Building America to Last

...2) the Pentagon admits the technologies don’t exist to let the B-2 even try...

...He’d rather do the lease -which looks on his budget like a smaller expenseand use the $4 million “extra” for other agency needs...

...And our R&D investmentabout 3 percent of GNP-appears competitive at first glance...

...After all, the government now fimctions under a scheme that for years has declared deficits to be under control when in fact they’ve skyrocketed...

...Consider: The energy efficiency of government buildings has remained flat over the decades (the Environmental Protection Agency and Department of Energy are among the least efficient), while the efficiency of private sector buildings has grown two- or threefold thanks to new technology...

...Welcome to the world of “cash budgeting,” where taxpayers fund such cockeyed choices because, in the government’s “unified” budget, all outlays are created equal...

...According to Congressional Budget Office estimates, halting this dubious investment at the 15 planes already authorized (and scrapping the 60 more now planned) would free up $4 billion a year through 1997...

...It’s as if Uncle Sam saw no lifference between borrowing to go out to dinler and borrowing to buy a house...

...In all account books, “capital” can be a pretty misleading term...

...Sure, there will be classification disputes if capital budgeting is implemented...

...Education: Money may not be the...

...While we gladly spend a million bucks on a prototype uniform for the Air Force or on tastier dehydrated field rations, the rate of federal spending on nondefense R&D has dropped by 50 percent since the mid-sixties...

...And, in the best tradition of third-world debtors, 70 percent of the money we borrow goes to pay interest on the debt we’ve already piled up...

...What will it cost our kids to fix the broken roads, bridges, airports, and sewers if we don’t...

...Typically, the budget is divided into two parts: an operating and a capital component...

...Even after the 41 percent boost provided in the recently passed transportation bill, our annual infrastructure investment will amount to approximately 1 percent of GNP, compared to Germany’s 3 percent and Japan’s 5 percent...

...s what it’s used for that determines whether ’s been smart or stupid to borrow...

...How much...

...Why borrow to subsidize profitable megafarms when we could instead provide seed money for a school-to-work apprenticeship program like Germany’s...

...Building America to Last A smarter investment strategy can end the recession and balance the budget by Matthew Miller very household’s share of the debt tab has piralled in the last decade from $11,000 to 39,000...

...Meanwhile, as the task force talks, the government will borrow another $400 billion dollars before the November election, create few of the jobs necessary to end the recession, and invest astonishingly little...

...Governor Jim Florio, whose days are numbered in part because he has tried to remedy this sort of inequity, can tell you that rich districts aren’t interested in reforms that improve poor schools at the expense of their own...

...In fact, many of the beneficiaries of investments haven’t even been born...

...All incentives point in the opposite direction...

...With visionary bookkeeping like ours, it’s no surprise that the share of national income devoted to investment has plummeted by one third since 1973...

...You don’t need an MBA to know that buying the building is a better deal...

...Despite the red ink, the Edsel was an “asset” on the books-an asset that nearly sank the entire company...

...It breaks down by the background of the individual...

...You scout he market and come down to two options...

...Investing in transportaion, for example, pays off not only in moother, safer roads somewhere down the me, but also in the short run to the tune of ome 41,000 new jobs for every $1 billion pent...

...OU can rent the space you need on a 20-year :ase at $1 million a year...

...This money is being redistributed by Uncle Sam from households whose average yearly income is just $30,000...

...To be sure, federal dollars alone can’t fill all of these gaps-but neither can the feds shirk their essentiafleadership role...

...Or that, compared to investment juggernauts like Germany and Japan, we’re spendthrifts...

...and 3) much cheaper planes are likely to be as effective...

...Take our current “capital investment” in the B-2 “stealth” bomber, whose $700-million-a-copy cost is as high-flying as its mission is obscure...

...And if the states don’t watch themselves, Wall Street will...

...definition that most states conduct using strict accounting rules...

...The year after, the interest on that borrowing will eat up an additional $30 billion, as our biggest federal program-interest payments-crowds out every investment priority in its way...

...Support for it “doesn’t break down by party,” says Controller General Bowsher, a long-time capital budgeting advocate...

...It’s time we owned up to the Edsel on our hands and wrote off the $35 billion we’ve sunk in the B-2...

...While most Americans would surely agree that our physical and human infrastructure deserves far-sighted, sensible investment, those investments don’t have anything like the organized, letter-writing constituencies that support pensions, Medicare, farm subsidies, or dozens of other consumption programs...

...The trick is to identify real capital-an exercise in ment agenda, and capital budgeting as a proven tool for managing it, the inevitable question follows: What keeps us from getting on with the job...

...And in spite of the president’s inaugural lament that we have “more will than wallet,” there’s plenty of money to invest if we’re ready to shut down the unfair consumption and phony investment programs we bankroll today...

...New York City learned that the hard way in the mid-seventies, when it went broke after shifting millions of dollars of police salaries and vocational education costs into its capital budget and then borrowed to fund them...

...Every time it comes up,” says budget expert Stan Collander, a former Hill staffer now at Price Waterhouse, “it’s always by people who want to spend more...

...operating approach...

...That means that equalizing opportunity will require new funds...

...Consider some of the whopping investment shortfalls we’re about to pass on to future generationsalong with huge debts that, instead of being spent on ourselves, might have been used to plug the gaps: >Infrastructure: The Department of Transportation says 40 percent of interstate roads are in fair or poor condition...

...For example, if the administration fully funded Head Start-that is, provided the extra $2.2 billion Congress asked for-it would mean 70,000 more teaching jobs in the next 12 months, as well as smarter graduating classes 12 years down the road...

...Buried in a recent budget document of the Office of Management and Budget (OMB) is a summary of what the federal budget would look like if it were recast using this capital vs...

...While Germany and Japan today devote nearly 3 percent of GNP to commercial R&D, the U.S...

...In these deficit nightmares, liberBudget director Richard Darman is making encouraging noises...

...Politicians don’t get punished at the polls for rusty bridges-and when the bridges finally collapse, it’ll probably be on someone else’s watch...

...Lumping investnent and consumption expenses together, as he federal budget does, is more than just an ccounting no-no...

...But because it involves a bigger cash outlay this year, your boss tells you it’s a no-go...

...Almost $30 billion in social security, Medicare benefits, and federal pensions go each year to households with incomes of more than $100,000...

...For example, no state currently treats investments in education and training as “human capital” that will bring long-term returns...

...That basic bookkeeping disincentive plays out in thousands of different, expensive ways, even in places where a small investment has a clear economic payoff...

...Say you’re a Department of Health and Hunan Services official, and your Medicaid vatchdogs need new office space...

...And a generation of children, unaware of the grim inheritance being prepared for them, will laugh as kids always laugh...

...In New York state, for example, the salary of an architect who designs bridge repairs comes out of the capital budget, while the salaries of A delicate balance people who operate the bridge-the budget manager or toll collectors--come out of the operating side of Like most good ideas in Washington, capital bud- the budget...

...cuse to justify new spending, and the classification of expenses as “capital investment” will be abused to make this possible...

...If the budget gets too far out of line, a state’s bond rating drops, and funding for roads, buildings, and other bond-supported items dries up...

...This type of investment creates both hort-term jobs and long-term economic benfitsa combination that can help jumpstart sluggish economy...

...With this kind of money, we budget circus...

...The bottom line...

...That conclusion is not surprising when you consider that the share of federal dollars devoted to infrastructure spending has fallen by half since 1965...

...So when push comes to shove, it’s easy to guess which outlays our leaders choose to defer...

...Maybe that’s why even Japan divides its overall General Account into similar pieces...

...At his behest, a task force from OMB, GAO, and the budget committees recently began exal Democrats will cook up measures like “The Conscientious Objector Investment Act” to give truckloads of cash to able-bodied people who, on principle, just don’t feel like working...

...With the collapse of the Soviet Union and with arms-reduction initiatives in the air, the B-2’s secret mission-as a bargaining chip-may not be worth a cent...

...answer to all that ails our education system-but for kids in poor districts, it could be one helluva help...

...In Princeton, New Jersey, the public schools spend $8,300 per pupil yearly, double what down-and-out Camden can afford...

...And the blue-ribbon National Council on Public Works Improvement, in its report, Fragile Foundations, warns, “We are drawing down past investments without making commensurate investments of our own...

...After playing bait-and-switch with this mission for years, the Pentagon now tells us that the B-2’s real purpose is to find and attack Soviet mobile missiles...

...operating layout, forced a discussion of whether the government’s plan is meeting our nation’s investment needs, we might begin doing right by our kids...

...But the picture changes when you take out defenserelated research, which can’t be counted on these days to spin off commercial applications...

...But these days there’s no budgetary compulsion to make those investments...

...We can’t go into debt to pad bloated board of education could lower the student-teacher ratio in poor districts and equip them with the textbooks, computers, and safe buildings their well-heeled neighbors take for granted, and we’d still have money left to offer scholarships to college students who’ll commit to serving as math and science teachers...

...Similarly, a relatively minor investment in an IRS computer system that could systematically pick out tax cheats would begin saving federal money immediately...

...This isn’t a groundless fear...

...But the bigger point is that this very debate about investment is precisely the kind of dialogue our consumption-crazy country needs...

...This prospect-of-abuse argument is laughable to anyone who’s stepped within 100 miles of today’s ploring budget process reforms, including the use of capital budgeting...

...A truly effective capital budgeting plan would do what states and companies still quiver to do: aggressively make distinctions between things that truly contribute to the nation’s resourceslike lowering class size to help disadvantaged kids learn to read-and those whose value ends on the ledger...

...States have avoided this trap through a sensible bookkeeping strategy-capital budgeting...

...At the federal level, siinilar standards geting has been kicked around for years-to no avail...

...The result...

...Carol Cox, president of the watchdog Committee for a Responsible Federal Budget, warns, “You can’t have a separate class of expenditures that we pretend is costless...

...Not surprisingly, Republicans tend to bring more business types into ofice who wonder why govemment doesn’t handle its books more sensibly...

...Compaies invest when they build a new plant to ike production...

...So would a beefed-up investment in the government’s Women, Infants, and Children Program for improving the nutrition of expectant mothers and young children, as money spent now on properly feeding these babies saves millions in health care costs later...

...Options like these suggest the possibilities if we get serious about the stakes...

...Research and Development: An advanced economy wins in international competition by translating scientific breakthroughs into new products and processes...

...Without sufficient investment in new factories, highways, research, education, and all of the other factors that determine the productivity of our labor force,” Controller General Charles Bowsher told a Senate subcommittee last spring, “the United States will not be competitive in the future world economy...

...Divide and prosper At the root of our wholesale capital neglect is an elementary political problem...

...Getting the government up to par could start paying off this winter...

...And in the long run it may also mean the difference between our kids’ living through an era of national renewal or becoming a lost generation...

...By law, most states are required to balance the revenues and expenses of their operating component each year...

...And their parents, who have the power to change things, will do . . . what...

...Forget for the moment that 1) our difficulty in finding Scud launchers in Iraq suggests that this may not be feasible...

...But to the extent that we do borrow, why borrow to pay windfall pensions when we could be underwriting a school year as long as Japan’s...

...Dollars spent now In, say, plane fares or pension payments or paler clips are gone forever...

...spending on grades K through 12 up to the average of the other industrial nations...

...Consumption expenditures, by contrast, are ust what they sound like...

...That’s not capital...

...Investment is what builds wealth, either for idividuals, businesses, or nations...

...But Democrats, perhaps wanting to snub a Darman initiative, haven’t joined the Republicans in detailing their highest-ranking staffers to the team...

...Just a nickel of each federal dollar we spend now goes for investment...

...This year, interest on the debt edged ut defense as the federal government’s iggest expense...

...spends less than 2 percent...

...In a period of budget restraint, this bias against capital investment adds an extra accounting hurdle to the huge political obstacles already facing long-term investments...

...In Minnesota, for example, where a 60 percent legislative majority must approve bond issues, capital projects are routinely traded for votes...

...While this duet of internal and external controls has proven effective, it is far from perfect...

...With federal spending now accounting for a full quarter of GNP, getting Uncle Sam serious about investment may begin lifting us out of the recession the right way...

...If every annual budget presentation, by virtue of its capital vs...

...It had to wait a few years for the results, but it was worth the wait: The kids in smaller classes registered significant increases in reading and math scores...

...Depending on whose numbers you prefer, an extra $20 to $50 billion a year...

...Tennessee began investing in 1985 to lower the student-teacher ratio in some of its poorest school districts...

...Wouldn’t we be better off investing this $30 billion in the education of tomorrow’s work force...

...As the first step in doing that, we’ll have to take the states’ capital budgeting scheme one step further...

...One study suggests that at least .5 percent of GNP-or about $25 billion a year-is needed to bring U.S...

...The General Accounting Office (GAO) says 5,200 bridges are “critically deficient...

...With an urgent investbureaucracies...

...Debt is not always a bad thing, of course...

...But through the seventies and eighties, even supporters of capital budgeting tended to concede that it has two fatal flaws: It will be used as an excould be enforced by a bipartisan board of accounting wizards, whose assignment would be to stand watch over the definition of “capital...

...that’s waste...

...Capital crimes In 1957, the Ford Motor Company, after a quarter billion-dollar investment, unveiled its newest, stateofthe-art automobile-the Edsel-and promptly lost $350 million when consumers stayed away in droves...

...Because the balanced operating budget includes the annual interest payment owed on the outstanding debt, there’s a built-in discipline that requires planning for repayment even as debt is incurred...

...The tab to achieve parity with our leading competitors would be about $50 billion a year...

...Investing in education matters in the short run, too...

...But making distinctions between true and false capital is obviously vital to sensible investment...

...That’s enough to fully fund bona fide longterm investments like Head Start, whose lack of cash today closes the door on a shameful 73 percent of eligible kids.Meanwhile, on the consumption front, why don’t we means-test old-age “entitlements” and invest the savings in our schools...

...Or you can buy a ood building outright for $5 million...

...They can borrow, however, to fund capital expenses...

...But putting these shenanigans aside, capital budgeting clearly helps governments to invest and borrow smart...

...Yet the fedral budget process ignores, by design, the one istinction that businesses, states, and families 11 use to make sure they’re thinking soundly bout debt: the distinction between investment nd consumption...

...so do cities when they uprade their airports to attract new business to 3wn...