Patty Murray and Paul Ryan have reached a budget deal that would add about $63 billion to discretionary spending, partially reversing the deficit-reduction scheme known as the "sequester." While the plan is a small step in the right direction, it does almost nothing to mitigate a decades-long decline in public investment and discretionary spending.
First, some background. In August 2011, Congress and the Administration attempted to solve an impending fiscal crisis through the Budget Control Act (BCA). The BCA rightly included a clause that would put in place automatic cuts should Congress fail to reach an agreement on deficit reduction, but failed in two key respects. One, the BCA attempted to achieve austerity far too quickly, cutting off support for a struggling economy right when it needed public funds the most. And two, BCA's cuts focused on the wrong type of spending, primarily cutting discretionary spending-a catchall term that mostly refers to spending other than interest and transfer programs-instead of large entitlement programs like Medicare and Social Security. When all was said and done, BCA cut expected discretionary spending by over $2 trillion over ten years.
As a result, discretionary spending has fallen to its lowest level in decades. In fiscal year 2013, discretionary spending amounted to just 7.6 percent of GDP, down from 12.6 percent five decades earlier and about 2 percentage points below the 50-year average. While not all discretionary spending is investment, much of it is, including spending on infrastructure, community development, and energy. If the sequester remains in place, this trend will continue. The Congressional Budget Office (CBO) estimates that discretionary spending will amount to just 5.5 percent of GDP in 2023-the lowest level in the postwar era.
Discretionary spending encompasses a wide range of programs and is not easily characterized. About half of discretionary spending goes towards defense, and the other half is spread across programs like education, health, transportation, energy, justice, and community development. Much of our public investment is made through discretionary spending, as is most of the spending on "public goods"—programs that benefit the country as a whole, rather than just a single individual or household.
This trend can be seen not only in CBO estimates of discretionary spending, but in the National Income and Product Accounts as well. In the five decades between 1963 and 2012, the share of spending classified as "federal consumption and gross investment"-a term that essential applies to all spending other than transfers, interest spending, and subsidies-fell from 13.7 percent of GDP in 1963 to just 8.0 percent of GDP in 2013.
Perhaps the starkest decline can be seen in historical budget data from the Office of Management and Budget (OMB). OMB tracks a category of spending called "Total investment outlays for major physical capital, research and development, and education and training"-which is a pretty decent measure of government investment in infrastructure and human capital. Over the past 50 years, our spending on this type of investment has plummeted. In 1963, a whopping 34.5 percent of the federal budget was devoted to this type of investment; by 2013 the percentage had more than halved to 15.0 percent. And as a share of GDP, spending on major investments fell from 6.4 percent of GDP to 3.1 percent.
Small-government advocates have cheered the sequester—and opposed the Murray/Ryan compromise—on the reasoning that all government spending is bad spending. But as any introductory economics student can attest, not all spending is equal, and there are big differences in spending to consume and spending to invest: investment leads to a richer life in the future, consumption does not.
Congressional agreement on partially reversing the sequester would be a small but critical first step towards improving public investment. Long-term deficit reduction is undoubtedly one of our nation's biggest challenges, but the solution lies in cutting back entitlement spending and raising sufficient revenues, not pushing down discretionary spending far below historical lows.