Washington Merry-Go-Round

The great budget mistake

IMMEDIATE RELEASE 17 December 2014

WASHINGTON MERRY-GO-ROUND

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The great budget mistake

By Douglas Cohn and Eleanor Clift

WASHINGTON – The great mistake of the federal budget presentation is that it does not distinguish between outlays for services and outlays for capital assets. In other words, it treats Congressional salaries the same as infrastructure projects and improvements. Whereas the funds going for salaries are gone when spent, the funds going for roads and bridges provide benefits for 20, 40, or more years. This is the reason why corporations are only allowed to write off capital expenditures over the depreciable life of the building, machine, etc. Were the federal government to do likewise, our actual budget deficits would be substantially lower.

Let us say that for every $100 spent by the government $70 is covered by tax and fee revenues and the balance by borrowing, creating a $30 deficit. But if $15 of the spending went toward capital projects with average usable lives of 30 years, the only portion to affect current spending would be $.5 a year based upon straight-line depreciation ($15/30 years), thereby reducing the budget deficit by $14.5. Of course, the same $30 of borrowing would still take place, but only $15.5 of it would go toward the true deficit. The balance would be treated as long term debt, just as a mortgage on a building is.

This brings us to the source and cost of government borrowing. With interest rates at historic lows, the cost of borrowing through U.S. treasury auctions of 30-year T-bills is currently 2.74 percent. And at that rate we should be borrowing almost as much as we can get from the Chinese and other nations and private investors or corporations.  Roads and bridges could be initiated or repaired, high speed rail lines could be constructed, and military assets built. Research and development could be accelerated in fields from medicine to munitions because such expenditures are investments, not expenses.

By making use of the nation’s credit rating and the resultant demand for its T-bills, America could address our crumbling infrastructure by embarking upon a long-overdue building binge that would create millions of high-paying jobs – jobs that would simultaneously restore the middle class and increase federal tax revenues. This virtuous circle would then eliminate that real deficit.

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© 2014 U.S. News Syndicate, Inc.

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