Commentary | Budget, Taxes, and Public Investment

How to lose the future in one easy step: Boehner budget drastically cuts public investments

In February, President Obama challenged Congress and the nation in both his State of the Union address and 2012 budget to a policy agenda of “winning the future.”  This meant boosting public investments in areas such as education, transportation, energy, broadband, and basic scientific research in order to enhance U.S. global competitiveness and lead to long-run economic growth.

Unfortunately, House Speaker John Boehner’s proposal to raise the debt ceiling in exchange for $1.1 trillion in spending cuts over 10 years doesn’t just fail to boost public investments, it drastically cuts them to dangerously low levels. This analysis finds:

  • Boehner’s proposal would cut the non-defense discretionary (NDD) budget by about 18% in 2021.
  • The NDD budget houses 95% of all non-defense public investments—such as infrastructure, education, and basic scientific research.
  • It is nearly impossible to protect these public investments from cuts because they represent nearly half of the total non-defense discretionary budget.
  • Assuming the discretionary savings come from the non-defense budget, and assuming proportionate cuts are made to both public investments and the rest of the non-defense budget, the Boehner proposal would slash public investments as a share of the economy by almost 45%, to 1.3% of GDP, the lowest level in over half a century.

The case for public investments

The case for higher public investments is overwhelming. First, the need is clear. The United States is falling behind in educational attainment and broadband access and connectivity. Blackouts caused by our antiquated electricity grid are occurring with greater frequency, and much of our transportation infrastructure is literally crumbling beneath our feet.

Second, public investments are vital to economic growth by contributing to higher productivity, fueling higher incomes and raising living standards. A recent and comprehensive review of the literature on this topic finds that a sustained 1% increase in public capital growth rate translates into a 0.6 percentage-point increase in the private-sector GDP growth rate, while certain investments—such as those in early childhood education—provide an even greater bang for the buck.[1]

Third, now is the perfect time for public investments. Higher investment levels will create jobs in construction and education and throughout the economy at a time when we need them the most.

Fourth and finally, the recession has caused the private sector and state and local governments to reduce their investment, leaving a large deficit in our stock of physical, human, and knowledge capital and potentially leaving the next generation economically scarred.[2]

In fact, there is a substantial cost to even delaying these critical public investments. It costs much less to repair a bridge than to rebuild it after its collapse. And while the cost of financing these investments is currently at historic lows, it won’t be forever.

In other words, cutting public investments doesn’t just harm us now—rather, it operates as the functional equivalent to a tax on future generations. They are the ones who will be increasingly burdened by an antiquated and crumbling infrastructure and a poor education system that leaves them unable to compete in the global labor market. They will live in a country with fewer opportunities as industry moves the knowledge and innovation jobs of tomorrow to the same place they moved the manufacturing jobs of yesterday: overseas.

The Boehner proposal

Speaker Boehner has released a proposal that would cut the discretionary budget by $1.1 trillion and start a legislative process to cut another $1.8 trillion, which would be accomplished mainly through cuts from mandatory spending.  It is also clear that most—if not all—of the initial $1.1 trillion would come from the non-defense discretionary budget (Boehner’s proposed base defense funding for 2012 is actually higher than 2011 appropriations, meaning that over 100% of the discretionary cuts in the coming year would come from the NDD budget).

This cut puts hundreds of billions worth of public investments in jeopardy.  Nearly half of the non-defense discretionary budget is public investment, which represents 95% of the total federal government’s non-defense public investment in a given year.

According to the Congressional Budget Office, that initial cut in budget authority would result in an $889 billion reduction in outlays over 10 years.[3]  Assuming that this entire cut is applied to the NDD budget, and assuming that public investments are cut proportionately to other parts of the NDD budget, public investments would be cut by 18% in 2021.[4]

But the proper baseline for assessing cuts to public investment isn’t nominal or real total outlays, rather it is spending as a share of the economy. Using that measure, public investment as a share of the economy would be cut by 45% in 2021 relative to its share of the economy in 2011.  As the figure shows, the Boehner plan would cut public investment down to the lowest level in over half a century.

And voila!  Losing the future in one easy step.  Sorry, future generations!

[1] Heintz, James. “The Impact of Public Capital on the U.S. Private Economy: New Evidence and Analysis.” International Review of Applied Economics, 24(5): 619-32.

[2] Irons, John 2009. “Economic scarring: The long-term impacts of the recession” Economic Policy Institute, Briefing Paper 243, Washington, D.C.: EPI.

[3]Congressional Budget Office. Letter from CBO Director Douglas W. Elmendorf to Hon. John Boehner, July 27, 2011.

[4] Public investment account-level data provided to EPI by Office of Management and Budget staff, available upon request.