What City Has at Stake in “Cliff” Talks

Like many things Washington does, deliberations on resolving the fiscal cliff and skyrocketing federal debt seem like they occur in a galaxy far away, rather than in our nation’s capital. Yet the fiscal decisions made by the leaders of our federal government in the coming months will affect the economy of cities and metropolitan areas such as Milwaukee for years, if not decades, to come.

The reasons are simple. The federal government is an enormous investor in people and places, companies and clusters, institutions and intermediaries. In fiscal year 2012, it spent $1.3 trillion on a wide range of discretionary programs from transit and community development to defense; $2.2 trillion on mandatory programs such as Social Security, Medicare and Medicaid; and $1.1 trillion on tax expenditures for research and development, housing, agriculture and energy, among others. In the Milwaukee metropolitan area, the federal government invested $12.3 billion in fiscal year 2010.

When it invests wisely, the federal government provides necessary support for our most vulnerable citizens, and critical support for long-term economic growth through investments in innovation, infrastructure and education. When it invests poorly, it helps stimulate over-investment in speculative and wasteful activities, such as the over production of housing that preceded the Great Recession.

The imperative for metro areas such as Milwaukee is clear: more smart investments, less stupid spending. But what Milwaukee needs from the national government might be different from what Miami or Memphis needs, given its distinct economic assets and advantages.

Milwaukee is a manufacturing powerhouse. It is the 39th largest metropolitan area in the United States by population, but it has the 15th most manufacturing jobs, with strong concentrations in electrical equipment production, leather and allied products manufacturing and machinery production.

Milwaukee is also a clean economy hub, with 13,471 clean jobs and a burgeoning water efficiency cluster. The University of Wisconsin-Milwaukee’s School of Freshwater Sciences anchors the region’s rising position in the “blue economy,” positioning it to potentially be a global hub for freshwater research, firm creation and business expansion.

Against this backdrop, the federal investments that matter for Milwaukee become clearer, as do those that do not.

What matters?

First, investments in clean energy research and development. At present, the U.S. government only invests about $5 billion a year in clean energy innovation. Increasing overall levels of investment to “crack the code” on low carbon is not only an environmental and energy imperative, but a market proposition as profound as the information revolution, capable of producing more and better jobs. In 2010, the American Energy Innovation Council, led by industry leaders such as Bill Gates and Jeff Immelt, recommended that the U.S. invest at least $16 billion a year in clean energy research and development.

Second, investments in manufacturing innovation. In the wake of the Great Recession, the U.S. is rediscovering how important it is to actually make things in order to spur innovation, raise wages, drive exports and lower the trade deficit. For about $625 million a year, the U.S. could create a nationwide network of advanced industries innovation hubs to expedite the conversion of basic research into commercially relevant technologies through university-industry-government partnerships.

Finally, investments in education. In the decades ahead, upgrading the education and skills of America’s increasingly diverse workforce is critical to meeting the demands of advanced manufacturing and clean energy jobs of the future. The federal government should fully fund the Obama administration’s proposed $8 billion per year Community College to Career Fund to train 2 million workers for good-paying jobs in high-growth, high-demand industries.

What doesn’t matter? The home mortgage interest deduction.

Given the comparatively lower cost of housing in the Milwaukee metropolitan area and throughout the state, the average mortgage interest deduction in Wisconsin – $7,793 – is the 42nd lowest among the 50 states, and nearly $3,000 below the national average. Yet, in the next five fiscal years, the federal government is projected to forgo more than $606 billion dollars in income tax revenue as the budget impact of the deduction grows from $100.9 billion in fiscal year 2013 to $143.5 billion in fiscal year 2017.

So here is an idea: Why not cut the mortgage interest deduction to invest in activities that would actually create good jobs in Milwaukee in the near term and prepare the region for innovative growth in the long term?

This is exactly what leaders in Washington should be considering as they negotiate a deal to avert the fiscal cliff and America’s long-term debt and deficit problems. The Obama administration has proposed capping the income tax rate at which taxpayers can take itemized deductions at 28%, including mortgage interest, which would only affect taxpayers in the top two income brackets. According to the Tax Policy Center, this could raise as much as $580 billion in new revenue over the next 10 years.

As the fiscal cliff approaches, it is critical that the federal government get strategic rather than just get smaller. Significant programmatic cuts and reforms are necessary, but other investments must be protected, and in some cases, even increased. Reforming the mortgage interest deduction offers a smart path toward raising revenue to contribute to meaningful deficit reduction and to invest in the drivers of long-term growth and prosperity in America’s cities and metros. It’s time for Washington to cut to invest.