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The Public Investment Deficit: Two Decades of Neglect Threaten 21st Century Economy

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February 1998 Briefing Paper

THE PUBLIC INVESTMENT DEFICIT


Two decades of neglect threaten 21st century economy

by Dean Baker

Introduction

Over the past two decades, federal support for virtually all categories of public investment has declined significantly. Since its peak in the late 1970s, federal spending on public investment, measured as a share of total economic output, has fallen by more than a third, and it will fall another 35% over the next 10 years on the current spending path. These projected spending declines-in education, infrastructure, research and development, and other areas-could significantly impede economic growth in the next century.

The primary factor behind these cuts has been pressure on the overall budget. The efforts to pare back the Reagan-era deficits has required significant constraints on spending, and investment expenditures, which often bear no return until far in the future, have been vulnerable targets. As a result, most categories of public investment have seen proportionately larger cutbacks than the rest of the federal budget.

In the last several years the budget situation has improved enormously. Spending has fallen below projected levels, tax collections have run ahead of projections, and, as a result, the deficit has virtually disappeared. This new situation creates the possibility of setting priorities under a budget that is in or near balance.

It is widely accepted among economists that public investment is important for productivity growth. Investments in education and training, physical infrastructure, and basic research have contibuted substantially to the economy’s growth over the last half century. In fact, some studies have indicated that expenditures on public investment actually have more of an impact on productivity than do expenditures on private investment (e.g., Holtz-Eakin and Schwartz 1994; Munnell 1994; and Aschauer 1990). But even if the impact of public and private investment on productivity is roughly comparable, the recent trends should provide grounds for concern, since we have seen a decline in public investment with no offsetting rise on the private side. This shortfall raises serious questions about whether future workers will have the education and training they need to be productive, whether the nation will have the appropriate infrastructure to support the technologies of the next century, and whether basic science is advancing at a pace needed to sustain innovations and technological advancements.

This paper sets out the case for a renewed commitment to public investment in this new budget context. It consists of four sections. The first examines the path of public investment over the recent past and projects it into the future. The second section examines the current economic and budget situation and the path of private investment in this business cycle. It looks particularly at whether the drive to reduce the deficit, which was primarily responsible for cuts in public investment, has had any compensating positive effects for the economy. The third section updates a 1991 estimate (Faux and Schafer 1991) of investment needs in a variety of categories of physical and human capital. Finally, the fourth section details three specific areas-Head Start, school repair and renovation, and environmental technologies-in which additional expenditures on public investment might be especially productive.

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