Disagreeing With Bruce About A Capital Budget

I always hate to disagree with any of my fellow CG&G bloggers, but I feel that I have no choice when it comes to Bruce's post below advocating capital budgeting.

I was a member of the President's Commission to Study Capital Budgeting that was created during the Clinton administration ( see page 10 of the report Bruce cites) so I've spent a great deal of time on this issue.  In a perfect world or if we were creating the system for the first time, we should indeed have a capital budget and capital budgeting.  But neither of these exists and, although I started on the commission convinced a capital budget was the right way to go, I came to understand that the implementation problems are so serious that there was no way to make it work.

In brief...

1.  There is no established definition of what constitutes a capital expense at the federal level.

2.  There's also no mechanism for creating and, more important, enforcing that definition.  And we know from the successful legal challenges to Gramm-Rudman-Hollings in the 1980s, that responsibility cannot be delegated to a congressional agency like GAO which, given its accounting expertise, would be the most likely.  For constitutional reasons, the decision will always be left to Congress and that will make it a political issue.

3.  The major benefit of capital budgeting is that it makes capital expenses appear to be less costly and, therefore, that we'll get more of them. That almost certainly means that congressional supporters of operating expenses will do everything possible to get them included in the capital expense definition. 

4.  And in many cases they'll have substantial substantive support for doing so because economists typically consider education an investment in "human capital."

5.  That will open the floodgates.  If education for younger Americans is classified as a capital expense, veterans and senior citizen programs advocates almost certainly will demand that those expenditures be classified as capital and funded through the capital budget as well.  After all, we can invest in older Americans as well as younger.

6.  And some will insist that military spending be classified as an investment in freedom.

7.  That doesn't even start to deal with the less political and more substantive definitional issues.  For example, is a missle or bullet a capital or operating expense?  The answer seems to be that it's a capital expense until it's fired, at which point it becomes an operating expense.

8.  There are also substantial issues with how we account for depreciation at the federal level.  Needless to say, there are substantial opportunities to play with the concepts and the budget impact.

Bruce is right in the sense that, because all expenditures are accounted for in the federal budget on a strictly cash basis, the federal government almost certainly has been and still is underinvesting in bridges, tunnels, sewers, highways, buildings, and other things that continue to provide benefits long after the construction work is completed.

But the solution he suggests -- a federal capital budget -- will likely create a series of problems far worse than the underinvesting currently going on.  And, if many operating expenses end up being classified as capital, there will be litle or no benefist of any kind.

If you don't think that could happen, remember that New York City used to include the salaries of its police force in its capital budget so that it's operating budget could appear to be balanced.  That worked for years.