Commentary | Budget, Taxes, and Public Investment

President Obama’s 2012 budget: An analysis of the public investments

President Obama’s FY 2012 Budget:
An Analysis of the Public Investments

President Obama laid out an ambitious agenda to boost the economy and keep America competitive abroad in his State of the Union address a couple weeks ago.  The release of his fiscal year 2012 budget details his approach, and includes sustained public investments in education, energy, transportation, broadband, and basic scientific research.

Education: An 11% increase in education, investing in 100,000 new science, technology, engineering, and math teachers, and a $1.4 billion new investment in early childhood education.  Pell Grant funding is increased by over 20%, although eligibility criteria will actually be narrowed to prevent a larger increase spurred by growing demand for higher education and rising tuition costs.

Transportation: A 60% increase in transportation infrastructure investments over six years, focusing on rebuilding and maintaining the current system and building out the transit and rail infrastructure (ensuring that 80% of Americans have convenient access to a passenger rail system within 25 years).  This includes an immediate $50 billion investment as a down payment on this stronger commitment to transportation, and $30 billion for a National Infrastructure Bank.

Energy: A 12% increase, including a doubling of energy efficiency research, development, and deployment, increasing renewable energy investments by over 70% and continuing the vital investments in the national electricity grid.

Science and innovation: Doubles basic research at the National Science Foundation, the Department of Energy’s Office of Science, and the National Institute of Standards and Technologies, while maintaining funding for the National Institute of Health.  The budget would also invest $15 billion in the national broadband network to boost speed and increase access.

The increased investments are desperately needed.  The United States has now fallen to 12th out of 36advanced nations in terms of the share of 25-to34-year olds with college degrees.[1]  One in three roads is in poor or mediocre condition, while one in four rural and one in three urban bridges is structurally deficient or functionally obsolete.  The lack of a modernized road, rail, and transit system leads Americans to spend more than 4 billion hours a year stuck in traffic, costing nearly $80 billion in wasted time and fuel costs and subsidizing many unfriendly foreign governments.  Our broadband speed is failing to keep up with technology, with only 63% of Americans with access to high-speed internet, and the United States has fallen to 12th in average download speeds compared to other countries.  Blackouts caused by our antiquated electricity grid are occurring with greater and greater frequency, and pollution and the threat of climate change continue to threaten our health and way of life.

Public investments are also vital to economic growth.  There exists a general consensus in the economic literature that public investments contribute to productivity growth, allowing us to produce more with less, and fueling higher incomes and living standards.  A recent and comprehensive review of this literature finds that a sustained 1% increase in public capital growth translates into a 0.6 percentage-point increase in the private-sector GDP growth rate.[2]  Certain investments—such as those in early childhood education—provide even greater bang for the buck.  Overall, these public investments ensure a brighter future for our children and grandchildren.

There is also a benefit to making these investments now.  The recession has led to a reduction in state, local, and private funding for these public investments, leaving a large gap in our physical and human capital stock and scarring a generation of children for the rest of their lives.  Furthermore, these investments will immediately create hundreds of thousands of jobs at a time when the jobs crisis is the number one issue facing working America.  Finally, there is a substantial cost to delaying these investments: the cost of repairing a bridge is much less than it is to rebuild it after its collapse, and the cost of financing these investments is at historic lows.

In order to comply with Obama’s self-imposed non-security discretionary freeze, the president was forced to make deep cuts elsewhere in the budget (which the exception of the proposed increases in surface transportation, which as mandatory spending, is outside the discretionary budget).  This includes deep cuts to Community Development Block Grants, the National Institute for Health, and community health centers.  These cuts—and the freeze more broadly—will harm the economic recovery at a time when Congress and the president should be focused on job creation.  Many of the cuts will also fall directly on the backs of the very same low- and middle-income households that have been hit the hardest by the recession.

Many in Congress have proposed even larger, across the board cuts.  For example, Republican leaders in the House of Representatives have proposed $100 billion worth of cuts for the remaining 210 days in the fiscal year (starting March 5th).  Included in this proposal are across-the-board cuts to public investments, bringing them down to historic lows. 

These two approaches to investment are fundamentally at odds.  The president’s investment plan would create jobs and increase American productivity and competitiveness while at the same time reducing public debt burdens.  The Republican plan, by contrast, would lower employment by nearly 700,000.[3] The President’s budget is not perfect, but its investments agenda begins to address our nation’s long-run challenges.

See also:

Flawed, but better than some alternatives

An analysis of the budget cuts

An analysis of tax policies

[1] The College Board, The College Completion Agenda 2010 Progress Report,

[2] Heintz, James. 2010. “The Impact of Public Capital on the U.S. Private Economy: New Evidence and Analysis.” International Review of Applied Economics, 24(5): 619-32.

[3] “Uses the rule-of-thumb that a spending cut of 1% of GDP is associated with a 1 million drop in employment.”