Friday, April 12, 2013

The Stock of Federal Investment

Each year when the president releases a proposed federal budget, as President Obama did on Wednesday, an "Analytical Perspectives" volume is also released with other angles on the budget. This year, Chapter 20 of that volume is about "Federal Investment." Of course, there's a certain tendency by those who favor a certain area--from national defense to health care to antipoverty programs--to label as "an investment." But as the budget states: "The distinction between investment spending and current outlays is a matter of judgment. The budget has historically employed a relatively broad classification of investment, encompassing physical investment, research, development, education, and training." In these areas, what is the accumulated value of the federal investments over time?

The total stock of physical capital from federal investment is worth $3.2 trillion in 2013, according to the budget estimates, which look both at investment and at depreciation over time. About 30% of that is defense-related. About 20% is direct federal spending on projects like water and power. The remaining half or so is capital financed by federal grants, and about two-thirds of that ($1.1 trillion) is related to transportation.

The total stock of research and development capital from federal investment is $1.6 trillion in 2013. One way to divide that up is that about 40% is related to national defense, and 60% is not. Another way to divide it up is that about half is basic research, and the other half is applied research.

The total stock of education and training from federal investment is estimated at $2.2 trillion in 2013, with about three-quarters of that being K-12 education, and the rest being higher education.

I'm sure that the calculations behind these estimates can be critiqued on many grounds, but just taking them at face value, it's thought-provoking that the stock of physical capital investment is less than the sum of the education and R&D capital. In discussions of federal "investment," the quick and handy references are usually to fixing roads and bridges. Here in Minnesota, where memories are still fresh of the highway bridge that collapsed in August 2007, I'd be the last one to denigrate fixing up roads and bridges. But when it comes to long-term economic health of the country, it's not the 1950s any more, when the legislation for the interstate highway system was passed. Investments in technology and education, as well as in communications and energy infrastructure, seem likely to be more important drivers of 21st century growth than roads and bridges.