Contact: Brian Lustig (202) 331-5530 or Nan Gibson (202) 331-5546

Two decades of neglect threaten 21st century economy

Washington, D.C. – The unmet need for public investment currently totals between $66 billion and $95 billion, and will rise to more than $170 billion in ten years if current spending continues, the Economic Policy Institute reports in a new study.

In The Public Investment Deficit: Two Decades of Neglect Threaten 21st Century Economy, EPI economist Dean Baker finds that federal public investment – spending in areas such as education, transportation infrastructure and technological research – has fallen by one-third over two decades. At the current rate of decline, such investment will drop another 35 percent over the next ten years, falling to about half its peak value in the 1960s and seriously impeding economic growth in the coming century.

Baker notes the widespread acceptance of the importance of public investment to productivity growth, and argues that in their zeal to reduce the budget deficit generated by Reagan-era spending, federal officials have neglected public investment through disproportionate reductions.

He shows that austerity-driven efforts have not resulted in significant improvements to the American economy. Now that the political goal of a balanced budget has been achieved, monies can be shifted from deficit reduction to public investment without harming the economy.

The report’s findings are as follows:

• In order to cut the deficit, both constant dollars and the share of GDP devoted to public investment have been reduced significantly not only from peak levels in the 1960s and ’70s, but also markedly from their level in the early 1990s. Public investment is projected by the GAO to fall 2 percent per year in constant dollars through 2002.
• This decline has hit all categories of public investment, such as education and training, infrastructure and R&D, despite modest Clinton administration initiatives in some areas.
• Economic growth (GDP) over the past five years has been almost exactly the same as the baseline projected by the Congressional Budget Office (CBO) prior to the passage of the first Clinton budget. Therefore, reduction in the budget deficit has had no net positive effect on the growth rate.
• Real interest rates over this period actually have been slightly higher than projected by the CBO. Thus, deficit reduction does not appear to have led to a fall in interest rates – the primary economic rationale for deficit reduction.
• The investment share of GDP in 1997 was 10.4 percent – exactly the same as the investment share at the last business-cycle peak in 1989, when the deficit was 3 percent of GDP. Deficit reduction failed to stimulate more private investment than otherwise would be expected in a business cycle recovery.
• Productivity growth in the current business cycle has averaged 1.1 percent annually, which is virtually the same rate as in the 1980s and significantly below the rates of the 1960s and ’70s. This means that deficit reduction has not improved the economy’s long-run growth path.

“Government investment in education and training, infrastructure, and research and development has a proven track record,” Baker writes. The need to build for the future remains, and in light of the current budget surplus projections, he concludes that “a renewed commitment to public investment must be a central part of this planning.”

Dean Baker is a macroeconomist at the Economic Policy Institute. He earned an M.A. in economics at the University of Denver and a Ph.D. in economics at the University of Michigan. A specialist in monetary and fiscal policy and public finance, Baker is most recently the editor of Getting Prices Right: The Debate Over the Consumer Price Index, and the author of the Twentieth Century Fund paper “An Evaluation of Private Alternatives to Social Security.”

For more information, contact:
Nan Gibson (202) 331-5546
Brian Lustig (202) 331-5530

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The Economic Policy Institute is a nonprofit, non-partisan economic think tank
based in Washington, D.C. Founded in 1986, EPI seeks to widen the debate about policies to achieve healthy economic growth, prosperity and opportunity in the U.S.

To order copies of The Public Investment Deficit, contact EPI at 1-800-EPI-4844 or order online.