America's capital investment deficit
Friday, December 31, 2010; 11:41 PM
"Lose weight and get fit" is a good New Year's resolution. Not necessarily for you, dear readers, as half of you are extremely handsome and the other half, stunningly beautiful (and all of you have great taste in newspapers). But for the government, it's spot on.
Of course, the government is constantly talking about losing a few inches around the deficit. What worries me, though, is that the "get fit" part will get forgotten. The government can no more cut its way to a strong economy than a person can starve himself to health. Andy Stern, the former president of the SEIU and a member of the president's fiscal commission, nails the point in his dissent to the commission's final report. America, he says, has two deficits: The budget deficit we're all used to hearing about. And the investment deficit that often goes unmentioned.
The two deficits are more alike than people realize. Larry Summers, the outgoing director of the National Economics Council, explains it well: "You run a deficit both when you borrow money and when you defer maintenance that needs to be done. Either way, you're imposing a cost on future generations." A dollar in delayed road repairs and a dollar in borrowed money are not, in other words, that different: Both mean someone is going to have to spend a dollar later. In 2011, America should stop passing that buck.
Infrastructure is the easiest place to start. The American Society of Civil Engineers estimates that the nation needs about $2.2 trillion in infrastructure repairs and upgrades merely to bring the existing infrastructure up to "good condition." But has America's rallying cry really gone from "We're No. 1" to "We're only $2.2 trillion away from good condition"? How inspiring.
Our runways are clogged, our rail system is decrepit, and our levees - well, the ASCE gave our levees a D-minus - and its report came out four years after Hurricane Katrina. But in 2011, infrastructure is more than roads, rails and runways. The United States lags the rest of the developed world in broadband speed, penetration and cost. The country has no smart grid to speak of. We don't just need to bring our infrastructure up to "good condition." We need to make it better.
Here's the good news: Infrastructure investment is the best deal in the economy right now. Government borrowing costs are lower than they've been since the 1950s. Unemployment in the construction sector is above 15 percent, which means companies are desperate for work and bids to complete projects are coming in low. A weak global economy means cheap raw materials. Bottom line? These investments are more affordable now than they're likely to be in a few years. We'd be foolish to miss this opportunity.
But it's not just our physical capital that needs investment. Our human capital does, too. Our schools spend a lot of money but fail a lot of children. We don't have a national system of pre-kindergarten, despite an almost endless amount of evidence that pre-K education has huge returns for every dollar spent and is probably the single most valuable investment we could make in the country's future. We know that the value of a college education has increased in recent decades but that the percentage of Americans who graduate from college has stagnated - a trend that economists Claudia Goldin and Lawrence Katz estimate accounts for about two-thirds of the run-up in our skyrocketing income inequality.
Then there's intellectual capital. Research and development are good things in normal times but are even more necessary when the 10 hottest years on record have all been within the past 13 years and every attempt to price carbon has fizzled in the Senate. We either innovate our way out of climate change, or we're not getting out of it. And though this will come as, ahem, cold comfort to those of you who've spent the past week in a Sisyphean struggle with the snow on your walk, 2010 looks likely to be either the hottest or second-hottest year on record. We need to be spending a lot more on a Manhattan Project for renewable energy, routed through a professional, independent agency modeled on the National Institutes of Health.
Not all of this requires new money. In many cases, what's needed is not money at all, but the resolve to make difficult decisions to close, simplify or, at the very least, rigorously evaluate existing programs.
Take broadband. The Federal Communications Commission is responsible for the Universal Service Fund, which collects almost $8 billion annually to subsidize rural telephone lines. You might wonder whether - in an age when voice-over-Internet services are both common and cheap, when cellphone coverage is almost everywhere and when online connectivity is an economic necessity - that money shouldn't be going to broadband coverage. As it happens, pretty much everyone wonders this. The problem is that attempts to do anything about it have been fought by rural telephone companies and their allies in Congress.
Or education. One common refrain of employers is that we don't graduate enough science and engineering majors. When he served on the president's fiscal commission, Dave Cote, chief executive of Honeywell, made this a big theme. Working with Sen. Tom Coburn and Stern, he identified 110 programs meant to increase the number of science and engineering graduates - but no data on whether they were working.
Sen. Kent Conrad, chairman of the Budget Committee and a fiscal commission member, made a similar point about job training: "There were over 40 different job training programs, with very little coordination between them, and different definitions of who was eligible. And there were almost no metrics on any of them."
The government's problem with self-evaluation - and thus with self-improvement - has been noticed outside the fiscal commission, too. Michael Greenstone, director of the Hamilton Project, remembers his time as chief economist for the president's Council of Economic Advisers. "In the first year of the Obama administration," he says, "I appointed myself to run around and argue that the stimulus was the greatest opportunity for evaluation of federal programs that's ever happened. But the federal government is not equipped to do that. No one is against it, really, but it's not a priority. It's not part of the culture. And so it doesn't have the sense of urgency that running a fit government would require."
The problem, Greenstone continues, is that the government simply doesn't have good data on what works and what doesn't. But there's a solution. "We should take one-half of 1 percent of funding for every program and use it for evaluation," he says.
For the federal government, it's the equivalent of stepping on the scale everyday. And if you'd resolved to lose weight and get fit, isn't that how you'd start?