Financing Katrina Relief Efforts: Capital Budgeting ala the National Review

Republicans are split over how to pay for the Katrina-Rita relief and reconstruction efforts. President Bush wants to temporarily increase the deficit. Fiscal conservatives like Andrew Samwick have fiscal offsets in mind to avoid adding even more government debt to our children’s future. Jerry Bowyer sides with Bush:

George W. Bush is not a Goldwater Republican – he’s a Lincoln Republican. Like the founder of the Republican party, Bush doesn’t mind spending money on his priorities, and he doesn’t mind doing some of this spending with borrowed money. Like Lincoln, he doesn’t mind federal expenditures for what Lincoln called “internal improvements,” such as canals and railroads or, today, new roads and levies in the Gulf. Lincoln, too, was a big borrower, which seems to have worked out okay for the sixteenth president … Some people complain that Katrina rebuilding should not be financed through deficits, but why not? Infrastructure creation is exactly the sort of thing that should be shouldered by government. Current expenses typically come through operating budgets. Expenditures that provide benefits for new generations of Americans go through the capital budget, meaning future generations participate in the cost of the projects that will benefit those future generations. This makes sense. It’s why most corporations have separate capital budgets and operating budgets. It’s why America was right to finance the Civil War, WWI, WWII, and the Cold War through deficits.

In theory, Bowyer’s point about capital budgets seems like a good one – especially to someone like myself who has preached the virtues of looking at government budgets from a long-run perspective. So why did I and other liberal bloggers praise fiscal conservatives such as Dr. Samwick? Perhaps because the General Fund deficit was over $550 billion even during the year that Bowyer’s Fuzzchart showed tax revenues were higher than the incredibly low levels of a couple of years ago.

While it is true the investment projects provide benefits over the long-term, they must be financed at some point in time along with the financing of government consumption. But maybe Bowyer is trying to tell us that much of the reason for the Bush deficits is that we are investing more now than we ever had and that the lower level of taxes is consistent with a lower level of government consumption. In fact, this excuse for offered for the Reagan deficits a generation ago. But I’m wondering why Bowyer did not provide us one of his charts showing government investment relative to GDP. Using date from NIPA table 3.1 provided by Bureau of Economic Analysis, we plot government investment relative to GDP from 1975 to 2004. This ratio has averaged 3.4% over the past 30 years with the most recent level being near 3.2%. Although this ratio is a bit higher than what we observed in 1998, the massive increase in the General Fund deficit is only partially due to more government investment.

The Katrina-Rita relief and reconstruction efforts will likely kick this up over the next couple of years as it adds to a General Fund deficit that is already near 5% of GDP. While the rise in the deficit might only be temporary, the long-run prospect for deficit financing are ominous – unless we start adopting fiscal policy more in line with what the fiscal conservatives are demanding.