RALEIGH – Both in Washington and Raleigh, left-wing politicians and activists desperate to defend their favorite government programs from the budget ax are relentlessly substituting the term “investment” for “spending.” President Obama just did it yesterday in his State of the Union address. A coalition of North Carolina spending lobbies just did it in a press release the day before.
Perhaps even they think their rhetorical “framing” strategy is a new one. It’s not.
When I spent a year as a reporter-researcher at The New Republic in Washington, I well remember several discussions among staff and contributors about the idea of reclassifying federal spending as federal “investment.” Robert Reich, later to serve as President Bill Clinton’s Labor Secretary, wrote a piece arguing for a division of the federal budget into an operations budget (including most income-transfer programs) and an investment budget (including spending on education and infrastructure). The idea was that the latter expenditures could properly be funded with federal borrowing, since they represented the formation of human and physical capital that would deliver an economic return.
That was in 1989.
The fact that liberals have been trying to redefine the term “government spending” for at last two decades, to little success so far, doesn’t mean that the underlying concept is entirely lacking of merit. Obviously, if you accept the traditional distinction between consumption and investment spending in household or business budgets, it would be difficult to reject its application to government budgets.
Some government spending does, indeed, meet the definition of investment. To invest simply means to defer immediate gratification in anticipation of a larger benefit in the future. Instead of spending a dollar on a consumption good today, you spend it on a capital good that will help you earn additional income in the future. You will either consume that future income yourself or give it to others to consume or invest.
Capital comes in many forms, such as physical (plants, equipment, or infrastructure), human (education, training, or social skills), and financial (cash balances or securities that can be converted to other goods in the future). Obviously, governments can engage in all these forms of capital formation.
So far, so good. Unfortunately, liberal politicians and activists tend to stop there. Either because they lack a firm grounding in capital theory or hope their audience lacks such a grounding, they assert that once they’ve classified their favorite government spending as “investment,” they’ve made the case for rescuing it through tax hikes.
Not at all. For one thing, all these new investment gurus exhibit a remarkably elastic definition of capital formation. Rather than saying that government spending can sometimes be classified as investment, they end up saying that virtually all government spending is an investment. As I have previously observed in a different context, if you define a category so broadly that there is virtually nothing remaining outside it, your definition is probably faulty.
Secondly, and more importantly, not all investments are worth making. Some are likely to pay off. Others aren’t. When buggy manufacturers spent millions of dollars upgrading their plants and equipment in the early 20th century, they were investing – but poorly. When governments today spend billions of dollars on ineffective or unproductive education programs and obsolete and wasteful transportation technologies, they are also investing – poorly.
For example, North Carolina spends hundreds of millions of dollars more on subsidizing university research and instruction than an adherence to the national average would dictate. We don’t have higher-than-average educational attainment or wealth creation as a result.
Similarly, the General Assembly enacted a series of education programs in the mid-1990s that now cost taxpayers hundreds of millions of dollars a year. They included Smart Start, across-the-board pay increases, extra pay for obtaining advanced degrees, and smaller class sizes in grades above K-1. At about the time these programs kicked in, North Carolina’s gains on credible national achievement tests began to slow, then stopped.
These were investments. But they weren’t wise ones. They didn’t sufficiently transform the structure and incentives in North Carolina education, so the additional dollars didn’t translate into better performance.
If you are going to use the lingo of investment, folks, you have to apply the concept properly. Otherwise, you really are just engaging in rhetorical games. North Carolina’s new political leaders face daunting fiscal and economic challenges. They don’t have time to play with you at the moment.
Hood is president of the John Locke Foundation.