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Staff Summary of Testimony to the PCSCB: Eisner, Northwestern University

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Robert Eisner, Professor Emeritus of Economics, Northwestern University; former president, American Economic Association (appearance on April 24, 1998)

Testimony: Mr. Eisner criticized the Federal budget, which, unlike private income statements, does not contain separate accounts for capital transactions. Comprehensive, consistent, and separate capital and consumption accounts can be presented within the unified budget, and are essential for enlightened policy making and analysis.

In the private sector, profit and loss statements include as costs only current expenditures and depreciation of fixed capital. A good model for public sector accounting for capital assets is the National Income and Product Accounts (NIPA) developed by the Bureau of Economic Analysis (BEA). The BEA has set up a separate capital accounts for Federal, State, and local governments, and their breakdown of gross domestic product now includes totals designated "Government consumption expenditures and gross investment." NIPAs also contain sections on "Government Receipts, Current Expenditures and Gross Investment," and "Gross Saving and Investment," which includes both gross private saving and gross government saving.

Mr. Eisner called for three separate sets of Federal accounts: 1) a current account that includes depreciation or capital consumption as a cost; 2) a capital account that contains all investment outlays; and 3) a unified account that merges the current and capital accounts. Without such accounts, policy makers are encouraged to make bad economic decisions. If the goal of deficit reduction is to provide more resources for the future, cutting government investment in long-term capital assets to reduce Federal spending is counterproductive.

Many oppose capital budgeting because they fear it would lead to increased budget deficits. However, Mr. Eisner pointed out, due to a lack of Federal investment in capital assets in recent years, a properly constructed set of accounts would show a current expense budget more in deficit than the unified budget and a capital budget, if restricted only to investment in tangible capital, in substantial surplus. In addition, a proper set of national accounts should include not only investment in fixed or tangible capital, but should also recognize the much greater and more vital investment in human and other intangible capital. Currently, neither public nor private accounting treat these expenditures properly, and investment in research and development other than facilities, and computer software is not capitalized.

Questions from the Commissioners:

Q.    Are you proposing separate rules for capital versus current expenditures, or advocating capital budgeting for informational purposes only?
A.    I am concerned with providing information on capital assets in a manner so that people can make an informed decision.

Q.    How should the information you advocate be included in the current budget process?
A.    The President should propose his budget in the three forms I have described: current budget, capital budget, and consolidated budget.

President's Commission to Study Capital Budgeting

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