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The Atlantic Monthly | January/February 2003
 
[Public Capital]

Taking Stock

The demands of our two politically mightiest generations—Boomers and retirees—have knocked the country's public-investment priorities out of whack
 
by Jonathan Rauch
 
.....
 
sometimes think sourly of the Constitution's majestic call on the government to provide for the general welfare when my teeth are cracking together as I bounce over one of the District of Columbia's crater-sized potholes. Or when I forlornly watch bicyclists glide past my car as I wait, and wait, in the gridlocked morning traffic of northern Virginia. Government does grand things, but little of what it does is more important—or more noticeable when neglected—than the routine job of providing and maintaining public capital.

Further reading
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Markets, entrepreneurialism, and the miracle of compound interest are every bit as marvelous as their enthusiasts tell us, but private growth depends on public capital. Governments will often invest shortsightedly or inefficiently, as anybody knows who has spent ten minutes listening to Congress debate a highway or water bill. Still, public capital, even when less than ideally provided, often has the important benefit of stimulating private investment and thus economic growth. Build a road, and development follows. Invent a new method of encryption, and new forms of e-commerce flower. Much of what government does tends to crowd out private activity. Public capital, in sharp and important contrast, often crowds it in.

Two main categories of public capital are infrastructure (physical capital) and research and development. Public investment has gone through three distinct periods: a boom until the mid-1960s; a bust through the early 1980s; and then a moderate recovery, though not to pre-1970 levels. In response, the accumulated stock of public capital—relative to the size of the U.S. economy—climbed through the 1960s, leveled off, and then entered a long, gradual decline.

This is not as bad as it might seem. For one thing, the boom of the 1950s and the 1960s was occasioned largely by the postwar push to build the national highway system and by the need for new schools to accommodate the Baby Boomers. Now, of course, the highway system is finished and most of the schools we need are in place. Moreover, starting in the 1980s governments found themselves spending more of their capital budgets on computers, software, and other kinds of information technology that depreciate much faster than do bridges or buildings. That is probably why the capital stock continued to decline in value even after investment recovered in the 1980s: the lower figures reflect not so much a neglect of bricks and mortar as a shift toward bits and bytes. Roads and bridges, for example, are mostly in good shape, bone-rattling exceptions notwithstanding. Congress passed two large highway bills in the 1990s (politicians love nothing better than to pave the country), with the result that road conditions in the national highway system have steadily improved.

Even so, that classic example of how a public-capital bottleneck can restrict private-sector economic growth—to wit, the traffic jam—has grown more common. Recently the Texas Transportation Institute estimated that in 2000 alone, congestion cost the drivers of seventy-five urban areas a combined total of almost $70 billion in wasted fuel and time. Although the country's roads are not falling to pieces, more investment—especially in the better use of existing roads (through smart-highway technology and congestion pricing, for example)—would not go amiss.

From an economic point of view, then, the road system appears better than adequate but less than optimal. The same might be said of public infrastructure more generally. It turns out that periods of rising and declining investment in infrastructure coincide rather nicely with periods of greater and lesser economic growth. That might be simply because the country has more to spend on public capital in boom times. But in 1989 an economist named David Alan Aschauer set the economics profession on its ear with a paper arguing that the causality ran at least as strongly the other way. Investment in public capital, he found, substantially increased productivity—"which implied," as he recalled in a recent phone interview from Bates College, in Maine, where he teaches, "that a substantial portion of the productivity slowdown we'd experienced could be connected to a slowdown in public investment."

Aschauer's findings set off a wave of research into the economic effects of public capital. The results came out all over the place, but the central tendency of various studies was to find that infrastructure investment does indeed spur productivity, though not as dramatically as Aschauer had initially found. In 1998 Aschauer revisited the subject in a paper called "How Big Should the Public Capital Stock Be?" He used data from forty-eight states to estimate the ratio of public to private capital that seemed to maximize economic growth. Various methods all put that optimal ratio at roughly sixty cents of public capital for every dollar of private capital. Then he noted that the actual ratio of public to private capital in those forty-eight states averaged only about forty-five cents per dollar. "The public capital stock did not keep pace with the private capital stock during the 1970s and 1980s," he wrote. The implication was that the country might be considerably better off with more public capital. "Overall, we're doing pretty well," Aschauer told me, "but there's anecdotal and statistical evidence that we could be doing better."

In his paper, however, Aschauer went on to make a point that enthusiasts of government spending will find less congenial: most of the benefit from increased investment in public infrastructure comes only if the investment is funded by reducing other government spending. The reason is that additional public investment financed by tax increases or government borrowing comes partly at the expense of private investment. In fact, Aschauer says, his findings suggest that public spending overall is too high from the point of view of economic efficiency, even as spending on public capital in particular is too low.

hat of research and development? Here, by any measure, the United States is the world's powerhouse. America alone accounts for almost half of R&D expenditures among the thirty countries of the Organization for Economic Cooperation and Development; indeed, America's R&D spending is more than double that of No. 2, Japan. Moreover, recently R&D spending has continued apace in the United States even as it has slowed in many other places, so the gap has, if anything, widened. America's university system is the envy of the world, and its scientific establishment is unequaled in the history of civilization. Today only a few countries spend more than the United States on R&D as a percentage of their GDP, and with the important exception of Japan, they are small economies—in 2000 Finland and Sweden—rather than major competitors. All of that gives reason for pride and optimism.

However, the composition of America's public R&D has changed dramatically in recent years, and perhaps excessively. Whereas most R&D spending was roughly flat (in constant dollars) through the 1990s, health-related R&D went soaring into the stratosphere—almost literally, given that the level now nearly matches, and may soon exceed, spending on space research at its peak, in the moon-shot years. The extent of this change is hard to overstate. Medicine and biology accounted for almost half of the government's fiscal 2002 research budget. In fact, the National Institutes of Health alone has accounted for essentially all of the increase in Washington's non-defense research spending since the mid-1990s, and today more than half of all federal basic research is conducted under the NIH's auspices. It is as if the moon shot had become a health shot, with the NIH replacing NASA. Moreover, because the federal government is such an important sponsor of university research, the tilt in Washington's priorities is mirrored in academia.

"I think we're out of whack," Roger G. Noll, a Stanford University economist who studies R&D, told me recently. "Only about two thirds of the students who want to be physical-science and engineering majors can be, because of enrollment constraints." (Training scientists is expensive and heavily reliant on government support.) "We're right in the middle of the growth curve for information technology, and this is not a wise time to be cutting back on the basic research that supports those technologies," he says. "We really do know that the kinds of work people are doing in solid-state physics and algorithm design and other areas of information technology have a huge payoff."

Why, then, the lurch toward health? Here our two stories, one about infrastructure and the other about R&D, appear to converge. The U.S. population, as everyone knows, is aging. Baby Boomers are beginning to peer at mortality, and they don't like what they see. They want no expense spared in the search for new treatments for cancer and heart disease and Alzheimer's, and they are a large cohort that politicians are eager to please. Another influential constituency—possibly the most influential of them all—is retirees, and the aging of the population means that there are more and more of them. For more than thirty years Washington has been devoting steadily more resources, measured as a share of GDP, to writing benefits checks to individuals through entitlement programs like Social Security and Medicare, while the share devoted to public investment has remained the same.

In sum, the demands of two politically mighty generations have shifted government's priorities toward consumption as a general matter and, within the R&D budget, toward the sort of research that most resembles consumption. Good health and long life are very important, but in economic terms they are not seed corn. That does not mean the future is being starved, but it probably does imply that opportunities for a still better future are being missed.

The hopeful news is that Washington has begun to notice, at least where R&D is concerned. A presidential advisory council on science and technology recently called for a better-balanced research portfolio to bring the physical sciences in line with the life sciences; and complementary efforts got under way in Congress to double the budget of the National Science Foundation—the NIH's counterpart in the physical sciences—over five years.

Infrastructure, however, is primarily in the hands of state and local governments, which at the moment are cutting back. What is true in flush times is doubly true in lean ones: the squeakiest wheel gets the grease, and long-term investment rarely squeaks the loudest. When public capital suffers relative to other priorities, that is generally because of thoughtlessness rather than hostility. Whether you are a state legislator crunching a budget or a voter losing your molars to a pothole, the remedy amounts to this: pay attention.

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Jonathan Rauch is a correspondent for The Atlantic.
Copyright © 2003 by The Atlantic Monthly Group. All rights reserved.
The Atlantic Monthly; January/February 2003; Taking Stock; Volume 291, No. 1; 119-123.