In his State of the Union address last night, President Obama talked about the economic importance of education and infrastructure. That's all well and good. But how do we fund these investments when discretionary spending is likely to be cut to the bone in order to reduce the budget deficit?
The answer: We need to treat public investments differently from discretionary spending.
No rational family would borrow to pay for a vacation but not borrow to send a kid to college. And no rational business would borrow to pay current salaries but not take out a loan to buy crucial new machinery.
Yet that's, in effect, what our government does because it doesn't distinguish between current spending and public investment needed to ensure future economic growth.
A rational federal budget would allow additional borrowing for public investments whenever the expected return on those investments is higher than the cost of the borrowing. And it wouldn't borrow a penny if the return on the investment is less than the borrowing costs.
Granted, such public returns can be hard to measure. But well-developed tools exist for doing so.
Studies show for every dollar we invest in infrastructure, for example, we can expect a return of nearly $2 in economic gains. Of course we need to make sure these investments are smart. No bridges to nowhere. Still, no one can argue that much of our infrastructure is badly outdated.
Investing in early childhood education gives us an even bigger bang -- a return on investment of between 10 and 16 percent. A better-education workforce means greater productivity. Putting more money into basic R&D yields a similar big return.
Capital markets are now global. Money sloshes across borders in search of the highest return anywhere.
The only way to ensure private investors will continue to invest in America, and support the high living standards we want, is for Americans to be highly productive. This requires public investments.
Which is why we need a public investment budget -- separate from a current spending budget -- that can't fall victim to partisan bickering and will allow us to keep borrowing when the return on public investment -- and the public good -- justifies it.