by Robert B. Reich

The federal budget deficit will hit nearly $1.5 trillion this year, according to the Congressional Budget Office. Should you be worried? It depends on what we're borrowing the money for.

But it's impossible to have an intelligent discussion about this, because the federal deficit is a swamp of misleading figures hiding within a cloud of confusion inside a fog of misinformation.

Which is probably why most Americans think it ought to be reduced but don't want to make any sacrifices to do so. According to a recent CNN poll, only one American in five regards the federal deficit as such big problem as to justify cuts in Social Security or Medicare -- which, along with national defense, are the biggest spending items.

So we get House Republicans piously promising to reduce the deficit without coming up with any serious proposals to do so. And the president says he intends to reduce the deficit, but then devotes his State of the Union address -- presumably his campaign theme leading up to 2012 -- to the importance of spending more on the key "investments" of education, infrastructure and basic research.

By the way, the president is absolutely right about those investments. But he's not going to get anywhere if they're competing for dollars with Social Security, Medicare and defense. And he doesn't have a prayer of getting extra dollars to help hard-pressed states that are now disinvesting like mad in education and infrastructure.

Over the long term, the only way to improve the living standards of most Americans is to invest in our people -- especially their educations, skills, and the communications and transportation systems linking them together and with the rest of the world.

In the global economy, the only "asset" that's unique to any nation -- and that determines its living standards -- is the people who comprise it. Everything else -- money, equipment, factories, supplies -- moves across global boundaries at the flick of a computer key.

Get it? Spending on education, infrastructure and basic R&D is fundamentally different from other categories of government spending. These outlays are really investments in the future productivity of our people.

But you'd never know it from the way the federal budget operates.

If the federal budget were organized sanely, it would be divided into three parts: past obligations, current needs and future investments.

Past obligations are those that the federal government has made to retirees -- the availability of Social Security and Medicare -- in return for their payments into these programs during their working lives. These past obligations must be honored no matter how big the budget deficit, because Americans have relied on them. They're based on an implicit contract between the public and their government. Pay payroll taxes and you'll get Social Security and Medicare. If this contract is to be altered, it should be altered only for future generations who haven't yet -- or have barely -- entered into them.

Current needs include everything we rely on today in order to remain safe and healthy. Within this category are national defense, homeland security, Medicaid, and much of the rest of what government does that keeps us going year by year. This "current needs" budget should be balanced each year. It's appropriate that we pay for all our current needs through our current taxes.

But future investments are qualitatively different. There's no problem with borrowing from the future in order to finance investments in the future. Families do it all the time. While it might be irresponsible for a family to go into debt in order to finance a worldwide cruise, it would be highly responsible for the same family to borrow money in order to help finance their kids' college educations.

Businesses also borrow in order to increase future productivity. If they didn't, they'd be out of business. Such borrowing makes sense as long as the return on the investment is higher than the cost (principal plus interest) of the borrowing.

This is why America needs an "investment budget" that allows us to see how much we're investing in education, infrastructure and basic R&D; how much we're paying to borrow the money to finance these investments; and what sort of "return" we're getting. It won't be an easy call in every case, of course, but the Congressional Budget Office and the Office of Management and Budget take on much harder ones.

Past, present and future. A sensible federal budget would draw the distinctions, and thereby lift some of the fog.

 

Robert Reich, former U.S. Secretary of Labor, is professor of public policy at the University of California at Berkeley and the author of the book Aftershock: The Next Economy and America's Future.

Sensible Budget Must Include Investment in Our Future