April 19, 2006
Investing Strategically
Has state government forgotten the difference between spending and investing?
Some advocates of smaller government encourage us to think of the state budget like the family budget. We all must live within our means, we are reminded, which may require us to tighten our belts and lower our sights. You can almost hear mom and dad explaining to the kids why there will be more Hamburger Helper, less ice cream, and no trip to Disney World this year.
Many Minnesotans don’t realize it, but as a share of our income, what we spend on government has shrunk from a decade ago, thanks to the No-New-Taxes pledge. This shrinkage of government explains our constant state of fiscal crisis and inadequate resources to do what the people clearly want done.
Another unfortunate side effect: A spending-only-on-necessities mindset develops, with a focus on long-term expenditure controls, not on long-term investment. Investing in the future becomes a discretionary expense, reserved for better times. Yet when fiscal conditions improve, we hear demands to return the “excess” to the taxpayer, who can better invest the money.
In education, public health and safety, transportation and the environment, the bar goes lower and lower until the consequences of deferred investment are impossible to ignore.
The state does allocate funding for public buildings, infrastructure and land acquisition — investing in our physical capital. But it has become less generous in investing in the human capital that increases the capacity of individuals and their families to earn a living and contribute to society.
One argument against state investment in families is that families understand their needs and can invest the money more effectively than government. But not all families have the same priorities or capacity to invest in their children.
Government employs three common approaches to investment: Universal free access (like K-12 education); highly targeted support to those in need (like food stamps); or a hybrid model (like higher ed) that seeks universal access by combining spending on institutions with some financial support for families — all the way up into the middle class.
Further reading:
Why has Minnesota stopped investing in education?
State doesn’t ‘invest’; it spends
Spend: a liberal economic program
Governor Tim Pawlenty’s 2006 Capital Budget Recommendations
How investing in education pays off
What do you think?
1. Although investment may be directed to one need, positive outcomes can overlap. Investment in education correlates with higher income and reduced incarceration. Investment in smart growth transportation can lead to reduced commute times and fewer fatalities. Given a limited amount to invest, where would you direct Minnesota’s investment over the next 10 years?
2. Which of the three investment models described above would you favor, and why?
3. It’s comparatively easy to see when the budget balances. How can we best determine if our investments are paying off?
Comments:
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There is a very strong case for the economic return on investment in early childhood education. Major research on this is coming out of the Federal Reserve Bank of Minneapolis (of all places). It would make a lot of sense to invest in this...
http://minneapolisfed.org/research/studies/earlychild/#ecd
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http://minneapolisfed.org/research/studies/earlychild/#ecd
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