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Squaring the budget circle

As the current legislative session comes to a close, Democrats and Republicans are far apart in their ideas as to how to spend public funds over the next two years.

In the pattern of our current left/right partisan differences, Democrats want to spend more and Republicans less.

But from a nonpartisan perspective, the parties differ over two concepts: what is a surplus and what is an investment.

One set of arguments between the parties contests what to do with the projected surplus. Another set — revolving mostly around education and transportation — contests what is a proper investment of public funds.

If we could get to a place intellectually where the governor and a majority of senators and representatives had a common understanding of  what a “surplus” is and what an “investment” is, we could more easily square the circle of disagreement and get a compromise furthering the common good.

First, what is a surplus?

Technically, this is an easy concept to understand.  A surplus is having more cash on hand than you need to spend. That happy circumstance arises because income comes in higher than expected or costs are incurred which are lower than expected.

In the case of Minnesota, the projected surplus will result from having more revenues than expected expenditures.

This kind of a surplus is unplanned and thus is a windfall.   It is like a gift from a rich uncle or winnings at a casino or from the lottery. It is a one-time event leaving us flush with funds.

There are only a few options as to how to spend such winnings: save it all, spend it all, or spend some and save some and argue about how much to do of each.

To me the best use of surplus funds is to help us be better off in the future.  So savings of surplus funds would be highly recommended.  Savings are a form of investment, a making of capital which can be drawn upon later.

In the most simple terms, banking the surplus and then drawing annual interest payments on the corpus over years to come would provide a secure revenue stream in future years. That revenue could be directed to some recurring expense.  This is what happened to the moneys coming to the state from its settlement with Big Tobacco.

Or, the corpus of funds in savings could be spent to offset the occasional costs brought about by unplanned future damage randomly — but regularly — caused by storms or floods.

Alternatively, a surplus could be put into other forms of capital — buildings, roads and bridges.

Or, a surplus could be used to build up financial capital in the form of an investment fund to promote research and new businesses.  A surplus fund could be used to guarantee private investments in new companies creating new jobs, or new benefit corporations meeting social and environmental challenges with innovate new market approaches.

I do not favor spending a surplus for indulgent purposes or on a spree with its momentary flush of pleasure but without lasting benefits.

Of course, some spending on what we desire to have right now is therapeutic. When we get a gift or win at gambling, the proceeds are outside our sense of what is habitual and normal. We all like to live it up a bit if we can and I see no harm in having some fun now and then. But how much of such spending becomes too much?

Thus for part of the surplus, say a third, the governor, the legislative Democrats and the legislative Republicans could each nominate projects for one-sixth of the total projected income.  Therein lies an equitable deal among the powers that were elected by the people at large.

Then, the more complicated idea over which the parties differ and about which we need to gain clarity, is: What is an investment?

Democrats for two decades now have spoken of almost every government expenditure as an “investment” in our future.  Republicans, on the other hand, tend to see such spending in the current accounting period as just that: spending.

The Republican approach embodies a more cautious approach to understanding “investment”.

Any expenditure can be described as an “investment” if the advocate is clever enough. This is just another instance of “lawyering” where our understanding of good and bad, right and wrong, might depend on what the meaning of “is” is.

In politics, maybe it’s better just to call such labeling “spin,” which is not anywhere close to hard truth. What we call something — how we “spin” it to others — reflects our own possibly slippery or selfishly misguided thinking and not any cosmic reality true in all times and places like some Kantian categorical imperative.

In spin, we put labels on things and events in order to make them appear more or less appealing to our audience.

To me, the hard content of making an “investment” is spending money today which will bring cash or other current returns in the future.

Thus, we speak of “investing” in stocks or by buying land. We expect the stock to pay dividends and the land to produce rent in the future or that we can later sell the shares or the land for a profit and end up having more wealth at our disposal.

We also easily speak of “investing” in education. By this I think we mean both spending today to get more income tomorrow — a good job based on academic qualifications — or by becoming a better person more fully able to live well and make a contribution to our country and society.

We also say we “invest” in infrastructure and the means of production — power plants, roads, bridges, communications technology, plant and equipment.  We spend today to have at hand the where-with-all to make money tomorrow.

Money that is spend in the present to obtain goods in the present is not an investment. It is consumption.  Spending money to build a road is an investment. Paying for its use through a toll or a gas tax is consumption of a transportation service like buying a ticket for a flight or a train ride.

With respect to spending on transportation, most of it to me is investment in physical infrastructure which has, in the past, proven its capacity to boost economic activity and raise standards of living.

But the deeper issue with transportation is who should later pay off the investment and how?

Simply put, consumers of transportation should pay in the first instance. Then, in the second place should be the general public which would be taxed to pay for a public good helping to raise all boats in the society and the economy.

Gov. Mark Dayton and the DFL also tend to advocate for their spending proposals in education as “investments.” But is this a wise use of the term?

Sometimes I fear that the DFL policy thinkers just use the label “investment” for those public goods and services they want to make available to deserving citizens. These expenditures, to me, are often better considered as current subsidies, a form of consumption.

I accept the point that spending today on many programs will lead to beneficial results in the future.  This is true for education, transportation, health care, parks and recreation, support for the arts, and many other forms of building social and human capital.

Social and human capital are the foundations for both economic growth and political felicity.

Across history where there has been, or is, poverty and oppression, war and violence, corruption and abuses of power, there has been paucity of good social and human capital.

It is people who bring about economic success. It is people of good character who bring about democracy and show prudence in preserving the common good.  Such people are capital assets for any culture or society.

The social institutions which bring about high quality human capital are social capital of note and worth.

To say that a public expenditure is an investment in social or human capital needs to be defended with facts and arguments.  The proponents of such spending need to show what the future returns of such spending will be and what are the systemic links between the use of the money today, what it will accomplish, and how that accomplishment will affect the future out 10 or 20 years.

This has been well done with respect to early childhood education.

A Wilder Foundation report on the Northside Achievement Zone (NAZ) looking to overcome the achievement gap in education for children in north Minneapolis provides us all with an example of how to make such a case for investment in social and human capital.  Their methodology should be used more broadly.

When Democrats put facts and good arguments about the expected returns on investment dollars on the table and not pieties or expressions of hopes and good will, then Republicans can honorably engage with specifics and agree with some of what the Democrats argue or present better arguments of their own to which the Democrats must defer out of intellectual integrity.

Such analysis will tend to focus expenditures on real investments and not just nominal ones.

Stephen B. Young is executive director of the Caux Round Table, an international network advocating ethical principles for business and government.

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