Global Crisis/Innovation Blog

Why America Needs a Capital Budget

By Shlomo Maital

Facing the threat of a double-dip recession, as the U.S. economy again slows and joblessness remains stuck at about one worker in 10, President Obama has brought new proposals to Congress.  One of them is a program for investing in infrastructure – roads, railways, airport runways – through an Infrastructure Bank.  According to Bernard Schwartz and David Rothkopf, writing in Financial Times,

“All of the president’s ideas are solid ones with broad potential benefits. In our view, among these, an infrastructure bank is particularly promising and has been misunderstood in many of the initial responses. It is so central to what the US requires at present that voters and leaders in both parties need to examine it carefully and find a way to bring it to fruition.”[1]

Here is the problem Barack Obama and the Democrats face.  They spent $1.2 trillion in “fiscal stimulus” and bailouts, and the American people perceive that a large part of this money was wasted, because, it is a fact, the economy has not recovered despite this massive spending, yet the American people will now suffer the ‘hangover’ from it – paying back the debt that this program created. No-one likes to pay a debt for something that gave no value.

The Republicans are taking full advantage of this.  Hence, at a time when the economy needs more government stimulus, it is doubtful the Congress will agree to it, especially not before the Nov. mid-term elections.

Is there an innovative solution?

Why not simply redefine, restructure and rethink the massive U.S. federal budget?  Why not separate government spending into two parts:  Current and Capital.  Current spending, on things that are used up in a year or so. Capital spending, on things that create assets that yield future income. This includes investment in physical capital (bridges, roads, railroads),  and human capital (education, schools).  Against current spending, no borrowing should occur.  Such spending will not generate assets whose income can pay off the debt.  But against capital spending, borrowing is allowed, because such spending does generate yielding assets that generate the income needed to pay principal and interest.

Will the American people buy this? I believe they will.    Businesses do their budgets this way.   And well-run countries should be managed like businesses.  Americans can understand the difference between wasting billions on bailing out GM and Chrysler, and spending money on modernizing the moribund air traffic control system or putting in an additional runway at Boston’s Logan Airport.  Show them the numbers clearly and accurately, explain them, and I believe they will understand and agree.   Perhaps even a change in politicians thinking will occur.  By creating a capital budget, there will be a strong incentive to starve the current budget and feed the capital one.  Which is precisely the kind of long-run policy America and its run-down physical capital need.

[1] “The right plan to tackle America’s crises”,   www.ft.com,  Sept. 8/2010.