There is a simple reason for the federal government’s dismal financial outlook: its outlays are growing far faster than its revenues. Typical solutions for this problem involve some combination of slowing the rate of spending growth and increasing revenue collections.
It’s a sound strategy, but its implementation encounters major political problems. As that prolific author Anonymous said, “Watching the Republicans and Democrats argue over these issues is like watching two drunks fight over the bar bill on the Titanic.”
The problems associated with actually cutting spending and increasing revenues make major capital investments- the kind that can create new jobs, boost productivity and create tangible assets that can continue promoting economic activity long after the federal dollars have been spent- another option for solving our daunting problems.
Raising revenue usually means boosting tax rates or eliminating tax deductions, like the one for home mortgage interest. This is politically difficult to achieve, given the perception among many in Congress that voting for tax increases is tantamount to announcing your forthcoming retirement from elective politics.
Similarly, slowing spending growth probably means cutting Social Security, Medicare and Medicaid, all of which are bound to be opposed by retirees- a large and growing component of the nation’s voters.
How else can we boost gross domestic product (“GDP”) so the federal government can grow its way out of the economic crisis?
One option is to have the Federal Reserve work overtime to pump up the nation’s money supply. If this leads to a rise in prices, the same number of widgets sold tomorrow would produce more income for the widget firm and more tax revenue for the government.
Inflating the current dollar value of GDP will generate more revenue with no change in tax rates (which is why it’s been so popular throughout history among many national governments). However, raising prices will reduce the buying power of federal outlays. Total outlays will have to be increased to keep up with higher prices, leaving us right back where we started.
Increasing GDP without raising prices would progressively narrow the gap between the growth of total outlay dollars and the growth of total revenue dollars. This would be the macroeconomic equivalent of being home free. Major capital investment is a way to get there that has a proven track record.
A too-often forgotten legacy of President Roosevelt’s New Deal was massive federal capital investment in economic growth projects like rural electrification, the Tennessee Valley Authority and Boulder Dam, not to mention hundreds of commercial airports like LaGuardia and JFK in New York City, thousands of modern post offices, schools and local courthouses. Two decades later President Eisenhower, the Republican New Dealer, began building the 41,000-mile Interstate Highway System.
America has been living off these investments ever since. Their contribution to decades of job growth and increasing national prosperity has been so enormous that we’ve come to take them for granted.
Now is the time to again develop a series of major capital programs to create jobs and build a better, stronger, more prosperous nation.
Capital investment programs can generate the kind of near-term, non-inflationary economic growth needed to solve our looming financial problems without having to raise taxes or cut popular middle class benefit programs. They can, in fact, enable us to grow our way out of financial trouble.
But escalating federal budget deficits and skyrocketing debt, even at historically low interest rates, raise questions about government’s ability to come up with the start-up dollars. One solution is to recruit private firms as active partners to help start, fund, and run as many of these programs as possible.
If properly structured, such public-private partnerships could tap into the billions of dollars in private capital hungering for low-risk investment opportunities that offer decent rates of return. These New Deal style programs provide such an opportunity, greatly minimizing the need for scarce government dollars.
If the common-sense approach of cutting spending and raising revenue isn’t politically feasible, a partnership between the federal government and the private sector to embark on a program of major capital investments is the best route to growing our way out of a daunting fiscal mess.
originally published: September 29, 2012