If you’re confused about why American economic growth has been so disappointing, consider this: US government investment in capital, research and development, and education and training is at its lowest point in 45 years. In 2014, federal investment turned negative for the first time since 2001, meaning that government capital is depreciating or becoming obsolete faster than it is being replaced.
Harvard economist and former Obama adviser Larry Summers recently highlighted this troubling trend in a Washington Post op-ed warning about future recessions. He notes that during previous bouts of low federal investment, the US was enjoying “peace dividends” in the wake of the post Vietnam and Cold Wars. This time around, he says, the lack of federal investment is a sign of counter-productive budget cutting.
Since leaving the White House in 2010, Summers been among America’s loudest advocates for a return to higher government spending, particularly in research, technology, and physical infrastructure, as a way to break out of the doldrums (pdf) that slowed the expansion of the US economy in the wake of the Great Recession.
The IMF agrees with Summers, but not everyone does. Former Federal Reserve chair Ben Bernanke, for one, thinks the real problem is a fiendish plot by countries like Germany to suck up America’s precious demand.
Regardless of your theory of what’s wrong with our economy, it’s easy to sympathize with Summers’ fear that the Federal Reserve, now in tightening mode, is not in a great position to further stimulate the economy. Boosting government investment to even average levels would help inoculate the economy against further growth slowdowns and also lay the groundwork for long-term expansion.
But the political economy side of the equation is harder to balance. Absent a budget deal to reallocate spending, the budget legacy of the Obama administration is a bipartisan deal to hold down budget levels across the board. Known as sequester, it did not so much cut the fat from government spending as allow it to calcify into fiscal arteriosclerosis. Meanwhile, the opportunity to borrow at incredibly low interest rates is quickly slipping away as the Fed tries to tighten.
Boosting domestic investment isn’t too far out of reach, though. Returning to pre-recession levels would require an increase of $90 billion a year. If the US started to crack down on tax evasion, which costs the country perhaps $36 billion a year, or closed loopholes that allow US multinationals to move profits abroad (about $50 billion a year), we’d be nearly there.
Or, alternatively, lawmakers have an ever-available compromise in the form of a repatriation holiday for foreign profits to fund an infrastructure bank (pdf) that could lend money to major projects.