Lautenberg, Senate Budget Committee
Testimony of
Senator Frank R. Lautenberg
Before the
President's Commission to Study Capital Budgeting

January 30, 1998 10:21AM draft

Sue (x40560); Bruce (x49712)

    I appreciate the opportunity to appear today before the Capital Budgeting Commission.

    I would like to commend the co-chairs for holding the first of what I'm sure will be many informative hearings on this important issue. You have a great deal of hard work ahead of you but I'm confident that this distinguished group of experts is up to the job.

    I was pleased when President Clinton established this Commission. I firmly believe that public investment is a critical basis for a growing economy. Unfortunately, spending for public investment has declined steadily over the past three decades.

    In 1981, the Federal government spent 2.6 percent of total national income on nondefense investment. According to Administration estimates for the 1998 budget, that figure is now 1.5 percent. I believe that our current budget practices have contributed to this dramatic decline.

    My perspective on this issue has been shaped by my personal experience. Like many of you, my background is in business. Before I came to the Senate, I was a CEO of a Fortune 500 corporation.

    The company I founded with two friends, Automatic Data Processing, is the largest computing services firm in the world, and it employs about 30,000 people in a number of countries. But it wasn't always that way.

    We grew our company from scratch, using not only our own funds but money lent to us to make wise investments. In the end, many of those investments paid off. That's how most successful businesses do it.

    Unlike a business, the federal budget treats all dollars the same regardless of whether they are spent on school construction or office supples. This is true even though a new school provides benefits for many years while paper clips enjoy a relatively brief shelf life. As a result, we make billion dollar spending decisions every year with no notion of how they might affect economic growth and productivity.

    I don't want to imply that public investment is superior to all other types of Federal spending. We need to support a strong national defense, criminal justice programs, health care benefits, and unemployment compensation. But failure to distinguish between these very different forms of spending means that we are unable to budget for investment in any meaningful way.

    There is a growing body of evidence that public investment, carefully chosen, can contribute to economic growth. A CBO report found that federal investments in physical infrastructure such as highway and aviation projects yield economic rates of return higher than the average return on private capital. The highest benefits resulted from maintaining existing infrastructure assets and from expanding capacity at highly congested facilities. In March, CBO will include the latest evidence of the economic returns to public investment in their annual report on long-term budgetary pressures and policy options.

    By failing to recognize its critical importance, we have allowed public investment to decline steadily over the past decade both in terms of overall Federal spending and as a share of the economy.

    The United States is at the bottom of the list of major industrialized nationals in terms of share of national income devoted to public capital investment. Japan invests in infrastructure at almost triple the rate of the U.S.

    This underinvestment in our future is more critical in some areas than others. A study by the U.S. Department of Transportation found that we would need to invest an additional $15 billion a year in our highway and transit systems just to maintain them -- not expand or improve them. The $15 billion figure grows to $40 billion when you count necessary improvements.

    And it is even higher if you count the infrastructure needs of our nation's airports. While fifteen billion dollars seems like a lot of money, consider the cost of not investing. Congested roads in the largest 25 cities cost motorists $43 billion a year in lost productivity and fuel.

    Clearly, the challenges of the future will require significant increases in both private and public investment. That does not mean that we can "spend" our way to a higher standard of living or that we shouldn't count public investment as government spending. My point is that public investment can complement rather than compete with investment by the private sector. It is not economically equivalent to across-the-board tax cuts or increased noninvestment spending.

    I am pleased, therefore, that you will be considering ways to incorporate more business-oriented practices into federal budgeting. The fact is, when businesses plan, they don't simply equate capital investment with operating expenses. And I don't think government should, either.

    Needless to say, capital budgeting for the Federal government would involve some difficult technical issues, such as whether and how to depreciate assets that the Federal government may not own, but that are purchased indirectly through grants to States and local governments. And we need to realistically assess the risk that any such system could be subject to gamesmanship by politicians seeking to promote certain types of spending.

    But while these issues are difficult, the need to promote public investment makes them worth tackling with a serious effort. Most States manage to define what is a capital investment and what is not. I am optimistic that, with some work, we can do so at the Federal level.

    In any case, I am firmly convinced that the federal budget process must be changed to better promote investment. And I hope you will be able to resolve the difficult technical issues involved, and produce recommendations on how to establish a capital budget. If not, I also would encourage you to evaluate other approaches, such as establishing specific targets for public investment, that also could promote a greater focus on investment.

    Again, I appreciate your invitation to testify on this matter and I look forward with great interest to the recommendation that you will make. I hope we can work together to implement sensible investment budgeting throughout the budget and legislative process.

President's Commission to Study Capital Budgeting

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