Schultze

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Staff Summary of Testimony to the PCSCB: Schultze, The Brookings Institution

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Charles L. Schultze, Senior Fellow Emeritus, Economic Studies, Brookings Institution (appearance on April 24, 1998)

Testimony: Dr. Schultze strongly recommended against adopting a capital budget. He asserted that the major issue before the Commission is whether the Federal government's net investment outlays should be financed by borrowing. He believes adopting this rule would be a mistake at any time--but especially under the current economic and political circumstances. He elaborated on the following three issues to prove his point:

Adopting the rule has adverse economic consequences.
The rule brings political and procedural problems.
State and local capital budgets are irrelevant to the Federal government.

Dr. Schultze believes that under present economic conditions, increased government borrowing displaces highly productive private investment. He stated that this reduces productivity and the level of future national income. He quoted studies by the Federal Reserve, CBO, and OECD that concluded that public investments are less productive than private investments.

He said the borrow-for-investment rule leads to a political "struggle for investment identity." This struggle creates constant procedural battles over budget rules, reversing the painfully won current budget discipline. He agreed with Federal Reserve Governor Edward Gramlich's testimony that the rule would further complicate already arcane budget rules.

Dr. Schultze advanced two reasons why State and local capital budgets are not relevant to the Federal budget. First, unlike State and local governments, the Federal government can "print money and buy its securities when things get tough," which eliminates a powerful self-limiting device. Second, the Federal government need worry far less than State and local governments about individual taxpayers and businesses' fleeing the jurisdiction if tax bills build-up.

Questions from the Commissioners: Questions were on the nation's State of economy, effects of budgetary caps and tradeoffs between public and private investments.

Q. You said when the economy is at full utilization of resources, borrowing reduces private investment, hence, GDP. How often in the past has the economy been in full utilization?
A. We have been close or getting close to full utilization for about 75 percent of the past 25 years. I believe the Federal government should borrow in recessions, but not necessarily for capital rather than consumption.

Q. Due to caps on budget authority and outlays, does it really matter whether the Federal government funds capital investments from current revenues or borrowing?
A. It would not matter in the short-run, but in the long-run, a larger fraction of the budget would be classified as investments if they can be financed by borrowing. So investments would tend to be financed when otherwise they would not have been.

Q. Do you believe we don't need that much more capital spending?
A. There is a tradeoff. I agree some areas need more capital spending, but the loss from substituting lower return public investments would be much worse.

President's Commission to Study Capital Budgeting

Schultze