JANUARY 27, 2011

Milton Friedman warned that government spending cancels out higher-return private investment.

Words matter in politics, which is why the federal government no longer “spends” (and wastes) money, but rather “invests” it. According to Barack Obama’s State of the Union address, nearly every penny of the $2.5 trillion domestic budget—for installing solar paneling on the roofs of libraries, funding lavish teacher retirement funds, building high-speed rail lines to nowhere, erecting billboards advertising the stimulus plan—is a high-return “investment” in America’s future.

This is all spin. It’s a variation on the theme that brought us the $814 billion stimulus two years ago. That spending—er, investment—was going to create three million jobs. Those jobs never showed up.

As part of the counterattack against Republican plans to cut $100 billion out of the domestic budget, the White House claims that America has been under-investing in infrastructure, education, science, research, transportation, environmental protection, green energy and so on. But if you examine the actual funding record of these programs, you see that there’s been no spending drought. There’s been a deluge.

Total spending on what Mr. Obama’s budget calls “investment outlays,” outside of defense, rose 46% between 2008 and 2010, to $372 billion from $254 billion. Of that, education funding soared 116%, though it’s anyone’s guess how much of that investment found its way into a classroom. Aid to states and localities rose one-third, as did funding for the National Science Foundation. Unemployment insurance, which has been the administration’s highest budget priority, quadrupled to $189 billion from $43 billion.

As far as the infrastructure crisis, that’s a myth too. If our bridges are collapsing and roads and airports are congested, its not for a lack of funding. Transportation financing has climbed just under 40% since 2008. The administration secured a 60% increase in transit dollars in 2010.

Another big winner has been government investment in business—which used to be called corporate welfare. The Department of Commerce’s budget has more than doubled since 2008, which is only slightly faster than the 81% budget hike for the Department of Energy and the 84% jackpot that went to housing programs.

Keep in mind that these budgets have skyrocketed over the same two-year period when household incomes and spending—investment in families and children—have barely budged. If you want new jobs, business investment should get much higher priority than government spending, so the mismatch is distressing. Total private business investment has fallen by 10% since 2008. It’s possible that government investing isn’t adding to the total stock of capital in the country at all but rather, as Milton Friedman used to warn, is merely canceling out higher-return business spending.

The budget blowout comes atop the spending blitz carried out by George W. Bush. In the decade before Mr. Obama took office, inflation-adjusted spending on infrastructure, education and R&D rose by 32%. The education budget soared after the 2001 No Child Left Behind law, and in 2007 Mr. Bush signed a $284 billion highway bill, the largest in U.S. history.
Let’s grant for a moment that all government spending is really “investment.” The question no one dares to ask in Washington is, what is the return on that investment? Can anyone really argue that the schools are better today than they were in the 1950s or ’60s, before Jimmy Carter created the Department of Education? The U.S. government also spent billions on green energy in 2009 and 2010, but the number of wind projects fell by 50% last year. If that’s an investment, it’s one that any private investor would pull the plug on.

The administration doesn’t want cuts in Pell Grants and other student-loan programs. But the main effect of student aid for higher education has been to raise tuitions, not to make college more affordable.

As Republicans in Congress make decisions about what to fund and what not to fund, they should ask this fundamental question: Is this dollar of funding so valuable to the economy that it is worth borrowing another 40 cents?

That is why the best investment in America’s future now is to bring spending down as rapidly as possible to reduce debt and finance reductions in tax rates—especially on investment.

Mr. Moore is senior economics writer for The Wall Street Journal editorial board.


Leave a Reply

Search All Posts