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Have the large federal budget deficits of the 1980s financed public consumption at the expense of private investment, as official data indicate? Or has some federal spending bought public investments that, like their private counterparts, contribute to national wealth? This study examining these issues was prepared for the Joint Economic Committee of the United States Congress.

The study was written by Jenifer Wishart of the Natural Resources and Commerce Division under the supervision of Everett M. Ehrlich. Many people contributed to the development of the report. Within CBO, Frank S. Russek, Marvin M. Phaup, Robert W. Hartman, R. William Thomas, Maureen McLaughlin, Daniel Koretz, and David Elkes made helpful suggestions, while Andrew Haughwout, Mark A. Weatherly, and R. Mark Musell contributed important data. John C. Musgrave and David J. Levin of the Department of Commerce provided valuable assistance on national income concepts and measures. Francis Pierce edited the manuscript. Gwen Coleman and Kathryn Quattrone prepared the paper for publication.
 

Edward M. Gramlich
Acting Director
December 1987
 
 

SUMMARY

I - INTRODUCTION

II - DEFINING PUBLIC INVESTMENT

• The NIPA Concept of Investment
• Extended Concepts of Capital

III - VALUING FEDERAL INVESTMENTS

• Measuring Federal Investment Outlays
• Measuring Federal Investment Subsidies
• Depreciation Rules

IV - DIRECT FEDERAL INVESTMENT

• Measuring Physical Investment--the NIPA Story
• Effect on Saving and Investment Measures

V - EXTENDING CAPITAL CONCEPTS

• Investment in Defense Assets
• Investment in Intangible Capital
• Loans and Grants to Other Sectors
• Subsidies for Investment in Human Capital
• Overall Effects of Extending Capital Concepts on National Saving and Investment Rates

APPENDIXES

A - Assumptions About Service Lives and Retirement Patterns for Government Physical Capital
B - Estimates of Gross Investment (In 1982 Prices)
 

TABLES
1.	The Share of National Output Devoted to Investment and Saving
2.	Federal Expenditures Qualifying as Investment under Different Concepts of Capital
3.	Net Federal Physical Investment after Deducting Assets Withdrawn from Service
4.	Net Federal Physical Investment after Deducting Equal Annual Amounts for Depreciation
5.	Effect of Varying Assumptions for Depreciation Estimates on Net Investment for Conservation and Development of Water and Energy Resources
6.	Net Investment in Defense Assets
7.	Federal and Private Net Investment in Intellectual Capital through Research and Development
8.	Net Physical Investment by States and Localities from Grants and Other Sources
A-1.	Bureau of Economic Analysis Assumptions About Service Lives for Government Physical Capital
A-2.	Bureau of Economic Analysis Assumptions About Retirement Patterns
B-1.	Gross Federal Physical Investment
B-2.	Gross Investment in Defense Assets
B-3.	Private Gross Investment in Intellectual Capital through Research and Development
B-4.	Federal Gross Investment in Intellectual Capital through Research and Development
B-5.	Physical Investment Financing through Grants to States and Local Governments
FIGURES
S-1.	Net Investment Attributable to Federal Budgets under Different Concepts
1.	Net National Saving and Investment as Percent of Net National Product
2.	Measures of Federal Physical Investment
3.	Completion Cost and Rate of Return on Recent Water Projects
4.	Effects of Federal Investment on National Saving and Investment Rates
5.	Effect of Investment in Defense Assets on National Saving and Investment Rates
6.	Effect of Investment in Research and Development on National Saving and Investment Rates
7.	Net Investment in Highways by Source
8.	Investment in Wastewater Treatment
9.	Resources Available for Transit Investment
10.	Effect of Federal, State, and Local Physical Investment on National Saving and Investment Rates
11.	Overall Effects of Different Capital Concepts on National Net Investment and Public Saving
BOX
1.	Saving and Investment

 

The great increase in federal deficits in recent years has given rise to fears that federal borrowing may be financed from private savings that would otherwise be available for business investment. In response, some analysts have suggested that much federal spending represents productive investment that adds to the nation's wealth. If so, the deficits have not represented as large a drain on domestic saving as their numerical size would suggest. The decline in net private domestic investment in the 1980s may, in this view, have been partly offset by the investments made by the federal government. Some analysts also argue that federal investment contributes to the long-run strength of the economy by stimulating private investment in certain areas that would otherwise be neglected.

The extent to which federal spending has added to the nation's wealth depends on the answers to two questions:

• Which forms of federal spending are investment?
  
  
• How is the value of these federal investments to be assessed?
  
  

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