Testimony: Dr. Reischauer strongly recommended against any type of capital budget. He believes there is a conceptual justification for treating investment and operating spending differently, but the current investment decision-making process does not have any significant problems that need fixing. He also believes that even if there were problems in the current process, changing it would create more problems. To support his beliefs, he discussed how the current process affects public investments, and projected problems in changing the current process.

He feels that on balance, the current budget rules have not led to a serious underinvestment by the Federal government, particularly physical investments. He believes physical infrastructure projects are chosen more on the basis of geographical equity and political power than any potential economic return. He also said that in the past, spending has been allocated to stabilize the Nation's economy. He said there may currently be bias for physical investments, because they are geographically specific and our national legislators come from State and local governments, which are heavily into physical investments.

He believes the costs of changing the current process outweigh the benefits. He feels the change may degrade fiscal control and reduce private investment and thus, economic growth. He also believes that having a separate capital budget would create the following problems:

• There would be tremendous pressure to classify every favorite program as an investment.
• A capital budget would not apply to much of the Federal investment activities producing assets that are not owned by the Federal government.
• There would be considerable pressure to manipulate the depreciation estimates.

Questions from the Commissioners: Questions focused on the cost-benefit analysis, possible bias against investment spending, and the political decision-making process for resource allocation.

Q.    Isn't the proposed capital budget reform similar to the 1991 credit reform that was designed to eliminate bias for loan guarantees? Isn't there a sign of systematic bias against capital expenditures?
A.    You can theoretically argue that the two reforms are similar, but there is no evidence that we are underinvesting in some cosmic sense, so why fix it? To say needs are unmet is to say we are human, because there will always be unmet needs. Political decisions allocate resources among these competing priorities, so I don't consider this allocation as a proof of bias against capital expenditures.

Q.    Is there a connection between treating capital expenditures as a current expense and a lack of long-range outlook? Would a capital budget promote more attention and create better decision-making process? What areas should the Commission look at?
A.    I am sure a capital budget would change the way we look at them, but the issue is whether we as a Nation would be better off or not with the capital budget. This is a judgement call, and I think not. However, recommending micro-improvements is good.

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