The Congressional Budget Office Reports on Federal Investment

With the recent surge in congressional activity towards infrastructure spending it is worth noting a Congressional Budget Office (CBO) report released in June entitled Federal Investment, 1962 to 2018. That report provides a great overview of the investments the federal government has made over several decades in a variety of areas, including infrastructure.

Federal investment in any given year is massive by the standards of mere mortals. Last year, the federal government spent $492 billion on investment in physical capital, research and development (R&D), and education and training. This sum, drawn mostly from discretionary funds, amounts to 12 percent of federal spending and 2 percent of gross domestic product (GDP), targeted to what economists call public goods, or spending that has desired aftereffects across society: an educated, well-trained worker makes more money than an unskilled one, in turn paying more into the treasury in taxes; a well-maintained highway system helps the unimpeded flow of goods across the country; a healthy R&D program yields innovations with knock-on economic effects, including new materials and products.

About 40 percent of the federal investment budget was spent on national defense. The remaining 60 percent, or $297 billion, was allocated at about 41 percent for education and training, 37 percent for physical capital, and 22 percent for R&D. (The national-defense portion of funding was split between physical capital at 75 percent and R&D at 25 percent; educational spending for the service academies and military preparedness is accounted for as “obligational,” falling outside the purview of the CBO’s accounting.) Somewhat more than half (56 percent) constituted funds spent directly by federal agencies, with the rest distributed by means of grants to state and local governments. As the report notes, some of this funding is also indirect—tax deductions for new equipment purchased by individual tax filers and firms, for example, or tax credits for higher education.

Much of the spending on R&D, in that regard, came through tax credits to corporations for research on such things as “orphan drugs” meant to treat rare illnesses that might otherwise be given low priority by a pharmaceutical manufacturer. The report notes that the federal government awards almost no grant money for R&D to state and local governments, distributing it instead to federal laboratories, universities, and private and nonprofit organizations. Conversely, nearly half of federal funding for education and training is distributed to and administered by state and local governments, and more than two-thirds of nondefense infrastructure spending was distributed in the same way.

Nondefense spending on physical capital mostly goes to transportation infrastructure, while nondefense spending on R&D concentrates on the sciences, which is of tremendous benefit to research universities across the country. The report notes, in that regard, that investment in converting the closed DARPANet computer system into the open Internet created whole segments of the economy that did not exist before, a discussion that ties in to the larger problem of measuring what effects government investment might have overall. It might take decades for the effects of any given investment to be assessed, the report notes, while economic benefits derived from federally funded research, such as privately owned patents, may not be widely shared throughout the economy. That it does not easily lend itself to measurement does not, of course, diminish the importance of this spending.

The CBO report charts a long history of discretionary spending over six decades, noting at the outset that while the 2018 level is relatively consistent with patterns set over the last 25 years, it is far below spending in the 1960s, when investment spending account for about 30 percent of all federal spending. Nondefense spending was at it peak in the later 1960s, when the government was funding such costly programs as the Apollo space initiative and the nationwide construction of the interstate highway system. Similarly, defense spending has varied from a high, in terms of overall share, of about 50 percent to a low of about 30 percent, reflecting changes in geopolitical conditions and the policies of various presidential administrations. Perhaps the most marked change in spending concerns water infrastructure, which fell to an all-time low in 2017, with most spending carried out by the states, while the most stable category, changing little as a percentage of GDP from 1962 to today, has been public transportation.

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