Time for a Federal Capital Budget?
I have long been sympathetic to the idea of a capital budget. One fear I have going forward is that when it comes time to do deficit reduction that capital spending will bear an excessive share of the spending cuts at the expense of more politically popular consumption programs. As with any diet, we should strive to cut fat out of the budget, not muscle. A new report from Brookings argues the case for a capital budget.
http://www.brookings.edu/~/media/Files/rc/reports/2009/1210_infrastructu...
Bookmark/Search this post with
Good idea that is next to impossible to implement
Clay Shaw and a bipartisan group of House members who were also CPAs introduced this proposal in 1985. The basic idea would be to finance operating costs on an annual basis with a requirement to balance the operating budget every year and finance capital costs over an extended period with federal deficit spending limited to the capital budget and controled by restrictions on the debt limit. Standard business accounting 101 in any corporation and most state or local governments. Liberals immediately embraced the concept with "one small enhancement". The y insisted on including "Human Capital" in the long term budget. The legislation died in subcommittee without a vote because even the Democrats in control of the House at the time recognized it would be meaningless to enact a capital budget that essentially defined 85-90 percent of the federal budget as a capital expenditure. I think the same dynamic would apply today.
Human Capital
It's not illegitimate in principle to include human capital. In fact, today, human capital is clearly more important than old-fashioned heavy equipment to future growth. The problem is definitional. With a private business it is relatively clear what capital is--an investment for the purpose of earning future income. Transferring this concept to government is obviously difficult because there is no flow of taxable income associated with capital investments. One way around this is to create income flows for such investments. For example, charging tolls on federal highways, charging agencies market rents on government buildings and so on. Of course, rates of return would have to be assumed in many cases, but still it is worth doing as best we can. It would have the added benefit of helping the government to know whether a particular function is better done through its sovereign powers or through some market or market-oriented mechanism. Clearly, there are vast numbers of things government does that are not inherently governmental by nature. Having a capital budget would be a step in the direction of sorting those inherently governmental functions from those that could be delivered through the private sector or by contracting out.
Human capital has all sorts
Human capital has all sorts of problems from an accounting standpoint. First, there is the question of ownership. Slavery having been outlawed for some time, organizations cannot excercize the ownership over human capital in the same way as physical capital. Second, there is the question of depreciation. A primary reason for establishing capital budgets is to facilitate sinking funds that recognize depreciation and fund neccessary repairs in advance. A major reason Clay Shaw was so interested in the issue in 1985 was that prior to moving to Ways and Means, he was ranking member on the Public Buildings and Ground Subcommittee of PW&T. As a CPA he was horrified to learn that not only was the Pentagon about to fall down but no financing mechanism had been established to fund repairs. Third, and most important, it is just way too easy to stretch the definition of human capital. The leading proponent of the concept in 1985 was Congressman Gus Savage. As you may recall from your time on the Hill, Savage was not a leading advocate of fiscal responsibility and it became increasinly clear that any effort to implement capital budgeting would end up as a joke given his chairmanship of the subcommittee.