The Biggest Deficit You’ve Never Heard Of

America has a deficit problem. But the country’s biggest deficit isn’t the federal budget deficit. It’s the deficit in public investment.

The public investment deficit is the gap between what we should be investing in our future — on infrastructure, education, and basic research — and the relatively little we are investing.

Increasing public investment needs to be a major goal of the Biden administration.

Public investment is similar to private investment in that we invest today because of the payoff in the future. The difference is public investment pays off for all of us, for America. 

In the 1960s, we used to make a lot of public investments. But they’ve been steadily declining ever since.

That decline has been largely driven by so-called “deficit hawks” who argue against more federal spending. But as I’ve been saying for years, reducing the federal deficit just for the sake of reducing it makes no sense. 

Any business person knows that you borrow money for the sake of investing in the future of your business. Those are wise borrowings. Because then you can pay those debts off when they get bigger. 

A national economy works exactly the same way. It doesn’t matter that we’re borrowing money, if we’re investing those monies that we borrowed from abroad — in education, training, infrastructure, factories — but we’re not.

The public return on infrastructure investment, based on 2020 report taking into account the pandemic, averages $2.70 for every single public dollar invested — yet we haven’t made those investments. Our infrastructure today is crumbling.

The return on early childhood education is between 10 and 16 percent — but only a handful of our children have access to early childhood education. 

Public investment on clean energy has an annual return of over 27 percent. But federal tax breaks favor fossil fuels over renewables by about 7 to 1.

The public return on investments in basic research and development are huge. America’s competitiveness depends on them, because no individual company has an incentive to make them. The lithium-ion battery that powers iPhones and electric cars was developed by federally sponsored materials science research, while the Internet itself was borne out of the Advanced Research Projects Administration. 

And yet in recent years, public investment in basic research has declined as well. 

Are you seeing a pattern yet? Federal investments in all these areas have shrunk — even though the payoffs from these investments are gigantic, and the costs of not making them are astronomical. American productivity is already suffering.

Now, some say we don’t need to worry about this public investment deficit because private investments fill the gap. Baloney.

Corporations are focused on getting the best return for themselves, not for America. For most of the last four decades, they’ve made money by lowering their costs, at the expense of working people: capping wages, reducing taxes, and deregulating.

A common assumption is that when American corporations are profitable, Americans are better off. But that’s false. Trickle-down economics is a sham. Tax cuts and subsidies to big corporations and the wealthy don’t build the economy. Economies don’t grow from the top down — they grow from the bottom up, through public investment.

So if private investment won’t fill the gap, how do we fill it? Two ways: tax the wealthy and large corporations, and borrow.

Tax rates on the wealthy and on corporations have continued to drop over the past 40 years, just as the deficit in public investment has grown. In the 1950s, the highest tax rate on individuals was over 90 percent. Even after tax deductions and credits, it was still over 40 percent. But since then, tax rates have dropped dramatically. For the first time on record, the 400 richest Americans now pay a lower effective tax rate than people in the bottom half.
Revenue from corporate taxes has also plummeted.

If wealthy individuals and corporations want all the advantages that come with being American, they have to pay taxes so America can afford the public investments necessary for a high-wage, high-productivity society.

The other way to pay for public investment is through public borrowing. This kind of borrowing doesn’t burden future generations, because it’s used to build a better future for those future generations. 

Remember: There’s a difference between borrowing for the future and borrowing for today. You might not want to borrow to pay for a vacation, but it’s perfectly rational to borrow to purchase a house, because a vacation doesn’t have any future return, while a home does. Right now, the federal budget irrationally treats all government borrowing the same.

The government needs a public investment budget separate from the current spending budget to clarify what we’re investing in and allow us to keep borrowing for investments as long as the returns justify it.

Public investment is the biggest and most important deficit you’ve never heard of. 

Don’t listen to people who claim we can’t afford to invest in the American people. We can afford it. We can’t afford not to. Joe Biden needs to recognize this, and make public investment a central part of his economic strategy. 

WHY LIBERAL STATES WON AMERICA’S TAX EXPERIMENT

For years, conservatives have been telling us that a healthy business-friendly economy depends on low taxes, few regulations, and low wages. Are they right?

We’ve had an experiment going on here in the United States that provides an answer.

At the one end of the scale are Kansas and Texas, with among the nation’s lowest taxes, least regulations, and lowest wages.

At the other end is California, featuring among the nation’s highest taxes, especially on the wealthy; lots of regulations, particularly when it comes to the environment; and high wages.

So according to conservative doctrine, Kansas and Texas ought to be booming, and California ought to be in the pits.

Actually, it’s just the opposite. For years now, Kansas’s rate of economic growth has been the worst in the nation. Last year its economy actually shrank.  Texas hasn’t been doing all that much better. Its rate of job growth has been below the national average. Retail sales are way down. The value of Texas exports has been dropping.

But what about so-called over-taxed, over-regulated, high-wage California? California leads the nation in the rate of economic growth — more than twice the national average. In other words, conservatives have it exactly backwards.

So why are Kansas and Texas doing so badly? And California so well?

Because taxes enable states to invest in their people – their education and skill-training, great research universities that spawn new industries and attract talented innovators and inventors worldwide, and modern infrastructure.

That’s why California is the world center of high-tech, entertainment, and venture capital.

Kansas and Texas haven’t been investing nearly to the same extent.

California also provides services to a diverse population including many who are attracted to California because of its opportunities.

And California’s regulations protect the public health and the state’s natural beauty, which also draws people to the state – including talented people who could settle anywhere.

Wages are high in California because the economy is growing so fast employers have to pay more for workers. And that’s not a bad thing. After all, the goal isn’t just growth. It’s a high standard of living.

Now in fairness, Texas’s problems are also linked to the oil bust. But that’s really no excuse because Texas has failed to diversify its economy. And here again, it hasn’t made adequate investments.

California is far from perfect. A housing shortage has been driving rents and home prices into the stratosphere. And roads are clogged. Much more needs to be done.

But overall, the contrast is clear. Economic success depends on tax revenues that go into public investments, and regulations that protect the environment and public health. And true economic success results in high wages.

So the next time you hear a conservative say “low taxes, few regulations, and low wages are the keys to economic business-friendly success, just remember Kansas, Texas, and California.

The conservative formula is wrong.