Ending America's Public Investment Drought
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ENDING AMERICA’S PUBLIC INVESTMENT DROUGHT Ending America’s Public Investment Drought Ben Ritz Brendan McDermott December 2018 P1 ENDING AMERICA’S PUBLIC INVESTMENT DROUGHT DECEMBER 2018 Ending America’s Public Ben Ritz Brendan McDermott Investment Drought INTRODUCTION Economists from Adam Smith Unlike private investments, investments in public goods generate benefits that accrue onward have understood that not to individual investors but rather society free markets don’t exist or as a whole. Thus, the responsibility for investing 1 in public goods falls on government: the one thrive in a state of nature. institution that represents all citizens and They are nestled within a therefore has an obligation to act in the common framework of governance interest. Public investments such as education, infrastructure, and scientific research lay the that defends societies against foundation for long-term economic growth outside threats, writes and and shared prosperity. Only by making these enforces common laws, and investments can governments facilitate the success of private enterprise and free markets. provides public goods – those For over three decades following the end of that all people need but that World War II, policymakers in the United States private actors would have little dutifully fulfilled this obligation and invested in incentive or ability to develop America’s future. The post-WWII G.I. Bill provided unprecedented access to higher education for 2 on their own. returning veterans and their families regardless of their financial situation, giving them an opportunity to pursue a lucrative and fulfilling career while providing businesses access to a skilled workforce.3 The Interstate Highway P2 ENDING AMERICA’S PUBLIC INVESTMENT DROUGHT System connected people from across the infrastructure, and scientific research averaged country to exchange goods and services – and about 2.5 percent of gross domestic product still supports one quarter of all vehicle traffic (the total value of all goods and services over 60 years later.4,5 And the “Space Race” of produced by the United States in a given year). the 1960s resulted in the development of new Investment spending at that level would have technologies from LEDs to water purifiers that been equal to roughly $470 billion in 2017. Yet in continue to benefit our society today.6 reality, the federal government spent just $300 billion on public investment in 2017 – less than But in recent years, policymakers have defaulted 1.5 percent of GDP.7 If current trends continue, on their fundamental responsibility to maintain such investment is projected to reach its lowest sufficient public investment. Between 1965 level in modern history by 2026 (Fig. 1).8 and 1980, federal spending on education, Figure 1. Federal Public Investment Spending Over Time 30 Historical Proected 25 20 15 E T Per P Per 10 P 05 Resear Dev 00 2010 2020 1970 1980 1990 2000 2015 2025 1965 1975 1985 1995 2005 Note: Education & training excludes federal student loan programs, which can be unpredictable and fluctuate from year to year based on repayment rates. Projections assume public investment changes at the same rate as total non-defense discretionary spending and that discretionary spending increases from the February 2018 budget deal are continued.9 Sources: Office of Management and Budget10,11,Congressional Budget Office12,13, St. Louis Fed14, Committee for a Responsible Federal Budget15, and PPI calculations P3 ENDING AMERICA’S PUBLIC INVESTMENT DROUGHT If the current generation of policymakers fails to budget for investments in a better future. “pay it forward” by maintaining and building upon Meanwhile, state and local governments are the investments made by their predecessors, also cutting back their public investment young Americans and future generations will spending due to similar demographic and not have the kind of opportunities for economic political challenges. The bills for unfunded and social advancement that their parents and pension liabilities are coming due as a massive grandparents enjoyed. Instead, they would face number of public employees move into a future of diminished economic dynamism retirement. The cost of state commitments and growth, lower productivity and wages, and to health programs such as Medicaid are also greater social inequality and class conflict. swelling due to the same rising health care Simply put, the de-facto policy of disinvestment costs that pressure Medicare at the federal is a formula for national decline. level. And while policymakers in some states Rather than address this looming threat, current are working to tackle these problems, others policymakers have been making America’s public have made matters worse by enacting their investment drought worse. Donald Trump and own reckless tax cuts based on the same the Republican-controlled Congress abandoned flawed ideology as Republicans in Washington. any pretense of fiscal responsibility and enacted The result is cuts to public investment at all a package of partisan tax cuts in 2017 that levels of government. the official scorekeepers at the non-partisan Fortunately, there are signs that the American Congressional Budget Office estimate will cost people appreciate the stakes: large majorities more than $2 trillion over the next decade.16 of voters in both parties have expressed These policies provided tax relief to those who strong support for government spending on needed it least while draining much-needed public investments in several independent revenue from public investments that could polls.17,18,19 Additionally, a poll conducted by benefit everyone. PPI on the eve of the 2018 midterm elections But the federal government’s fiscal challenges found that more respondents were worried extend beyond insufficient revenue. America’s about the growing federal budget deficit than aging population and rising health care costs any other issue polled – including almost 9 out are causing spending on expensive federal of 10 independent voters.20 health and retirement programs such as These findings suggest that Democrats Medicare, Medicaid, and Social Security to grow serving in the 116th Congress (or running significantly faster than the rest of our economy for higher office in 2020) have a unique – a trend that members of both parties, but opportunity to draw a stark contrast between particularly Democrats, have largely refused themselves and fiscally irresponsible to tackle. The result is that many people who Republicans by offering the electorate an consider themselves progressives have become agenda that pairs robust public investment in complicit in a profoundly unprogressive policy progressive priorities with the fiscal discipline of throttling public investment. These forces necessary to secure those investments for together are producing ballooning public debts generations to come. while leaving less and less room in the federal P4 ENDING AMERICA’S PUBLIC INVESTMENT DROUGHT KEY TAKEAWAYS That disinvestment threatens basic scientific The goal of this report is to highlight for research that lays the foundation for new American policymakers and their constituents industries and technological innovations. the role that public investment plays in providing • This year, for the first time in modern the foundation for a prosperous economy, as history, China – not the United States – will well as the steps that must be taken to end be the global leader in R&D spending. If America’s current public investment drought. policymakers don’t boost public investment The first three sections provide an overview and in R&D, they risk forfeiting America’s position analysis of the three main categories of public as the global leader in innovation. investment in the United States: research and Our Infrastructure is Obsolete and Falling Apart development (intellectual capital), infrastructure (PP. 13-16): (physical capital), and education (human • Common public goods such as roads, school capital). Next, the report demonstrates how buildings, electric grids, and water systems these public investments both create long-term provide the physical foundation for private economic growth and ensure its benefits are investment and enterprise. But in recent shared by all. Finally, the report explores the years, that foundation has been allowed to external forces that have resulted in recent cuts crumble as total government spending on to public investment, with one section on the infrastructure has fallen to record-low levels pressures facing the federal budget and another as a percent of GDP. on the parallel challenges facing state and local governments. • Several independent estimates suggest the United States will need to spend roughly In 2019, PPI’s Center for Funding America’s $1.4 trillion more on infrastructure than Future will offer concrete proposals for a fiscally it is currently projected to spend over the responsible public investment agenda that next decade. Failure to reverse America’s fosters robust and inclusive economic growth. disinvestment in infrastructure could reduce We’re Falling Behind in Research and GDP by nearly $4 trillion over that time Development (PP. 8-13): period, costing the average family about • Federal R&D spending has contributed to $3,400 per year. countless technological innovations that • Investments in infrastructure also boost enrich our society. To take just one example, economic growth in the short term by a study of NIH’s Human Genome Project creating well-paying jobs today. Roughly