Taking on the $41 Trillion Three Deficits

Looking back over the 2011 budget deficit debate one thing’s for certain: the political landscape and policy discussion hasn’t changed much at all and as a result our future fiscal and economic growth potential are threatened. In addition, our ability to address grand challenges like climate change and energy security become significantly less probable than they already are.

That’s one of the key messages from a new report by the Information Technology and Innovation Foundation and the Breakthrough Institute titled, “Taking on the Three Deficits: An Investment Guide to American Renewal.”  The report argues that what’s needed is a fundamentally different framework that counters the predominant approach that all government expenditures are “on the table” to close the budget deficit, estimated to grow to $18 trillion by 2021. While such a strategy makes policymakers appear bold in their approach, in practice it would actually be counterproductive.  Across-the-board budget cuts would ultimately reduce economic growth and lead to a higher budget deficit over time while stifling key investments in innovation.

The reason is simple: America isn’t tasked with eliminating just one deficit; it actually faces three interrelated deficits. In addition to the worsening budget deficit, America faces a persistent and growing trade deficit, representing a hidden tax on future generations who will have to pay it off with reduced consumption of goods and services. America also faces a deepening shortfall in public investments in the building blocks of innovation such as R&D, education, and infrastructure. All told, America isn’t challenged with just an $18 trillion cumulative budget deficit by 2021 – it’s challenged with an estimated $41 trillion three deficits by 2021.

And there are no silver bullets to solving the three deficits as each deficit impacts the others.  For example, cutting investments in R&D stifles the development of breakthrough science and new technologies such as clean energy, nanotechnology, and biotechnology that are the backbones of future waves of economic growth. As such, U.S. exportable industries become less productive, harming American international competitiveness, exacerbating the trade deficit and reducing federal tax revenue. As conservative columnist George Will warns, cutting productive public investments is akin to “making an overweight aircraft flight-worthy by removing an engine.”

In other words, it’s an approach the United States cannot afford to take.

What’s needed is a more nuanced budget policy debate that breaks from traditional budget frameworks.  Most often, the debate comes down to discussions of discretionary vs. non-discretionary budgets or defense vs. non-defense expenditures.  But from a three deficits point-of-view, these matter little.  In fact, addressing the three deficits first requires distinguishing which government expenditures are productive investments and which are consumptive spending.  In doing so, policymakers should consider three simple criteria:

1. Innovation. Does the program or policy help spur innovation to create new products, processes, technologies, or knowledge that in turn adds value or creates new industries?

2. Productivity. Does the program or policy increase the productivity of organizations and the economy as a whole?

3. Competitiveness. Does the program or policy help close the trade deficit by making U.S. firms more globally competitive, thereby increasing exports, or reducing imports?

By using these three simple metrics as an investment guide, policymakers can begin making better budget decisions and effectively increase high-impact productive investments and tax reforms while targeting consumptive spending for cuts.

And as in other areas, not all energy-related expenditures are created equal. Take a look at how the current budget debate is impacting energy policy. Under the current approach, key investments in energy innovation, productivity, and competitiveness like ARPA-E, the regional innovation clusters program, R&D in emerging technologies like small modular reactors and key clean technology R&D programs within EERE are either targeted for cuts or are significantly underfunded.  For instance, under the House 2012 DOE budget proposal, total energy innovation budgets would be cut by 12 percent compared to 2011 funding levels, while unproductive consumptive energy spending like oil and gas subsidies and ethanol tax credits would continue untouched.

These policy choices negatively impact the three deficits. If we cut our investments in clean energy technologies (which directly increases the investment deficit), the U.S. increasingly loses out on the ability to invent competitive clean technologies domestically and sell them abroad. In addition, failing to support the nascent clean energy industry domestically, we lose out on growth potential and federal tax revenue, thus reversing or wiping out any small budget deficit reductions made from cutting energy innovation. It’s absolutely the wrong approach and reflects the entrenched interests in the energy sector rather than what’s best for the competitiveness and growth of the U.S. economy as a whole.

The super committee – and Congress in general – has two choices.  One, cut the budget deficit on the backs of the trade and investment deficits through indiscriminate policy and potentially put the U.S. economy on the route to fiscal and economic ruin.  Or two, make targeted, growth-enhancing investments to spur innovation, productivity, and competitiveness while making cuts and reforms to consumptive spending elsewhere.