Today (May 17, 2005), by a vote of 89-11, the Senate approved the highway bill. It’s $11 billion more than the administration said it would accept, and the administration is threatening to veto the bill on the grounds of so-called fiscal responsibility. But the logic is faulty. The highway bill is a good investment (as I'll explain below); consequently, the administration should be eager to sign the bill on the grounds of fiscal responsibility.
Here’s an excerpt from today’s AP article:
The Republican-controlled Senate brushed aside a presidential veto threat Tuesday and passed a $295 billion highway bill, arguing that massive spending on bigger and better roads was necessary to fight congestion and unsafe roadways.
The administration, while pressing Congress to pass a new highway bill, said the Senate version was too expensive in a time of war and debt and could result in the first veto of the Bush presidency. . .
White House press secretary Scott McClellan repeated the veto threat Tuesday, saying the president was "very serious" about following a fiscally responsible budget.
"Fiscal responsiblity"
Conventional wisdom says that it’s fiscally responsible to keep the debt down. But this is where I part company with conventional wisdom. The number we should be concerned about is not the debt per se; it is the debt burden. Here are the numbers: Today’s debt is $7.763 trillion; today’s debt burden (the ratio of debt-to-GDP) is 64.9%. Historically our debt burden has had its ups and downs, but today we’re in relatively good shape compared to other countries, and also compared to where we’ve been in the past.
One obvious way to decrease the debt burden is to decrease the debt (the numerator of the ratio); unfortunately, conventional wisdom mistakenly stops there. Another way—less-publicized, and therefore less understood—is to increase the debt (the numerator) at a slower rate than GDP (the denominator) grows. The math is simple, but the concept continues to elude the conventional wisdom about "fiscal responsibility." Nonetheless, growth eases the debt burden, and good investments induce growth.
The highway bill is an infrastructure investment; it promises to grow GDP by at least enough extra to keep the debt burden from increasing. If past experience is indicative of the future, it will yield significant extra efficiencies in the private sector. From the same AP article:
There was no dispute over the need for a new highway program: Poor road conditions are a factor in one-third of the 42,000 traffic fatalities every year, and road congestion costs the nation billions in productivity and wasted fuel, studies indicate.
Good investments generate future returns that offset their financing costs. Successful private sector businesses are well aware of that, and they know how to use leverage—a measured amount of borrowing to help finance good investments—to make their creditors and shareholders wealthier. So, why is it so difficult to admit that the same principle can apply to government finances?
The highway bill will cause GDP to grow more than it would have otherwise; because of that, tax receipts will do the same. Sufficient extra GDP growth would more than offset the debt growth, with the net result of a neutral or slightly reduced debt burden. Growing the economy while reducing the debt burden is the proper definition of fiscal responsibility.
Capitalists, of all people, should understand the growth-through-leverage phenomenon. The debt burden, not the debt, is the number to watch and to manage. President Bush should sign the growth-enhancing highway bill, not veto it. It’s the fiscally responsible thing for growth-conscious capitalists to do.
