XII. Government Investment: In What?
Let’s revert for a moment to Senator Moynihan’s 1990
charges that the Social Security Trust Fund was being "embezzled".
That might be true, but the mere fact that the government "turned
around and used the surplus for current expenditures" would
not prove it. It depends, as suggested before, on the character
of the expenditures.
Consider for a moment: what would the government have done
differently, if it had been intent on "investing" the
money? Would it hide the funds under a mattress? Fat lot of good
that would do future workers when it was pulled out from under
the mattress and presented for redemption in goods and services!
Or would the government, perhaps, buy private stocks and bonds,
as some variants of Social Security "reform" now contemplate?
If it did, the private caretakers would not hide the money under
a mattress, either. They’d spend it upon suitable
goods and services for the enhancement of future production.
What about the government’s own activities? Don’t
some of them enhance future production? Wouldn’t they
be suitable objects for investment? This question arose again
in a subsequent political episode. Early in his first term, President
Clinton presented a budget to Congress, in which he urged the
expansion of certain programs which he characterized as "investment
in human capital". A prominent
member of the opposition, seeing this as a smooth salesman’s
trick to put across expanded government while calling it "investment",
fired off the retort that "the government never invests anything".
[34]
"The government never invests anything"? This was
hot political rhetoric, and was probably not meant as a serious
challenge to the proposition that government expenditures can
have the character of an investment. Nonetheless, it’s worth
discussing, for there are indeed some differences between private
and public "investment".
Back to basics: what do we mean by an "investment"?
It’s an expenditure upon goods and services which are desired
not for immediate consumption, but for what they contribute to
consumption in the future. An obvious example would be the layout
of money to build and equip a factory, which, once it gets going,
turns out a product which would be more difficult or even impossible
to turn out by hand.
This seems straightforward enough, but there are various subtleties
to keep in mind:
- Time is of the essence. If we could commission instant
production of the same end product, we’d merely be spending,
not investing.
- The "end product" need not be physical;
it can be a service, and it can begin immediately, provided it
outlasts the up-front payment. If we save up and buy a car for
cash, that’s an investment. We take our return in services
provided by the car over its lifetime. If we borrow the money
to purchase it and run it into the ground before the payments
are completed, we’re not investing — but the lender
is investing, in what we will pay for the services that the car
is expected to render, on an agreed schedule.
- While we tend to think in terms of increased physical
product, that’s not necessarily the case. We can invest
in storage of agricultural products between harvests. The physical
quantities actually diminish as time goes by, due to spoilage
and hungry critters, but the value increases, simply because
it’s more valuable to us to have a part of the crop in the
off season.
- We also tend to think of investment as expenditure
upon new or additional equipment, but maintenance of
existing equipment is also investment. Accounting conventions
tend to obscure this: once an enterprise is established, maintenance
and replacement of existing equipment are financed out of revenue
and treated as current cost of production. Certainly, though,
if maintenance and replacement were neglected, we would in retrospect
agree that there had been disinvestment. The avoidance
of disinvestment is part and parcel of total investment.
With these considerations in mind, how is an interstate highway,
funded by the government, any less of an investment than a corporate
jet? How is a school less of an investment than a factory? How
is a sewer line less of an investment than the plumbing which
leads to it from a house? How is research upon public health less
of an investment than oil exploration?
All of these activities involve the up-front expenditure of
money that could otherwise be spent upon current satisfactions,
in return for a protracted (and often uncertain) stream of satisfactions
in the future. Some are undertaken by government, some by private
enterprise. An investment is an investment.
In fairness to the politician who exclaimed, "The government
never invests anything", he may have had in mind that the
government acts like the average debt-laden consumer: when it
does purchase anything whose fruits will be extended over time,
it borrows the money to do so. The bondholders do the investing,
not the government. That, most of the time, is a fair accusation.
Taxpayers spend a good deal of their money paying the more provident
part of the community to do the abstaining for them. Politicians
too often encourage this. Yet in such cases it’s not the
character of the expenditures which keeps them from being government
investments; they would be suitable subjects of investment if
only the government would invest.
Then again, the skeptic could advance an entirely different
point: government is an inefficient organization. Whatever it
manages, private enterprise could do better. Yes, it may lay out
money upon projects whose fruits will be deferred, but the market
could pick them more wisely and private business could carry them
out at less cost. The "investment" is therefore a net
loss, at least in terms of its opportunity cost.
From the 1930’s until some time in the 1980’s, this
latter argument would have been laughed out of court by what was
then the intellectual mainstream. It was taken for granted that
centralized economies were more "efficient",
and totalitarian economies were the most efficient of all. People
who looked with distress upon life under totalitarianism tended
to argue that some (Communist) "efficiency" should be
sacrificed for the sake of other values (liberty, human dignity,
etc.).Editorials pointed with alarm to the supposedly faster growth
of Communist economies, and Communist leaders themselves believed
it, notwithstanding their firsthand experience of shopping in
Moscow. A few naysayers like Hayek protested that command economies
were in fact rickety, brutish, and poor, but the Communist Party
of the Soviet Union itself had to ‘fess up before most intellectuals
would believe it.
Let us be grateful that, for the first time in recorded history,
a major world religion confessed that some of its major tenets
had been a ghastly mistake. Let us also, however, keep our feet
on the ground. Some of us who have spent our careers in private
employ are keenly aware that the defects of government enterprise
are no monopoly of the government. Political pressures, group
aggrandizement, office politics, ideological obsessions, fads
of the time, and mediocrity infect private organizations as well
as those run by the government. Decentralization limits the damage
and offers more elbow-room for innovators, and that’s worth
a great deal, but it’s not the end of the story.
There is one serious, consistent difference between government
and private investment: Namely, the government doesn’t charge
in detail for the services it provides. Indeed, the best case
for the government’s involvement in any type of service is
that its benefits are difficult to withhold from anyone who hasn’t
paid. If the nature of a service is such that freeloading is easy,
because it’s costly and difficult to determine who is taking
how much or deriving how much benefit, one way to cope with the
situation is to charge everybody a tax and provide the service
without explicit charge. The usual instrumentality for this is
government.
But if that’s what government is providing, how do we
measure the value of the service and its growth over time? How
can we compare its return with what we could get by investing
in the private sector? In this comparison, government unavoidably
looks bad: there is no earmarked revenue by which to measure
government-provided service, unless we choose to count the government’s
future tax take as a return upon the totality of its services.
But then how do we attribute any part of it to any particular
service? How do we know that taxpayers valued any part of it as
much as they were charged? The market gives consumers a wide variety
of detailed choices; by contrast, in the public sector every
sale is a tie-in sale, bundled with all the rest of the government’s
output. Moreover, "buying power" in the political sphere
is a murky combination of votes, political funding, and graft.
We know all this, yet we also know that the government does
fulfill some indispensable functions, and that some of them, at
least, have deferred impacts. These, if they’re positive,
might reasonably be counted as return upon an investment. We really
need to focus upon this fact and judge proposed activities by
their bearing upon future life support, as compared with the someday
support that we are promising ourselves. This is notably absent
in our political discourse, which tends to obsess about who will
get the immediate proceeds of government expenditure.
So what are some promising investments? Surprise! They will
mostly be found among types of activity already undertaken by
the government. It isn’t as if there had never been any discussion,
or any natural selection, of government versus private sector
roles. An emphasis upon investment is likely to affect the proportions
among different government activities, and what exactly goes into
them, rather than the general sphere of activity.
- Research and Exploration. If investment is to grow
the economy, research and exploration are high-priority candidates
for some funding. Anyone can point to examples where these have
extended our frontiers, multiplied the uses of whatever resources
we had, and added value in the form of easier, healthier, longer,
more interesting lives. Indeed, "research"
has been so closely coupled with economic growth that some people
who oppose growth would like to ban research. [35]
The question, where Social Security is concerned, is what kinds
of research and exploration projects should be undertaken by
government, if it is to earmark any of its activities as Social
Security investments.
Research always presents a puzzle for those in charge of funding
it: if we knew that it would succeed, and how to go about it,
and what would be the benefits, it wouldn’t be research.
At least, it wouldn’t be basic research, which is
the kind most often dependent on the government. The more basic
the research, the less we can foresee the results. This kind
of uncertainty, coupled with the occasionally spectacular benefits
of research in the past, has often been used as an argument for
public funding. In some cases, such as space exploration and
particle physics, the very scale of the required outlays, far
beyond the means of private firms, has also been used as an argument
for government funding.
Yet the government, when it spends taxpayers’ money, has
a responsibility to deliver their money’s worth, the same
as any private research organization. This will be particularly
so if it invests in behalf of Social Security. Any research organization,
public or private, must be bound by at least these rules: keep
an eye upon the value of potential prizes, and go where
the action is. That is, look for problems whose solution
would be highly rewarding, but they must plausibly lie in areas
in which science is currently generating lots of discoveries.
We can see, for example, that breakneck progress is being made
in microbiology, and it is not difficult to imagine immense benefits.
So place some money on microbiology. On the other hand, while
mental telepathy might be enormously valuable, nobody has any
credible idea how to do it. So leave that to the cranks. (You
never know, one of them might come up with something, but it’s
not a suitable bet for a keeper of people’s savings.)
Private enterprise can follow these same rules of thumb, and
has funded some excellent research organizations in the last
fifty years. The trick, though, is somewhat like funding insurance
or movie production or oil exploration: the funder must be in
a position to pool the risks. Fund enough research, and the successes
will bear the cost of the failures. Spectacular successes will
improve the return upon merely commonplace successes.
While private enterprises can and do engage in such activities,
they can make a sustainable business of it only if they can assure
that the results will be appropriable in some fashion
-- or at least, that they themselves will benefit enough to recompense
the investments. The more the research results in unpatentable
knowledge, side-effects whose beneficiaries are unforeseeable,
or public weal that is much more diluted for any one enterprise
than for the society at large, the better the case for government
funding.
Getting down to specifics, three promising arenas for Social
Security investment would be space exploration (including astronomy),
microbiology research (such as the human genome project), and
medical applications of new biology and new technology. All of
these are in a state of runaway progress, and all have public
benefits far beyond what can accrue to individual enterprises.
Indeed, many of the benefits which turn up will require us to
invent new forms of property before private enterprise can appropriate
a share proportioned to its contributions.
The same can be said for many other areas of investigation, such
as the environmental sciences. Space,
microbiology, and medical technology are put forward here first
because the author believes them to be inadequately appreciated
in current and pending political discourse. [36]
- Defense. It has long been conventional to regard defense
expenditures as dead waste.
For more than fifty years, ever since the Axis threat was dispensed
with, the left flank of the American body politic has had no
heart for military defense. For complex historical reasons, the
left simply could not see the Communist camp as the same kind
of threat as Naziism, Fascism, and Japanese imperialism had been.
(Hadn’t Eugene Debs proclaimed, "I am a Bolshevik to
the marrow of my bones"?) Over the decades, this negativism
has crept even into the recollection of World War II itself.
Yet any clearheaded evaluation of America’s present prosperity
must treat everything we spent on World War II as an investment.
Had the Axis powers won, we would not today be discussing animal
rights (having run out of additional classes of humans to whom
the protection of civil rights laws might be extended). At best,
we would be humbly petitioning our conquerors to accept Anglos
as honorary Aryans. We’d not be moaning about the expenses
of the Cold War, but rather bemoaning the enslavement of our
economy to support the wars of the victors. And that’s at
best. At worst, the wars of German and Japanese militarists would
have been hot ones, and most of us would be dead.
As for the Cold War, it is ironic that the American left, which
staunchly supports Social Security, has devalued most of what
two or three generations have done to earn it. It is argued that
from the standpoint of the world at large, military expenditures
are a complete waste -- whatever we spent merely rendered useless
what the Communists spent, and vice-versa. However, we are not
God looking down upon the tragedy of the human condition. We
are one group of humans embedded in that condition, and we must
value things from our own standpoint. The value of what was won
for Americans by the defense of America is best attested
by the desperate actions of "boat people" and other
refugees from places where Communists took over.
Part of what is needed to tone down the recriminations against
"greedy geezers" on Social Security is some soul-searching
about the value of what past defense expenditures have contributed
to present and future American well-being. For that is what much
of the Social Security surplus -- such as it was -- helped finance.
Put a dollar value on it, and characterize part of general taxation
as a payment for it, and suddenly the geezer generation is not
in deficit.
- Education. President Clinton did not invent the phrase
"human capital". It was
much used in the 1950’s by conservative economists
— for example, to explain the rapid economic recovery of
West Germany after most of its physical plant had been annihilated
during the war. [37]
The bombs shattered factories and houses, but what had been invested
in knowledge and skills endured, a well-rewarded outlay. Hardly
anyone today would deny the long-term value of education.
But not so fast! There’s education, and then there’s
education: it matters what is taught and how it’s
taught. Let us appraise it for a moment as a suitable target
for Social Security investment. Remember, the purported justification
would be that it provides the future wherewithal for payment
of pensions, in the sense that it creates an environment in which
future workers can easily bear the expense.
Well, then, should the Social Security Trust Fund subsidize the
social graces? Music and art have always been part of the public
school curriculum. Might they be considered a little frivolous
and irrelevant to the someday support of an elderly population?
Some people might say so. Yet the return to an investment, remember,
is measured in value, not physical quantities. We wouldn’t
want our Social Security investment guidelines to bend the schooling
system toward a drab, "bread alone" understanding of
future value. (Neither, though, can we avoid controversy over
musical and artistic taste.)
Reading, writing, and arithmetic seem uncontroversial enough
— but how should they be taught? When we put on our green
shades as Trust Fund administrators, can we really be indifferent
whether children are deprived of the secret code behind the written
word (i.e., phonics)? Do we consider spelling important? What’s
our attitude toward "new math"? Towards discipline?
Towards competition? How rapidly should immigrant children be
immersed in English? If the object of our investment is to grow
the economy, shouldn’t we devote the lion’s share of
our funds to the encouragement and assistance of the more
able students?
Then there’s the whole gamut of topics which bear on children’s
future citizenship roles. Surely we would object if Social Security
funds were invested in next year’s Democratic or Republican
election campaign. Yet depending on what children are taught
today in civics classes, history, and even some branches of natural
science (for example, ecology), we may well be investing in one
party’s success twenty-five years from now ¾
or at least, constraining what the parties may stand for by then.
What about athletics and health education? Not much quarrel,
one would think. Surely the physical health of tomorrow’s
workers bears heavily upon the ease with which they can produce
a living for themselves and for tomorrow’s retirees, not
to mention the impact upon disability insurance. Yet even in
this field, there’s the whole question of sex education,
and the battle over school sports disproportionately suited to
males.
A voucher system, allowing a variety of schools to flourish,
might ease some of the controversies over curriculum and teaching
methods ¾ provided the government,
as source of the vouchers, restrains its impulse to dictate more
and more "standards". But does anybody suppose that
the government will restrain that impulse? More precisely,
does anyone know of any constituency out there which will restrain
its own part of that impulse? Or even can restrain it?
We’re bound to teach the young something, and
we’re bound to experience high anxiety over what youngsters
are taught ¾ not only our own
youngsters, but those of other people as well. They become our
future environment. Imagine placing the Social Security Trust
Fund at the center of this maelstrom!
Finally, Social Security being a federal program, its involvement
would doubtlessly work towards a single educational system for
the whole land. That is not necessarily a bad thing, provided
the system offers a variety of methods and curriculum. We are,
after all, a mobile people, and rather like to be citizens of
a continent-wide power, with most of our options intact from
state to state. But federalization means that if the system chooses
to limit options, they will be limited throughout the
land. No havens, no liberated zones.
We’re left with a dilemma: education is both the best
and the worst of government investments to which we might direct
Social Security funding.
It’s the best, because it’s a prime example of an investment
whose product is difficult to package in individual wrappers
or put through a checkout counter, yet of undoubted benefit to
the community above and beyond its benefits to those who receive
the education. Also, many of the most important decisions have
to be made before the recipients are old enough to foresee their
personal stake in the future benefits. If there’s an argument
for any kind of public investment, surely education is a case
in point.
It’s the best, too, because education is already an appreciable
share of what governments spend (at the state and local level).
To tie it in with the money that Social Security is attempting
to invest, it is only necessary to start counting it as such,
with suitable arrangements to displace a part of local and state
tax burdens.
Finally, it’s the best because it’s a particularly
good match for what ought to be the main purpose of Social Security:
"career insurance". Viewed as a carrier of "career
insurance", Social Security has the same stake in education
that a carrier of fire insurance might have in sprinkler systems.
But education is also the worst of public investments
for Social Security to get mixed up with, because of all the
controversial details mentioned above. Any large-scale source
of funding for education is an automatic target of all the social,
political, and religious passions of the world. These passions,
of course, exist in any case, and are already fought out in skirmishes
at the state and local level. (Tacitly, they underlie some of
the battles over things like teaching methods and school discipline.)
The question is whether Social Security can channel money into
education without butting into these conflicts and taking on
all their resentments.
- Environmental Preservation. A glancing allusion was
made above to "people who oppose growth". These, for
the most part, are of the environmentalist persuasion, and their
objection is to the physical sorts of growth: to highways burying
more and more land, housing developments intruding upon more
and more of the wilderness, chemical industries dumping toxins
in the river, and that sort of thing. Bearing in mind, though,
that economic growth means growth in value, it’s
evident that if we place a value upon the environment, its preservation
may rightly be counted as a part of economic growth. Attempting
to put some measure upon this might be a very good exercise for
a Social Security Trust Fund.
In economics, value is always relative: the actual value which
we place on one thing is revealed by the amount we’re willing
to trade off for another. Moreover, it depends on the amounts
we already have. The first glass of water after a lapse of twenty-four
hours is worth just about anything we can give for it. The next
is worth less, and quaffing glass after glass in quick succession
will soon put us in mind to pay for the privilege of stopping.
So it is with environmental values ¾
wilderness, diversity, clean water, safety ¾
as against other human needs such as food and shelter. Desperately
poor people will do desperately short-sighted things to the environment
for the sake of their next meal. Richer societies can begin to
think about other values: beauty, safety, kindness to nature,
and what’s going to happen in the long run. They can trade
off further riches of the one kind for values of the latter sort
(but not so much as to make them desperate and poor again).
Many environmentalists, a bit over-enthusiastic, are repelled
by any talk of trade-offs. They want to assign infinite values
to various features of the environment, and implement their preferences
in absolute prohibitions. In practice, of course, this amounts
to overriding other people’s preferences (among them, survival,
comfort, and the urge to be fruitful and multiply). In the end,
political strife provides a feedback loop: environmentalists
get only enough of their way to galvanize an opposition when
they begin to make life too difficult for others. Trade-offs
take place, but only in the see-saw of political triumphs and
defeats.
It would be better to acknowledge that we have multiple needs
and mixed desires, and discuss the trade-offs in a reasoned way.
Treating environmental needs as one set of values among others
affecting our future, and therefore requiring investment, would
improve the whole discussion. Recognizing it as a part of Social
Security investment would institutionalize it and keep it in
a balanced perspective.
Those are just the "big ticket" items — the
ones with the most obvious ties to the future, and the most grandiose
prospects. Any look at the manifold activities of our government
will assuredly find many more with an "investment" quality
(and interested parties will assuredly take a look). Highways,
flood control, water management, public health …The
list goes on and on. Just about any expenditure which leaves a
residue for the future is a candidate to be assessed as an "investment".
Recall, now, the earlier observation that maintenance
of existing capital is also investment, however accounting conventions
may look upon it. With that in mind, we can make a strong case
for bridge repair, upgrading of computers and software, job retraining
for the unemployed, and all sorts of endeavors which tend to be
treated as "current expenditures". As such, they tend
to be disparaged in budget debates. They are part of the "embezzlement"
with which the Social Security Trust Fund has been charged. A
serious attempt to insure that Social Security funds flow to real
investment activities would have to look into all this and make
some careful distinctions.
