US public investment at lowest since 1947
Public investment in the US has hit its lowest level since demobilisation after the second world war because of Republican success in stymieing President Barack Obama’s push for more spending on infrastructure, science and education. Gross capital investment by the public sector has dropped to just 3.6 per cent of US output compared with a postwar average of 5 per cent, according to figures compiled by the Financial Times, as austerity bites in the world’s largest economy. Republicans in the House of Representatives have managed to shrink the US state with their constant demands for spending cuts, even though their uncompromising tactics have exacted a political price, with their approval ratings in Congress at record lows. Democrats control the White House and the Senate and made no substantial concessions in October’s battle over the government shutdown but Mr Obama is still far from one of the main economic goals of his presidency. The figures underline how across-the-board budget cuts are threatening future growth, as the axe falls heavily on federal investments that boost output, rather than transfers such as pensions and healthcare for the elderly. "This is the motivation for the president’s desire to significantly increase public investment," said Jason Furman, chairman of Mr Obama’s council of economic advisers, and a close aide since the days of his 2008 presidential campaign. "New authority for federal investment in the 2012 fiscal year was $475bn; you look at our proposal for 2014 and it’s $624.8bn. We are proposing a very large increase and that’s because the country is not investing enough in its infrastructure and it’s not investing enough in R&D." The figures come as Republicans and Democrats begin new budget talks on tax and spending plans for the rest of 2014 once a short-term deal expires in mid-January. Democrats will push for relief from across-the-board cuts in public spending, known as sequestration, but most analysts expect a modest deal at best. Kirk Dale, the township supervisor of Marlette, Michigan, has first-hand experience of what it means to spend less on infrastructure. Thirty years ago, he felt his small town was on the rise when Cooper Road, a local residential street, was first paved. But today, Marlette cannot afford the maintenance and has joined a number of small communities that have pulverised their streets and gone back to gravel. "You make a calculated, rational decision on which mile to do," said Mr Dale, the township supervisor. "And then you look long-term down the line saying ‘Hey, even if we were to pave this, how are we going to repave this 10 or 15 years down the line?’" It can cost $60,000 a mile to pave a road and the bill repeats itself every 10 years, said Dale Stolicker of the Sanilac County Road Commission, which approved Marlette’s unpaving contract. It costs between $10,000-$20,000 per mile to tear up a road but maintenance fees fall to $300 a year for dust control. Pressure on infrastructure budgets has become acute since the Great Recession of 2008-09 but public investment in the US has been weak since the late 1960s. Highways spending, for example, has fallen steadily since 2000 because the main sources of revenue for it – fuel taxes – are not linked to inflation while cars have become steadily more fuel-efficient. Reversing such trends was part of Barack Obama’s economic pitch from the moment he started campaigning for the US presidency. In a June 2008 speech at Kettering University in Flint, Michigan, he made investment in innovation, education and infrastructure the main answer to the economic challenges of technology and globalisation. "Entitlement spending is bound to increase as the Baby Boom generation retires," said Mr Obama back then. "But the answer to our fiscal problems is not to continue to short-change investments in education, energy, innovation and infrastructure – investments that are vital to long-term growth." Public investment picked up at the start of Mr Obama’s term – temporarily rising to its highest level since the early 1990s – because of his fiscal stimulus. But that has been more than reversed by subsequent cuts. The biggest falls are in infrastructure, especially construction of schools and highways by states and municipalities. Federal funding for research and development has only fallen modestly so far but will decline much further under any budget path that continues sequestration. That threatens a fundamental source of productivity growth for the whole global economy because so many scientific breakthroughs are funded by US bodies such as the National Institutes of Health. Although the intuition of most economists and businesspeople is that failure to invest in infrastructure will be bad for growth, the evidence is quite mixed, and it is hard to pin down what the "correct" level of public investment should be. Michael Leachman, director of state fiscal research at the Centre on Budget and Policy Priorities said: "Schools and transportation networks – these things are fundamental building blocks of a state’s economy. If a state’s unable to make investments in these things then its long-term growth will suffer." Douglas Holtz-Eakin contributed to the academic debate on public investment in the 1990s and is now president of the centre-right American Action Forum in Washington. He noted that studies on the US find growth and public investment were both high in the 1950s and 60s but low in the 1970s and 80s. "The question is which way you draw the causality," he says. Infrastructure came to seem less important during the internet boom of the late 1990s when the economy grew rapidly despite low public investment. But Josh Bivens, at the left-leaning Economic Policy Institute, argues that the 1990s now look like a one-off and says recent research implies the US public sector is investing less than it should. "I think the consequence of low public investment is lower productivity growth going forward unless it is reversed," says Mr Bivens. He argues it should be a high priority even amid other things that the left wants to spend money on. "It’s good near-term stimulus, but we should commit to a higher level of public investment even if we return to full employment," he says, arguing that the benefits of infrastructure-led growth would be widely shared. Mr Holtz-Eakin agrees that it makes little sense to cut public investment when the main driver of long-run deficits in the US is increasing spending on pensions, healthcare and other entitlements. He argues that the way to win Republican support is with reforms to make sure funds are spent efficiently. Most researchers find big variations in returns on public investment depending on when, where and what the money goes to. "One thing we’ve learned is there’s no automatic, disproportionate return from public investments that mean they should get a pass from scrutiny," says Mr Holtz-Eakin. "The second lesson is that we should probably think as much about reforming public investments in the US as increasing them." For example, he said there should be fewer individual pots of money for infrastructure, which require spending on particular kinds of transportation rather than those that are most valuable. But there is broad consensus that some kinds of public investment bring very high returns for the rest of the economy – such as spending on basic scientific research or fixing infrastructure bottlenecks – and they are under grave threat from today’s swingeing spending cuts in the US. That just adds to the frustration of the Obama administration. "You are missing an opportunity to both create jobs in the short-run and have a stronger basis for productivity growth in the long-run," Mr Furman said.