"A Perspective on Capital Budgeting"
Statement by Rep. Dennis J. Kucinich
January 30, 1998

        The Commission to Study Capital Budgeting begins its work at a very auspicious moment in our nation's history. For several decades the ability of the federal government to develop and implement bold new initiatives have been constrained by a federal budget deficit that, at times, seemed to grow out of control. We are now entering a new period that calls for a fresh perspective on budgetary matters.

        Many have criticized the way that the federal government puts forward its annual budget, leading to simplistic and misleading comparisons between the government's budget and the checking accounts of American households. Some commentators have suggested that we need a budget that clearly distinguishes between investments and operating expenses. It is important that the Commission look very carefully at the contribution made by public investment to our long-term economic prosperity. In this connection, I commend to the Commissioners an article by economist Jeff Faux, "Public Investment for a 21st Century Economy," a section of Restoring Broadly Shared Prosperity (Economic Policy Institute, 1997.) I request that this article be included in the Commission's record.

        The public and elected officials need more and better information on the costs and benefits of public investment. Now especially, given the prospect of significant budget surpluses followed by the economic challenge of the retirement of the Baby Boom, capital expenditure options are very salient. We are, after all, faced with the question of how to make use in the present of resources that will serve us well in the somewhat distant future. What is the most prudent and constructive policy that would benefit the vast majority of Americans? Retirement of public debt, new public investment, increased disposable private income, or some combination of these? The Commission has a historic opportunity to take a fresh look at our current situation and tackle these and other questions.

        Regarding the subject at hand, I would like to separate the question of capital budgeting into two parts. One is the function of analysis and reporting. The second part is the formal institution of a capital account tied to rules regulating the budget process.

        On the first question, our nation urgently needs comprehensive information on publicly-owned assets, on the state of environmental amenities, and on the productive capacity of our people. All of these represent the public wealth of the nation -- the peoples' capital, if you will -- in one sense or another.

        Presently there are some laudatory but limited efforts exerted by the General Accounting Office (GAO), the Office of Management and Budget (OMB), and the Bureau of Economic Analysis (BEA) of the Department of Commerce. GAO has been producing summary capital budget presentations of the Federal budget. The OMB has provided information on our national wealth. And the BEA has begun the enterprise of "green accounts" which seek to measure the economic implications of environmental conditions. Such work is properly central to capital budgeting, however the latter is conceived.

        Moving on to my second point, to a more specific, less aggregate level of analysis, we need more and better analysis of the costs and benefits of basic types of public projects, whether made possible by direct expenditure, by regulation, or by tax preferences. The theory and practice of cost-benefit analysis has aroused some suspicion in the past. First of all, we need a thorough review of how such analysis is performed in the Federal government with respect to its methodological soundness and its ideological neutrality. Ideally we would institutionalize a source of such analysis which steers an objective course between the interested Cabinet departments and the fiscally-focused Office of Management and Budget. Just as we mandate a tax expenditure budget, so we should mandate a more comprehensive and systematic analysis and reporting on public capital.

        With the benefit of such information, we could better establish how government policies and legislative proposals enrich or deplete the nation's wealth, in comprehensive terms. We would have better standing to compare, for instance, the alternatives of debt reduction to publicly-financed investment. We would have the tools to determine more effectively how to organize a capital budget itself.

        The construction of such a capital budget, however, is not without pitfalls. Serious movement towards a capital budget should be done cautiously. I have a number of concerns that, I believe, should be taken into account.

        1. There are certain investment that, undoubtedly, are public capital in some sense, such as the skill level of the workforce. Yet these things are more difficult to quantify in economic terms than tangible things like roads and bridges. These considerations would probably influence how capital was defined for purposes of capital budgeting, possibly resulting in an incomplete capital budget. A capital budget that was missing certain basic items -- such as human capital, or research and development expenditures -- could be worse than no capital budget at all. There is a danger that capital budget decisions could be improperly biased towards those functions that are more amenable to measurement.

        2. In a sense, investment can be viewed as a policy which generates benefits in the future, at some cost to living standards in the present. A capital budget could bias decisions towards investment and away from consumption -- notwithstanding the undeniable fact that there can be bad investment plans and worthwhile consumption programs. We don't want to see ill-advised infrastructure spending, for instance, that displaces crucial programs providing nutrition and health care to infants in poor families. Such nutrition and health care programs are important investments in the future of our communities and our workforce.

        3. If government is determined or obliged by law to maintain a balanced budget, a capital budget rule which discounted investment spending (in calculating what would in effect be an operating deficit) would imply that the correct level of net Federal borrowing was whatever investment had been planned. To the contrary, I would urge this Commission to forego such antiquated, pre-Keynesian economic notions. The Commission should emphasize the Federal government's obligation to run a fiscal policy which promotes full employment. The level of capital spending should have no automatic consequences for allowable deficits. We should stipulate that net investment levels would ideally approximate the level of borrowing, but not constrain it.

        4. Given the current organization of certain expenditure functions into trust funds with earmarked revenues, I would urge this Commission not to countenance the arbitrary coronation of such funds into separate capital budgets. The reason is that there is no necessary relationship between the revenues these funds receive and the future investment they ought to undertake. Motor fuels taxes, for instance, are user fees only in the most general sense. It should be obvious that we don't want to go back to the ancient days of budgetary fiefdoms.

        5. Finally, I would caution advocates of public investment that capital budgeting would not necessarily provide an important boost to their cause. Today's costless capital investment is tomorrow's depreciation charge against the operating budget. In any case, Congress and the President would set practical limits on the extent of such spending, and presently there is little reason to believe such limits would much exceed present, inadequate levels of public investment.

        In closing, I would emphasize that our greatest shortcoming in this area is knowledge of the nation's wealth and of the effect of policies on the progress of this wealth and our economy in the future. The logical prerequisite to capital budgeting is a significant expansion of the nation's wealth of knowledge about public investment possibilities of all types.

President's Commission to Study Capital Budgeting