Missing Side of Budget Debates

(Text, originally composed in 2005)

Every year, all year, we hear about the United States federal deficit (this was written only three years ago and, although happily the yearly budgetary deficit is gone, the exclusive focus on the yearly income-outgo budget is still a flaw). The federal budget is worth serious and sober discussion, but we should expand that discussion to include the changing net worth of the US for better understanding of the health of the economy.

Budget cashflow

Budget cashflow

Net worth

Net worth

If we spend $50 billion on highways, what is the benefit year-over-year of the increased productivity from ease of movement for both people and goods? That is, how is the net worth of the United States affected by the yearly expenditures?

Spending on Investment

When President Clinton came into office, he argued that we should spend for investment. His critics responded—No. Spending was spending. Although that is a truism, there is significant difference in effect between spending on consumption and spending on investment.

  • Consumption is necessary, but it is spending that uses up what it purchases right away. It does not increase net worth.
  • Investment is necessary to build works which yield benefits for multiple years. It increases net worth.

(Maintenance is a third type of spending.  It is spending to keep operational investment projects of previous years.)

What are some components of the US net worth?

Assets are tangible and intangible, like

  • Social factors – efficient judicial system, clear property rights, efficient government and institutions, political stability, regulatory quality, control of corruption
  • Roads, bridges, tunnels, airports
  • Natural resources (minerals, arable land, water, timber)
  • Intellectual property. Research and findings. Education of our people, the Internet, etc.

Liabilities are obligations and commitments, like

  • Social security, Medicare, Medicaid commitments
  • Government and Veterans pensions
  • Health research
  • Cleaning up the environment

Household Example

In a family’s personal finances, when a house is purchased, the effect on the budget is almost always negative in that year, then with time, principal reduction and household appreciation pushes household net worth up. Nearly two-thirds of all households decide this negative cash flow in their current year’s budget is paid for by the future growth in net worth.

From a glance at the US federal budget it is obvious that a good portion is investment, but immediate cost vs. long-term benefit is not subject to the same public scrutiny that the consumption elements of the budget are. We deserve the best enumeration of these factors when the federal budget is discussed.

  • Has the value of our roads, bridges, and tunnels increased this year?
  • Have we discovered new wealth in mineral deposits?
  • How much did the consumption of petroleum reserves cost in terms of pollution and habitat damage?

Government vs. Private

Since many assets are privately owned, not government owned, they are not included in the government calculations. The total net worth statement is essential for understanding the overall well-being of the US economy, but the Federal budget and net worth statements are essential for assessing the functioning of government.

It would allow a relative cost-benefit analysis for leasing of government resources to private concerns. Leases on which Clinton flipflopped when he commenced his presidency.

Measuring Progress

I’m certainly not saying that calculating the net worth of the US will be easy or that we’ll get it perfectly right from the start. Fortunately, the value of a net worth statement is gained by observing its change year-over-year. It’s one important measure of the economy’s success.

In making budgetary decisions, the change in wealth is at least as important as a yearly deficit.

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