Public Investment: Facts and Fantasies

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

Gross Government Investment as a Percent of GDP Gross Government Investment/GDP (percent)

7 6 5 4 3 2 1 0 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

7

70

6

60

5

50

Government

4

40

3

30

2

20 Private

1

10

0 1960

0 1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Gross Private Domestic Investment/GDP (percent)

Gross Government Investment/GDP (percent)

Gross Private and Government Investment as a Percent of GDP

Government Capital Stock as a Percent of GDP 120

Gross Capital Stock/GDP (percent)

100

80

60

40

20

0 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Government and Private Capital Stock as a Percent of GDP 120

290

280

270

Government

80

260

60

Private

250

240

40 230

20 220

0

210

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Private Capital Stock/GDP (percent)

Government Capital Stock/GDP (percent)

100

Government Net Worth as a Percent of GDP 60

Government Net Worth/GDP (percent)

50 40 30 20 10 0 -10 -20 -30 1970

1975

1980

1985

1990

1995

2000

2005

2010

14%

Actual and Forecasted Interest Rate Movements

12% Fed Funds Rate 3 Month Treasury

10%

10-Year Treasury Forecast 3 Month

8%

Forecast 10 Year

6%

4%

2%

0% 1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018

2021

Federal Budget Surplus/Deficit as a Percent of GDP 4% 3% 2%

2.1% 1.5%

1% 0%

-0.3%

-1.2%

-1%

-2%

-2.1%

-3% -4%

-3.8%

-5% -6% -7% -8% -9% -10% -11% 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024

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

90% 80%

77% 73%

Debt Held by the Public CBO Forecast Federal Reserve

70% 60% 50% 40% 30% 20%

10.5%

10% 0% 1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

Federal Spending Components as a Percent of GDP 18% 16%

Projected

14%

Interest

12% 10% 8%

Income Security Social Security

6% 4%

Medicaid

2% Medicare 0% 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

120%

Federal Debt Holdings as Percent of GDP: 1970-2012 104%

Gross Public Debt

100%

Debt Held by the Public Foreign Holders of Debt

80%

Federal Reserve

73%

60%

40% 35% 20% 10.5% 0% 1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

60%

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

50%

48%

40%

10.5% held by China 30%

9.6% held by Japan

20%

10%

0% 1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Interest Payments on Foreign Borrowing Economic Growth

Gross Domestic Product

Interest Payments on Foreign Borrowing

Gross Domestic Product

Projected Federal Spending Components to 2021: 30% 25.8%

Health Care

25% 21.3% 20%

22.9%

21.2%

Social Security

Pressure from Trust Fund Asset Sales beyond 2020?

15% Interest Payments 11.9% 10% 6.9% 5%

0% 2013

2015

2017

2019

2021

2023

Federal Revenue and Spending as Percent of GDP Revenue Less Interest

Mandatory Spending

Discretionary Spending

Budget Deficit

20% 15% 11%

10% 10%

13% 12% 8%

9% 5%

0% -5% -7% -10%

-10%

-15% 1972

1977

1982

1987

1992

1997

2002

2007

2012

Federal Spending Components as a Percent of Total 100% Projected

90%

Other

80%

Defense 70%

70% 62%

60% 50%

Interest Income Security

40%

28% 30% 20%

10% 0% 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

Social Security Medicaid

Medicare

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