Consumption, Investment, and the federal budget

Fareed Zakaria makes an interesting observation in his column this week. Stimulating the economy with tax cuts, he argues,

would be only one more way to keep the party going artificially—like asking a drunk to go to AA next year, but in the meantime to have even more whisky. A far better stimulus would be to announce and expedite major infrastructure and energy projects, which are investments, not consumption, and therefore have a much different effect on the country’s fiscal fortunes. (They are not listed separately in the federal budget, but that’s just bad accounting.)

I agree (although Mark might not). But there’s a more interesting and broader question here.

If it’s “bad accounting” to equate consumption with investment in the federal budget, is there an intellectually clear and honest way to do it that a) the public could understand; b) would not be undermined by the Norquist wingnuts; and c) could be done so that economists might reassess its effects on the economy? We’re all used to looking at deficits as a percentage of GDP; indeed, EU guidelines for its members use this to benchmark its governments’ adherence to EU rules. But if Zakaria is right, then it is a wrong metric.

Bill Clinton tried this in 1992, talking of new government investments, and was ridiculed by Republicans saying he just wanted to spend. But of course we all know that there is a big difference between using $50,000 to go on a vacation and using it to pay for a couple of years of college. Similarly, there is a big difference between investing in a nationwide broadband capacity or high-speed rail, and, say, spending a half trillion dollars in Iraq.

How could budget policy be changed to do this and do it right–and get the public to understand it? Mark? Mike?

Author: Jonathan Zasloff

Jonathan Zasloff teaches Torts, Land Use, Environmental Law, Comparative Urban Planning Law, Legal History, and Public Policy Clinic - Land Use, the Environment and Local Government. He grew up and still lives in the San Fernando Valley, about which he remains immensely proud (to the mystification of his friends and colleagues). After graduating from Yale Law School, and while clerking for a federal appeals court judge in Boston, he decided to return to Los Angeles shortly after the January 1994 Northridge earthquake, reasoning that he would gladly risk tremors in order to avoid the average New England wind chill temperature of negative 55 degrees. Professor Zasloff has a keen interest in world politics; he holds a PhD in the history of American foreign policy from Harvard and an M.Phil. in International Relations from Cambridge University. Much of his recent work concerns the influence of lawyers and legalism in US external relations, and has published articles on these subjects in the New York University Law Review and the Yale Law Journal. More generally, his recent interests focus on the response of public institutions to social problems, and the role of ideology in framing policy responses. Professor Zasloff has long been active in state and local politics and policy. He recently co-authored an article discussing the relationship of Proposition 13 (California's landmark tax limitation initiative) and school finance reform, and served for several years as a senior policy advisor to the Speaker of California Assembly. His practice background reflects these interests: for two years, he represented welfare recipients attempting to obtain child care benefits and microbusinesses in low income areas. He then practiced for two more years at one of Los Angeles' leading public interest environmental and land use firms, challenging poorly planned development and working to expand the network of the city's urban park system. He currently serves as a member of the boards of the Santa Monica Mountains Conservancy (a state agency charged with purchasing and protecting open space), the Los Angeles Center for Law and Justice (the leading legal service firm for low-income clients in east Los Angeles), and Friends of Israel's Environment. Professor Zasloff's other major activity consists in explaining the Triangle Offense to his very patient wife, Kathy.