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Commentary: A Capital Idea

President Obama faces a budget obstacle in his plans to rebuild crumbling bridges and address other pressing infrastructure needs. No, not _that_ budget problem, but a budget that doesn't even exist.

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Unlike many governments, the United States does not have a separate budget for capital spending, which means each tax dollar is as likely to go to the construction of, say, a courthouse, as it is to paying the salary of a judge or court clerk who works there. We have a ""unified cash-based budget"" that treats outlays for capital and operating activities alike. The federal government issues debt for general purposes of the government, not for specific projects or activities.

No family--or very few--would pay for a house completely out of current income (note: income, not savings), yet that is exactly what the federal government does.

What the federal government is doing is exactly the opposite of what brought New York City to the brink of fiscal collapse almost 40 years ago, but the results for both New York City and the federal government are the same--financial chaos.

When New York City struggled through its fiscal crisis, one of the causes was the melding of the city's operating and capital budgets. The city would borrow long-term for short-term expenses, essentially issuing long-term bonds to buy the groceries.

It started slowly with an argument by Mayor John Lindsay that if the city could issue bonds to build buildings, it should be able to issue bonds to build people by paying for textbooks and training programs through its capital rather than operating budget.

The solution to New York City's ""crisis"" was to bond out its deficits and agree to budget oversight by a state panel, which required a balanced budget in four years. The city achieved a balanced budget in three.

What would having a separate capital budget do for the country?

For starters, it would rationalize our spending and make it more difficult for lawmakers to lard up spending bills with long-term projects; those would, per force, have to be handled in a separate budget bill. The president and Congress could focus on turning on the lights each day.

A separate capital budget would also put to rest the concern that we are leaving a debt to future generations; we would no longer being ""paying forward,"" but future generations, in paying off debt, would be paying for items from which they are benefiting. Current tax dollars would not be used to pay for projects current taxpayers may never see built.

Former Clinton administration Labor Secretary Robert Reich recently advocated for an ""investment budget"" that would match funding of government operations with a return on investment so that education aid, for example, could be funded through this separate budget because of the return on improving education at all levels. While a common sense, rational approach, it resembles John Lindsay's slippery slope.

Though not recently, the GAO--when it was the ""Government Accounting Office"" not the ""Government Accountability Office"" it is today--weighed in on the issue in testimony before the House Subcommittee on Economic Development, part of the Committee on Public Works and Transportation.

""For several years, we have advocated better planning and budgeting for capital investments to provide a clearer picture of the composition of federal expenditures and to help focus public attention on the nation's investment needs,"" Paul Posner, director of budget issues in GAO's Accounting and Financial Management Division testified at the time.

The then-current budget structure, Posner concluded, focused on short-term goals, which do not necessarily promote long-term economic growth. That structure is still in place.

In 1997, President Clinton created a ""Commission to Study Capital Budgeting"" in response to growing demands for a constitutional amendment to require a balanced budget. The commission was co-chaired by Jon Corzine (who was chairman of Goldman Sachs) and by Kathleen Brown (then a former California State Treasurer and gubernatorial candidate). While Corzine moved to U.S. Senate and then became governor of New Jersey, Brown, circuitously, became a managing director of Goldman.

The commission punted on whether to recommend adoption of a dedicated capital budget, although it said, ""We have concluded ... that the existing federal budget process--as it affects decision-making about capital expenditures as well as other types of spending--has significant weaknesses,"" adding ""insufficient attention is paid to the long-run consequences of budget decisions. Capital spending in particular is inefficiently allocated among projects ... [and] the current process shortchanges the maintenance of existing assets.""

During the Reagan administration, the then-Treasury Secretary Donald Regan pushed for a capital budget, but then-budget director David Stockman successfully argued against the idea.

In the Clinton-era debate, three commissioners rejected a capital budget of any kind, and the commission could not agree on a single definition of capital. That failure doomed the proposal.

The Congressional Budget Office argued against the concept in testimony striking a difference between financial and budgetary accounting, defending the notion of recognizing the full cost of building or acquiring capital items up front because it then means there are fewer resources available for other programs. That Alice-in-Wonderland thinking is precisely why we need a separate capital budget.

Upcoming economic data:

The ""National Association of Home Builders"":https://www.nahb.org/ (NAHB) will reports its monthly Housing Market Index Tuesday, and while the headline number offers trend insight for the home building sector, a lot more can probably be discerned from some of the underlying data--specifically the ""buyer traffic"" component, which tracks the interest of potential homebuyers. While the overall index has been hovering around the ""break-even"" index point of 50 (as has the outlook for sales both immediately and six months out), the buyer traffic index has been stuck in the mid-30s, though even that represents a huge year-over-year jump. Even in today's online shopping world, buying a new home has to be done in person.

The ""Census Bureau"":http://www.census.gov/ and ""HUD"":http://portal.hud.gov/hudportal/HUD will follow the NAHB Wednesday with hard data on housing permits, starts and completions. The data on completions draws the least attention, but as completions continue to exceed new home sales, prices are affected.

The ""National Association of Realtors"":http://www.realtor.org/ will report Friday on existing home sales for January. The Pending Home Sales Index--which leads the sales report by about two months--edged up in November, but some January closings (the subject of Friday's report) may have been accelerated with concerns that the Mortgage Forgiveness Debt Relief Act was going to expire December 31. It didn't.

_Hear Mark Lieberman on POTUS (Politics of the United States), SiriusXM 124, Friday at 6:40 a.m. and again at 9:40 a.m. EST._

About Author: Mark Lieberman

Mark Lieberman is the former Senior Economist at Fox Business Network. He is now Managing Director and Senior Economist at Economics Analytics Research. He can be heard each Friday on The Morning Briefing on POTUS on Sirius-XM Radio 124.
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