Thursday, November 18, 2010

Can Federal Investment Reduce the Budget Deficit?

By Teryn Norris at Americans for Energy Leadership


David Leonhardt -- one of the country's leading economic reporters at the New York Times -- has a new article, "One Way to Trim Deficit: Cultivate Growth," which calls for increased federal investment in science, technology, and education as one of "the best ways to promote growth" and a primary strategy to reduce the budget deficit. He reports:
"If the economy grew one half of a percentage point faster than forecast each year over the next two decades — no easy feat, to be fair — the country would have to do roughly 40 to 50 percent less deficit-cutting than it now appears...

Even more important than the next couple of years is the second part of a pro-growth strategy: the long term. A good deficit plan doesn’t simply make across-the-board cuts for years on end. It cuts funding for programs that do not spur economic growth and increases funding for those relatively few that do...

Beyond tax reform, both [proposed] deficit plans mention the importance of making investments that will lead to future growth. In particular, the Bowles-Simpson plan calls for a gradual 15-cents-a-gallon increase in the federal gasoline tax to pay for highways, mass transit and other projects. The plans also urge the government to prioritize education and science.

These are clearly among the best ways to promote growth. The United States created the world’s most prosperous economy last century in large measure because it was the world’s most educated country. It no longer is. Federal science dollars, meanwhile, led to the creation of the intercontinental railroad, the airline industry, the microchip, the personal computer, the Internet and numerous medical breakthroughs. Yet science funding is scheduled to decline as stimulus money runs out."

Leonhardt's case, which our allies and us have consistently advocated, is supported by a large and growing degree of evidence. For example, in an article for The Quarterly Journal of Economics titled "Measuring the Social Return to R&D," two Stanford economists concluded:
"the optimal share of resources to invest in research is conservatively estimated to be two to four times larger than the actual amount invested by the U.S. economy. The extent of underinvestment is substantial, and could well be much larger."
In other words, the federal government has been substantially underinvesting in science and technology, and securing robust long-term growth and deficit reduction requires new public investment in strategic growth sectors -- with clean energy technology being a prime example.

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