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COMMENTARY: A CAPITAL IDEA By Mark Lieberman, Economist for the Five Star Institute President Obama faces a budget obstacle in his plans to rebuild crumbling bridges and address other pressing infrastructure needs. No, not that budget problem, but a budget that doesn't even exist. Unlike many governments, the United States does not have a separate budget for capital spending, which means each tax dollar is as likely to go to the construction of, say, a courthouse, as it is to paying the salary of a judge or court clerk who works there. We have a "unified cash-based budget" that treats outlays for capital and operating activities alike. The federal government issues debt for general purposes, not for specific projects or activities. No family, or very few, would pay for a house completely out of current income (note: income, not savings), yet that is exactly what the federal government does. Its strategy is exactly the opposite of what brought New York City to the brink of fiscal collapse almost 40 years ago, but the results are the same—financial chaos. When New York City struggled through its fiscal crisis, one of the causes was the melding of the city's operating and capital budgets. The city would borrow long-term for short-term expenses, essentially issuing long-term bonds to buy the groceries. It started slowly with an argument by then-Mayor John Lindsay that if the city could issue bonds to build buildings, it should be able to issue bonds to build people by paying for textbooks and training programs through its capital rather than operating budget. The solution to New York City's "crisis" was to bond out its deficit and submit to budget oversight by a state panel, which required the city to produce a balanced budget in four years. New York achieved a balanced budget in three. What would a separate capital budget do for the country? 42 For starters, it would rationalize our spending and make it more difficult for lawmakers to lard up spending bills with long-term projects; those would, per force, have to be handled in a separate budget bill. The president and Congress could focus on turning on the lights each day. A separate capital budget would also put to rest the concern that we are leaving a debt to future generations; we would no longer be "paying forward," but future generations, in paying off debt, would be paying for items from which they are benefiting. Current tax dollars would not be used to pay for projects current taxpayers may never see built. Former Clinton administration Labor Secretary Robert Reich recently advocated for an "investment budget" that would match funding of government operations with a return on investment so that education aid, for example, could be funded through this separate budget because of the return on improving education at all levels. While a common sense, rational approach, it resembles John Lindsay's slippery slope. The Government Accountability Office (GAO)—when it was known as the General Accounting Office, the name it held from 1921 until July 7, 2004—weighed in on the issue in testimony before the House Subcommittee on Economic Development, part of the Committee on Public Works and Transportation. "For several years, we have advocated better planning and budgeting for capital investments to provide a clearer picture of the composition of federal expenditures and to help focus public attention on the nation's investment needs," Paul Posner, director of budget issues in GAO's accounting and financial management division testified at the time. The then-current budget structure, Posner concluded, focused on short-term goals, which do not necessarily promote long-term economic growth. That structure is still in place. In 1997, President Clinton created the "Commission to Study Capital Budgeting" in response to growing demands for a constitutional amendment to require a balanced budget. The commission was co-chaired by Jon Corzine (who was chairman of Goldman Sachs) and Kathleen Brown (then a former California state treasurer and gubernatorial candidate). While Corzine moved to U.S. Senate and then became governor of New Jersey, Brown, circuitously, became a managing director at Goldman Sachs. The commission punted on whether to recommend adoption of a dedicated capital budget, although it said, "We have concluded … that the existing federal budget process—as it affects decision-making about capital expenditures as well as other types of spending—has significant weaknesses," adding, "insufficient attention is paid to the long-run consequences of budget decisions. Capital spending in particular is inefficiently allocated among projects … [and] the current process shortchanges the maintenance of existing assets." During the Reagan administration, thenTreasury Secretary Donald Regan pushed for a capital budget, but the budget director at the time, David Stockman, successfully argued against the idea. In the Clinton-era debate, three commissioners rejected a capital budget of any kind, and the commission could not agree on a single definition of capital. That failure doomed the proposal. The Congressional Budget Office argued against the concept in testimony striking a difference between financial and budgetary accounting, defending the notion of recognizing the full cost of building or acquiring capital items up front because it then means there are fewer resources available for other programs. That Alice-in-Wonderland thinking is precisely why we need a separate capital budget. Mark Lieberman can be heard on P.O.T.U.S. (Politics of the United States), SiriusXM 124, every Friday at 6:40 a.m. and again at 9:40 a.m. EDT. KNOW THIS On April 1, the Federal Housing Administration raised annual mortgage insurance premiums 0.05% to 0.10% depending on loan size, effective for all new forward mortgages except streamline refinances.

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