Public Investment: Facts and Fantasies

Dean Croushore

Professor of Economics and Rigsby Fellow

Robert C. Dolan

Professor of Economics

Annual Meeting of the GIC Global Society of Fellows

April 9, 2013 Richmond, Virginia

0

1

2

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6

7

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Gro

ss G

ove

rnm

ent

Inve

stm

ent/

GD

P (

per

cen

t)

Gross Government Investment as a Percent of GDP

0

10

20

30

40

50

60

70

0

1

2

3

4

5

6

7

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Gro

ss P

riva

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om

esti

c In

vest

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DP

(p

erce

nt)

Gro

ss G

ove

rnm

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Inve

stm

ent/

GD

P (

per

cen

t)

Gross Private and Government Investment as a Percent of GDP

Government

Private

0

20

40

60

80

100

120

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Gro

ss C

apit

al S

tock

/GD

P (

per

cen

t)

Government Capital Stock as a Percent of GDP

210

220

230

240

250

260

270

280

290

0

20

40

60

80

100

120

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Pri

vate

Cap

ital

Sto

ck/G

DP

(p

erce

nt)

Go

vern

men

t C

apit

al S

tock

/GD

P (

per

cen

t)

Government and Private Capital Stock as a Percent of GDP

Government

Private

-30

-20

-10

0

10

20

30

40

50

60

1970 1975 1980 1985 1990 1995 2000 2005 2010

Go

vern

men

t N

et W

ort

h/G

DP

(p

erce

nt)

Government Net Worth as a Percent of GDP

0%

2%

4%

6%

8%

10%

12%

14%

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021

Actual and Forecasted Interest Rate Movements

Fed Funds Rate

3 Month Treasury

10-Year Treasury

Forecast 3 Month

Forecast 10 Year

1.5%

-0.3%

-2.1%

2.1%

-1.2%

-3.8%

-11%

-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024

Federal Budget Surplus/Deficit as a Percent of GDP

73% 77%

10.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Federal Debt Held by the Public as a Percent of GDP: 1970-2023

Debt Held by the Public

CBO Forecast

Federal Reserve

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

Federal Spending Components as a Percent of GDP

Interest

IncomeSecurity

SocialSecurity

Medicaid

Medicare

Projected

104%

73%

35%

10.5%

0%

20%

40%

60%

80%

100%

120%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Federal Debt Holdings as Percent of GDP: 1970-2012

Gross Public Debt

Debt Held by the Public

Foreign Holders of Debt

Federal Reserve

48%

0%

10%

20%

30%

40%

50%

60%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Foreign Share of Federal Debt Held by the Public: 1970-2012

10.5% held by China 9.6% held by Japan

Gross Domestic Product

Interest Payments on Foreign Borrowing

Economic Growth

Gross Domestic Product

Interest Payments on Foreign Borrowing

21.2%

22.9% 21.3%

25.8%

6.9%

11.9%

0%

5%

10%

15%

20%

25%

30%

2013 2015 2017 2019 2021 2023

Projected Federal Spending Components to 2021:

Health Care

Social Security

Interest Payments

Pressure from Trust Fund Asset Sales beyond 2020?

9%

10% 11% 12%

13%

8%

-10%

-7%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1972 1977 1982 1987 1992 1997 2002 2007 2012

Federal Revenue and Spending as Percent of GDP

Revenue Less Interest Mandatory Spending Discretionary Spending Budget Deficit

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

Federal Spending Components as a Percent of Total

Other

Defense

Interest

IncomeSecurity

SocialSecurity

Medicaid

Medicare

Projected

28%

62%

70%

Prodigious Fruits of Public Investment!

• Internet, Micro chip, GPS, Bar code

• "There's no such thing as shovel-ready"

President Obama, October. 13, 2010 New York Times

"ARRA’s long-run impact on the economy will stem primarily from

the resulting increase in government debt."

"In the long run, each dollar of additional debt crowds out about a

third of a dollar’s worth of private domestic capital."

"Some of ARRA’s provisions, including its funding for roads and

highways, may add to the economy’s potential…Others, including its

funding of education, may raise long-term productivity by

enhancing people’s skills. Still other provisions create incentives for

increased private investment."

Estimated Impact of the American Recovery and Reinvestment Act Congressional Budget Office, November 2012, pp. 8-9