2015 offered extraordinary opportunities to strengthen America’s economy. Sadly, our elected leaders failed to do much to take advantage of opportunities to build a widely prosperous future.
Let’s take a look at where America’s leaders could do better in 2016.
Our economy suffers because we neglect investment in commonwealth goods and services, the foundation on which private wealth is built. Government investments are, and always have been, crucial to economic prosperity. Yet starving our public sector has become widely accepted policy.
Net public investment per capita at all levels of government, excluding the military, is slipping. The total invested is down to about a half of one percent of our economy. That means our roads, bridges, public buildings, equipment and software are wearing out as fast as we maintain them. There have been almost no net additions to our commonwealth in this century.
By 2020 we need to invest at least $3.6 trillion — roughly one year of federal spending — just to make our infrastructure safe and reliable, the American Society of Civil Engineers calculates.
Our research into understanding and mastering the universe, from making more efficient engines to more complex algorithms, is what enables economic growth. But for taxpayers in the last century spending money to develop jet engines and pressurized fuselages, we would not enjoy jet travel. But for government-funded research in mathematics, exotic materials and computer science, we would not have our cell phones or the Internet.
Yet federal spending on research and development, excluding the military, has been virtually unchanged in this century at about $66 billion per year. The only growth has been in military R&D, up 37 percent in real terms since 2000 to $75.7 billion this fiscal year.
This paucity of government investment is not uniquely American. The World Economic Forum estimates that human beings invest $2.7 trillion annually in energy, telecommunications, mass transit and water systems. Big as that number is it is less than two-thirds of what is needed for safety and efficient commerce, falling short by $1 trillion a year.
Christine Lagarde, the managing director of the International Monetary Fund, said last year that “we need higher investment today for stronger growth tomorrow,” noting that private investment had not made up for cuts in public investment.
Our most valuable asset, though, is not physical structures such as roads, dams and sewers. Our most valuable asset is the gray matter between young ears, into which we must invest more if we are to prosper in the ever more complex future we are entering. Yet taxpayer support for education is waning, with ever more money drawn off for administration and charter schools.
State-level taxpayer support for four-year public colleges fell 17 percent in real terms from the 2006–2007 academic year to 2012–2013, my analysis of National Center for Education Statistics data shows. Appropriations declined to $45.8 billion.
Federal appropriations, while only a tiny sliver of public four-year college budgets, fell even more, down 19 percent in real terms to $1.6 billion as Congress and President Barack Obama agreed on austerity budgets.
At the same time total spending by these public schools rose by $23 billion, or 9 percent. Higher tuition and fees explain almost three-fourths of the increase.
Higher tuition means fewer students will get college and post-graduate degrees. Raising tuition also means more students will work long hours while in college, reducing the time and focus they can devote to study, and will leave college in debt, restricted on what jobs they can afford to pursue and limited in what they can spend on their lives.
There’s a word for reducing public investments in brainpower: dumb.
Investing means deferring consumption today for future benefits. Investing in young brains is just like investing in your 401(k): you have less to spend now, but much more in the future. Thank goodness that Americans in the last century invested heavily in education, from the GI Bill to making college free or nearly so in many states as well as in basic research.
The smart policy right now would be take advantage of two closely related opportunities. First, America has a glut of savings at the top. So much money, chased by too little ability to buy more corporate goods and services, can be turned to our advantage. Doing so will also create profitable investment opportunities for the corporate sector.
Second, we remain in a period of exceptionally low interest rates even with the Federal Reserve’s modest increase this month in short-term interest rates. This means that the public sector can borrow from those cash-rich people and institutions at almost the lowest interest rates in 700 years. Invest that money in projects that make commerce more efficient, such as roads and water systems, and in making college free for serious students and we will earn huge rewards going forward.
Worried about inflation? I’m not, but if you believe that inflation is just around the corner, then you should be championing borrowing at today’s low fixed rates. If inflation re-emerges it would mean real interest rates — the sum of the posted interest rate minus inflation — going negative. Inflation would also reduce the value of the borrowed dollars paid back in the future, a discount that would produce benefits for everyone but the lenders.
If you are not aware of these basic economic facts, it’s not surprising. Our national political leaders give only cursory mention of the role of taxpayer-funded investment in prosperity. The editorial pages of our leading business publications, especially Forbes and The Wall Street Journal, champion current consumption over greater investment by government, a smart marketing tactic to draw money-focused readers that does terrible damage to popular understanding of economics.
The economic equation here is simple: more public investment in basic science, education and infrastructure equals more wealth, both individual and national. Smart public investments pay for themselves many times over.
If you like our current economic conditions, in which a lucky few are doing very well and most people tread water, then reelect these austerity politicians and applaud the tax cuts just signed into law by President Obama. If you vote next year for the same leaders, expect the same results. And if you don’t vote, don’t complain.
If you want a smarter, more pleasant and prosperous America, then act. Tell others we need to up our investments in tomorrow. And get yourself and others registered, to the polls and voting for politicians who promise more public investments to create a better future.