[PEN-L:12276] Re: Re: Re: Re: The New Government of the New Democrats

Max Sawicky sawicky at epinet.org
Mon Oct 4 09:21:38 PDT 1999


(thought this might interest somebody on LBO, so I've cross-posted it from PEN-L)

JD: >>>>>>>>>>>>>>>>> O'Connor argues that government investment programs typically have a positive ROR (rate of return) but that the government doesn't appropriate (capture) that return. Instead, the benefits redound to private business. Any program that _is_ profitable to its investors is hogged by private business, of course. (Then the private capitalists often turn around and blame the government for not running a profit on its enterprises!)
>>>>>>>>>>>>>>>>>>>>>>

One of these days I'll go a piece on O'Connor, as my gift to world marxism. Don't laugh. Naturally the Gov wouldn't appropriate the returns to its investments, by and large, since they are public goods. Non-defense investment can be beneficial to households, not just business. Your point about the hypocrisy of Biz in denouncing Gov for not running a profit is well-taken, though it's even worse than that. Many attacks on Gov stem from services that are contracted out and problems that arise from business malfeasance.

JD: >>>>>>>>>>>>>> Awhile back, I read an op-ed in the WSJournal by a S. California Congresscritter who argued that by standard accounting principles, the US government had a gigantic surplus. Since this was back when Ronnie ruled the roost, the only way I could figure out where the surplus came from was if _all_ government spending on durable goods and on R&D was counted as "investment" (just as owner-occupied housing, which is basically a durable consumer good, is counted as an investment). Well, a lot of these "investments" were military "goods" plus spending on "Star Wars" research!
>>>>>>>>>>>>

Eisner showed that in his books. Some years in which there were cash-flow deficits arguably reflected surpluses. He took the cash-flow deficit and subtracted net investment (gross minus depreciation); he added the state-local sector surplus; and he deducted the decline in the real value of outstanding public debt due to inflation. With a few other odds and ends there were years of cash-flow deficit but real economic surplus. Some Reaganites were tickled by this analysis because it let them off the hook. The WSJ editorial page liked it for similar reasons, also because they are more interested in tax cuts than deficit reduction.

Public budgets are supposed to record cost. From this standpoint, it is correct to count military hardware and base construction as investment, since the life of the stuff goes beyond the year of expenditure (note I didn't say 'useful life'). It doesn't matter what you think of the expenditure. You don't record cost by estimating the benefits of the expenditure. You record cost by separating investment from consumption (admittedly not straightforward in many cases), and by amortizing investment.

JD: >>>>>>>>>>>>>>>>>>>>>>>> This is a problem I haven't seen addressed in discussions of distinguishing investment from current expense in the government budget: why doesn't spending on military durables and R&D count as government investment?
>>>>>>>>>>>>>>>>>>>

In the limited capital-budget type reporting done, it does count as investment. But in the rules of the budget process, "investment" does not exist. Almost all cash outlays are current expenses (there are some funny rules for things like the Mexico bailout; guess why.). On top of that, there is some accounting in credit programs that counts future liabilities as current costs.

The Clinton Administration has assumed a jaundiced view of capital budgeting. I have some problems with it myself, but for different reasons. The Clintonoids state in the the Budget books that capital budgeting is not very relevant now because net public investment at the Federal level is negative. Chew on that one.

mbs



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