way’s hypothesis. The timing is off: 70 percent of the decline in relative public investment happened before 1975, while about 70 percent of the entitlement spending increases happened after 1975. In fact, since the mid-1970s total federal public investment has been relatively stable.
Now, this is not to say that we don’t have a public investment shortage. As the next graph shows, non-defense public investment (infrastructure, education, and research and development) was cut significantly in the early 1980s and never really recovered. But does Third Way really attribute such a precipitous drop—from 2.5 percent of GDP in 1981 to 1.8 percent in 1984—to entitlement spending increases? Perhaps there’s a more obvious explanation: a new conservative president who came into office with an anti-spending and anti-investment agenda and carried it out. Ronald Reagan (abetted by many Democrats in Congress) reduced investments in infrastructure, education, and R&D down to record-low levels, and no president since has been able to fully reverse his cuts.
Now add to that data misinterpretation a heap of irony. As it turns out, Keller and Third Way have both promoted the Bowles-Simpson plan as a “template” for a long-term deficit reduction grand bargain, even though the plan includes deep non-security discretionary (NSD) spending cuts that would likely fall heavily on public investment (nearly half of the NSD budget is comprised of non-defense public investment). As the figure below shows, if you enacted Bowles-Simpson but maintained public investment levels as a share of GDP, you have to cut everything else from 1.7 percent of GDP to 0.3 percent, an implausible cut of over 80 percent. And that’s just to maintain investment levels, whereas Keller and Third Way want to increase public investments as a share of GDP! Couple that professed objective with Bowles-Simpson and you’re talking about bringing the non-investment half of NSD (e.g., funding for government operations, environmental protection, land management, and even Congress itself) down to practically nothing. Simply put, you can’t support both a Bowles-Simpson type budget and an expansion of public investment.
Look, boosting public investment is hugely important—particularly in today’s environment of mass underemployment, a much depleted public capital stock, and cheap financing. It is possibly one of the biggest no-brainer public policies in the history of modern governance, only slightly behind the establishment of a national currency, rule of law, and standardization of weights and measurements. But let’s not kid ourselves: the public investment impasse has nothing to do with Social Security benefits for seniors. We aren’t investing adequately because a significant segment of Congress reflexively opposes these investments for ideological reasons—and intransigently refuses to raise revenue to pay for anything. They opposed non-defense investments when entitlement spending was low, and they opposed them as entitlement spending has risen. It’s really that simple.