Private virtue, public finance

Policy wonks frequently engage in arcane discussions about the effects of public debt on economic performance. Important as such debates are, they can obscure an ethical dimension that often in practice plays a substantial role in ongoing policy choices.

During the current Washington debate on the disposition of the predicted budgetary surplus, both President Clinton and his Republican critics are guided by the same principle. They share an underlying antipathy to public debt. Republicans would commit the surplus to finance massive tax cuts. The administration wants to employ much of the surplus to pay down the national debt. Both courses will have one telling result. Federal spending for a range of public purposes will shrink. These policy agendas reflect a distrust of the public sector with consequences that deserve close attention.

During the last two decades, the federal debt has become a national obsession. Although a few liberals argued that the debt reflected more than caused weaknesses in the national economy, both liberals and conservatives neglected another widespread phenomenon, the growth of private debt. Today as budgetary surpluses tend to grow not only in Washington but also in many state capitals, private debt for such items as mortgages, credit cards, and schooling has reached unprecedented levels. Our savings rates are minuscule, but the level of popular attention devoted to that topic pales in comparison with concerns about government debt.

Before we pay down the debt or cut taxes, we might take a closer look at the purported surplus. That surplus is based on absurdly stringent budgetary caps. These caps mean that over the next decade all of the government’s “discretionary” spending (everything but social insurance and interest on the debt) will be $726 billion lower than 1999 spending levels. Since both Clinton and the Republicans are pledged to make major increases in military spending, reductions in domestic spending are likely to be on the order of a hundred billion dollars a year.

What difference does this make to Maine citizens? In late June, the Finance Authority of Maine (FAME) released results of a follow-up study on why relatively few high school graduates in Maine go on to higher education. The study confirmed results of an earlier survey indicating that the cost of higher education rather than diminished aspirations was the key factor in these choices.

In a recent study for the Maine Center for Economic Policy, University of Southern Maine economist Charles Colgan pointed out that unmet capital needs remain a major barrier to economic development in Maine. He emphasized funding for an east-west highway and also went on to point out that “There are important looming decisions about water and sewer projects to control combined sewer overflows that can close the entire coast of Maine to fishing in heavy rain periods such as occurred in June, 1998.”

Though rail-transit alternatives to an east west highway deserve more consideration than they receive in Colgan’s scenario, Maine economic development clearly will require capital infusions in transit, water quality, and higher education. In addition, I would add that for a northern state as heavily dependent on hydrocarbons as Maine, research and advances in alternative energy remain crucial.

The decision to pay down the national debt will have one staggering consequence. It will mean that many such projects, if they are to be funded at all, will have to be financed out of ordinary income. Federal contributions to such investments are thus likely to take a nose dive. States will be asked to assume more of the financial burden for such major “infrastructure” investments.

These policy priorities are perverse. Northeastern University economist Barry Bluestone points out in a recent issue of The New Republic that over the last few decades the federal government made massive investments in computer technologies and in research carried on by private pharmaceutical firms. Without this aid, biotechnology, personal computers, or the internet would be unimaginable. Even if state governments assume responsibility for future growth industries, they face more constraints in terms of access to capital markets.

The consequences of the gradual retreat from the public sphere are already beginning to mount. In a study for the Economic Policy Institute, staff economist Dean Baker calculates that public investment is already down to about 1.4 percent of gross domestic product from an average of 2.4 percent two decades ago. It is projected to drop to 1 percent a decade from now.

Maine state government cannot step into the gap being created by such shortfalls. And on an individual level, citizens are already too heavily in debt to find private solutions to such concerns as safe drinking water and adequate transportation alternatives. But as shrinking the public sector becomes a sacred preoccupation for the political establishment, citizens will be left with nothing more than to hope for private remedies to growing public problems. Is it little wonder that such diversions as Tri-State Megabucks become ever more popular?

John Buell is a political economist who lives in Southwest Harbor. Readers wishing to contact him may e-mail comments to jbuell@acadia.net.