America is falling behind. I do not mean only that we are losing ground against Europe and Japan. I mean that we are falling behind with respect to our own capacities. We are not the country we once were, or the country we could be.
I do not need to document this sorry assertion. I want to write about what I think we can do to catch up. For we now have a unique chance to become the country we could be if we lived up to our possibilities. It lies within our grasp to overcome the single most difficult obstacle we face in trying to recover our momentum. That obstacle is the inadequacy of our infrastructure, the public underpinnings without which a society cannot be healthy or an economy prosperous.
Infrastructure is the public capital of a nation—the network of roads and water mains, harbors and air navigation systems, public health research facilities and public waste disposal facilities, on which we all depend for much of the quality of our individual lives. We also depend on it for much of our collective efficiency. Just as a train cannot exceed the limits of its roadbed, an economy cannot exceed those of its infrastructure.
American infrastructure is in a state of near collapse. For nearly twenty-five years we have virtually ceased to improve our public capital. Following World War II, we set out to build up interstate highways, airports, research and development laboratories and the like, until by 1952 spending on infrastructure absorbed 6.9 percent of the nonmilitary federal budget. Irregularly, but with increasing momentum, this share has been declining ever since. During the 1970s it plummeted to an average of 1.5 percent During the 1980s the share dropped still further to 1.2 percent. Thus a smaller and smaller fraction of government spending has gone into reinforcing or extending the public foundation of the economy. To drive across the Queensboro Bridge in New York is to know at first hand the meaning of allowing our infrastructure to decay.
Where there is longstanding current neglect, catch-up costs become large. The United States Department of Transportation tells us that it will now take $50 billion to repair the nation’s 240,000 bridges. To bring our highways up to their condition in 1983 will take ten years and $315 billion in current dollars. Air traffic control is in desperate need of funds for expansion and modernization—at least $25 billion by the year 2000. According to the Department of Housing and Urban Development, it will cost $20 billion to rehabilitate the nation’s stock of public housing, and rehabilitation does not mean adding to the current, shamefully inadequate stock. There is no official tally of the total expenditures needed to repair and maintain the infrastructure over the next ten years. The Congressional Budget Office estimates the amount at about $60 billion per year. The Association of Public Contractors puts it at $118 billion per year. The nation’s contractors are hardly a disinterested source, but in this case their estimates may be closer to reality.
These totals, moreover, include only “hard” investment—the public counterpart of private spending for plant and equipment. But some public spending for “soft” purposes is also properly included in infrastructure because it contributes to economic growth. One obvious such candidate is expenditure on education, whose economic consequence is the improvement of the skills and productivity of our citizenry.
This “soft” portion of our infrastructure is also badly neglected. Spending on elementary and secondary education reached 4.4 percent of GNP in the 1970s. It has fallen by 10 percent during the present decade. At the same time, investment in higher education has not risen since the 1970s. This is an important part of the reason that the quality of our labor force is deteriorating both at the bottom and at the top—and thus part of the reason that we are falling behind.
Economists of all political colorations agree that our ramshackle and rotting infrastructure constitutes a serious obstacle to vigorous economic growth. For example, David Aschauer of the Chicago Federal Reserve Bank has calculated that a dollar of public investment is today productive of more output than a dollar of private investment, and that private profitability would rise by two percentage points—that is, from, say, 10 to 12 percent—if infrastructure investment were merely brought back to its 1981 levels. The final report of President Reagan’s Council of Economic Advisers also notes the fall in federal investment spending as “a matter for concern” because it can adversely affect the growth of the private sector.
Thus the neglect of the national infrastructure has been an unmitigated disaster. No one has gained; all have lost. That is why I argue that of all the means of reestablishing our place, the most important is to rebuild the embankment on which the economy runs—indeed to expand it to the size consonant with our present-day social and economic needs. Paradoxically, this is also the cheapest way of regaining our momentum—indeed, as we shall see, it could be thought of as costing nothing.
I will turn in a moment to that opportunity. First, however, it is important to understand how we got where we are. How could a state of disrepair clearly injurious to our individual as well as our national interests have been permitted to come about?
There are three reasons, and everyone knows the first. We have been unwilling to impose the taxes—on income, consumption, or even on sin—to pay for public improvements. This is not because our tax structure is so high: in 1985 Sweden’s tax revenues amounted to 51 percent of its gross domestic product, France’s came to 46 percent, Germany’s and England’s each to 38 percent. Our revenue—federal plus state and local—was 29 percent of our gross product. Among advanced industrial capitalisms only Japan’s was lower—28 percent.*
I do not point this out to deplore (although I do deplore it), but to locate the first reason for our inadequate stock of public capital. It has simply been our refusal to pay for a more adequate one—a refusal as evident in the state legislatures as it is on Capitol Hill. The American public has made clear its distaste for taxes, even though opinion polls have again and again indicated the public’s dissatisfaction with the existing state of the environment, public facilities, the schools, and the like. However self-defeating and paradoxical this frame of mind, it is a fact of political life that must be reckoned with.
The second reason that we have allowed our infrastructural base to erode has been our fear of deficits. Even though adamantly opposed to paying more taxes, we could still have built roads and bridges, financed education, undertaken housing programs or carried on bold programs of public research and development, if we had been willing to pay for them by borrowing. That is, after all, the way in which the private sector typically finances its capital undertakings. Corporate America does not pay for its own infrastructure—that is, for its investment outlays—by writing checks against its earnings. It finances capital expenditures by issuing new bonds or new stock, which it will “service” from the enhanced earnings that its new capital projects are expected to produce.
Precisely such an avenue of finance is open to the government. Public investment, like private investment, typically yields its payback over a number of years, which is the rationale behind borrowing to pay for it, rather than paying the bill immediately. Moreover, just as private investment brings added earnings, so public investment brings a larger national income. The private corporation uses its additional earnings to pay the dividends or interest on its newly issued securities; the government uses the enhanced tax revenues that flow from a larger national income to pay interest on its new debts.
So why have we not used government borrowing to build public capital, as we have so often done in the past? Part of the answer is that, at least during the last few years, the opposition of the public to more taxes seems to have been matched by its opposition to more deficits. In late 1988, 44 percent of a nation-wide poll of voters chose “reducing the deficit” as the single most pressing issue facing the incoming Bush administration—more than twice the percentage of the next most worrisome issue (protecting US workers against foreign competition). Perhaps the fear of deficits reflects the failure of politicians to explain the resemblance of government borrowing for infrastructure to corporate borrowing for plant and equipment. Perhaps it reflects the failure of economists to explain the similarity to politicians. Whatever the explanation, the fear of deficits is clearly another reason why infrastructure did not get built. We were afraid that we might bankrupt ourselves if we built it. That, too, is a state of mind not likely to change in the near future.
There is one last reason why we have so neglected our public capital. It is that while our public capital expenditures for roads and housing and transportation and education have been declining, our spending for military purposes has been growing. Between 1980 and 1989, military spending doubled from $143 billion to over $300 billion. If we had managed to reduce military spending in 1989 to its inflation-corrected level in 1980, we would have been able to “find” some $50 to $60 billion for infrastructural repairs. But that option was not open to us. As long as the existence of a Soviet threat was the unchallengeable assumption on which American foreign policy was based, the claims of the military might have been whittled away, but could not be radically slashed.
The extraordinary events in Europe have challenged this assumption. There is no longer any question that the Pentagon budget will be sharply cut. Savings on the order of $50 billion ought to be visible within a year or two. If military spending decreases over the next three to five years to perhaps half its present level, which seems possible, $150 billion or more will be pared from the Pentagon budget. Moreover these are annual savings, available each year from the budgets of the future.
Applied to the improvement of our infrastructure, these funds would approximately restore its level to that of the 1960s. Moreover, that tremendous restoration could take place without incurring a penny of new taxes or a dime of new borrowing. History does not offer many such opportunities. If we let this one slip through our fingers, we will have passed over the greatest and most nourishing free lunch we are likely ever to enjoy.
Of course that lunch is not really free. It is true that we can rebuild our infrastructure without either paying added taxes or suffering the consequences of additional borrowing, but it is also true that we could use the cut in military spending to reduce our taxes or to cut back the amount that the government borrows. Thus the real cost of taking advantage of the chance to rebuild the country’s infrastructure is the private gain we will have to forgo—lower taxes, less public borrowing, with its interest costs—in order to achieve a long-denied public gain.
Nevertheless, if the money is spent effectively, it will feel like a free lunch. The proviso is important. The Pentagon has no monopoly on waste. Free or not, the lunch will not be nourishing if we use the peace dividend to buy ourselves a gigantic pork barrel.
That sobering consideration does not argue against seizing the unique chance to make up for past neglect. Rather, it alerts us to the need to find appropriate ways to monitor an opportunity of such extraordinary importance. Perhaps a newly organized bipartisan committee, along the lines of the much respected Congressional Budget Office, or entirely outside the structure of government, should watch over the performance of our public investment effort as we bring it up to the level that will be necessary.
In that case, we would see a change in the quality of life, as the numbers of school dropouts decline, the air gets cleaner, and the economy becomes more productive, the society more decent. We may even remember with disbelief what a ride across the old Queensboro bridge was like. Some may still declare that they would rather have had a tax cut, or a reduction in the national debt, but I suspect that most of us will simply be thankful that America has finally stopped falling behind and has begun to ready itself for whatever place it deserves in the scheme of things.
February 15, 1990