Friday, September 21, 2012

Unconstrained Politics and Government Spending, or, Is It Too Dangerous to Give Congress the Power to Call Some Projects "Investments"?

-- Posted by Neil H. Buchanan

In a post two weeks ago, partly in response to a student's inquiry regarding my advocacy of federal deficit spending, I described some extremely powerful examples of government investment spending that had recently been shown to have enormous payoffs.  These two investments (a massive research program in human genetics, and infrastructure spending to protect New Orleans from suffering a repeat of the devastation wrought by Hurricane Katrina) are exactly the type of spending that can easily be justified, even if they are financed with borrowed money.  (Indeed, as I have argued here on DoL, good financial accounting would suggest that they should be financed by borrowing, even if there were the political will to pay for them up front.)

The student who inspired that post has an accounting background, so she completely and immediately understood the fundamental concept of "capital budgeting" -- classifying government spending into the separate categories of investment or non-investment programs -- and the logic of borrowing to finance the investment projects.  Showing how quickly this discussion returns to politics, however, she followed up with the statement that she simply does not trust Congress to make responsible decisions about which projects are high-payoff projects (and thus can be financed with debt).  Her skepticism is, of course, well-founded -- and, if anything, has become even more salient as the mindset among the newest members of Congress has become ever more unhinged from reality.

Therefore, my immediate response to the question, "But can we trust Congress?" was, "Of course not, and I don't intend to."  I then gave a shorthand description of my proposal to create an expert commission, the Growth Budgeting Board (GBB), to prevent exactly the kind of game playing that jumps to any reasonable person's mind when we consider giving Congress the power to borrow for "good" spending.  (My DoL post describing the proposal is here.  The law review article is available here.)

The underlying problem is that separating the federal government's investment projects from non-investment projects, and then allowing/requiring investment projects to be financed with borrowed money, makes it politically "cheaper" to approve investment projects.  Non-investment projects, after all, would have to be paid for with current-year tax revenues, which have an immediate political cost.  Because of the cognitive defects of our political system, the path to approving such projects would thus be rockier than those that had been blessed as "investments."

And one need not be a right-wing anti-government zealot to be skeptical about the long-term payoffs of some proposed investments.  (Right-wing anti-government zealots simply believe that there is no such thing as government investment.  For them, it is not even an empirical question, much less a difficult one.)  Just as a teenager tries to convince his parents that having a car of his own will be "totally worth it" -- allowing him to help with trips to the grocery, more regular visits to study at the library, and so on -- politicians at all levels of government have shown again and again that they can be equally giddy (if not more so) when it comes to telling implausible stories to justify pet projects.  The supposed payoffs from building new sports stadiums are not even the most absurd fantasies.  (My personal favorite is the federally-financed Lawrence Welk Museum, in North Dakota -- but that is only because my grandparents tormented us as kids by forcing us to watch "The Lawrence Welk Show" on Sunday evenings.)

Therefore, my GBB proposal is an attempt to use technocrats to discipline the Congressional budgeting process.  If you give Congress a tool to make projects look too cheap, then you should worry that Congress will abuse that tool.  Politically insulated professionals, using well-established accounting standards, would be able to prevent Congress from running amok (at least partially).  One can disagree with my analysis on multiple levels, but that is the core idea: Congress often misbehaves, so we need to figure out ways to discipline them.

Although I continue to believe that a GBB-like entity would be the right way to go (or, better still, simply having the Congressional Budget Office add GBB-like analysis to its existing scope of work), my student's question has caused me to think anew about a related question: What if we created a capital budgeting system (in which projects designated as "high-payoff investments" could be financed by deficit spending), but we did not also create a disciplinary mechanism to keep Congress's worst impulses in check?  Although that would be worse than my proposal, would it be worse than the status quo?  I doubt it.

Recall that, under the current system, we implicitly treat all government projects as having the same long-term payoff: exactly zero percent.  No matter how the government's money is spent, we act as if it is either pure waste or only a "sugar high" (to steal a phrase that is currently being misused to attack the Federal Reserve).  This means that, when Congress goes on the hunt to cut spending -- trying to prove that it is serious about fiscal discipline -- everything is on the chopping block.  One dollar of cancer research is the same as one dollar spent to cover a classical statue's partial nudity.

If Congress could designate some spending as investment, there would certainly be a lot of inaccuracy involved.  Some worthy projects would never be funded, or would be misclassified as non-investment.  Some wasteful projects would show up on the list of investments.  I have no doubt that the result would be highly inaccurate (both over- and under-inclusive), to say the least.

Again, however, the question is whether that would be worse than the non-system that is in place today.  It is difficult to see how it could be.  The procedural maneuvers and raw political power that would allow a member of Congress to "protect" a favored program by putting it on the investment list are all available now, to continue to fund the programs in the current system.  The only way that this could be worse is if the existence of the favored list would create its own inertia, so that a project that might have come under scrutiny in a world without a special designation would be free of scrutiny in a system of capital budgeting.

That latter possibility seems remote.  For one thing, most of the least defensible projects are not ongoing, but are rather one-shot deals.  There are, moreover, plenty of ways to sneak bad projects into spending bills now.  It seems no different to wage any battle that might be fought at the "Is it an investment?" level in a capital budgeting system than it is to wage that battle over including the project in an appropriations bill under the current system.  I realize, of course, that there are actually very few such battles; but again, I think that the low level of scrutiny would be identical in either case.

On the other side of the ledger, it seems likely that the investment list ("good" spending) would include at least some projects that actually ought to be there, and that would not otherwise be approved for funding under our current system.  The upcoming "fiscal cliff" partly involves across-the-board cuts in programs that are not differentiated as investments or non-investments, with certain categories of spending excluded (Social Security, Medicare, Medicaid, interest on debt).  If we had had a category of high-payoff investments in place, it is much more than plausible that those projects would have been spared the automatic cuts.  And even in regular, day-to-day budget battles, money for infrastructure or education could be more reliably preserved if it were designated as an investment.

As always, therefore, this involves a series of educated guesses about what Congress would do.  Even if I am too optimistic about the low likelihood of funding still more Lawrence Welk Museums, it certainly seems unlikely that any such additional waste would outweigh the gains from protecting real investments.

If, therefore, a proposal were made to separate the federal budget into investments and non-investments, but without any disciplinary mechanism imposed on Congress, I would still support it -- not because I trust Congress, but because I think they have already done about as much damage as they can do in this area, while the new process could preserve some important investments in future prosperity.