The fact that we have not kept up with the training of skilled workers, particularly scientists and engineers, is also beginning to create problems for the economy. The United States now graduates fewer engineers per capita than nearly all other advanced industrialized countries. American firms are beginning to complain about the shortage of skilled workers in some sectors of the economy, forcing them either to import the talent or rely more than they would like on offshore outsourcing. We have also underinvested in basic science and research and development. Such efforts make possible the technological breakthroughs that historically revolutionize the economy and the way we live, and they are responsible for the innovation from which American companies derive premium returns on capital. But research and development spending as a share of GDP has declined over the last two decades, caused by steady declines in the federal government’s support for research and development. To date, these problems have had only a modest impact on our robust economy. But given the nature of today’s global economy, the more we delay correcting this shortfall in public investment, the more vulnerable we will become to more serious problems in the future.

First, in an age of globalization, public investment is the best way to help American-based companies compete against lower-wage economies–which they now must do if we are to maintain the standard of living of American workers. Public investment allows the United States to pursue a "high road," non-protectionist strategy toward international competition. By providing businesses with a better high-tech infrastructure, more skilled workers, and access to cheaper and cleaner energy, it lowers the cost of doing business and increases the efficiency of investment in the United States. Without more public investment, our choice is more protectionism or the loss of more good jobs.

Second, public investment is even more important in today’s global economy because knowledge, wealth, and innovation contribute a far greater share to our national income than they did 15 to 20 years ago. Adequate public spending on research and development is especially important at a time when many private companies are cutting back to reduce costs and increase short-term profits. As noted earlier, to an unacceptable degree, we have been living off the investments of the past that helped seed our aerospace, computer, and biotech industries, and we will need to make comparable levels of public investment now to ensure future technological advancements that generate new wealth.

Finally, in an age in which there are limits to how much one can redistribute income through the tax code, public investment has become an even more essential tool of social policy. Today, a robust public investment program would help correct income inequality and wage stagnation by creating good jobs. A program to upgrade our transportation and communications infrastructure to world standards and to lay the foundations for a new energy and water infrastructure for the twenty-first century would alone create millions of higher-skill jobs that would pay above median wages and could not be outsourced. This kind of public investment program would also help correct a labor market that has become overly weighted toward low-wage, low-skilled jobs, and it would be an important complement to the earned-income tax credit, which tends to subsidize low-wage occupations.

Too often, deficit hawks portray public investment as a financial burden. Instead it should be seen for what it is: an economic opportunity to create new middle-class jobs and stimulate new private investment in America’s economic future. Indeed, the greatest benefit of a robust program of public investment would be its positive impact on the real productive economy and on future productivity growth.

Public Investment First

Some proponents of a "deficit reduction first" strategy do acknowledge the importance of public investment to the American economy, but they nonetheless argue that it must wait until we have brought our fiscal deficit under control. This brings us to the core question of the debate: Which policy priority is most likely to contribute to a stronger economy in the long term? As should be apparent from our analysis, making a priority of cutting the deficit would do little to meet our most critical economic and social challenges, while contributing relatively little to our long-term financial health. Deficit hawks want to cut the deficit in order to reduce our external deficit and reduce the risk of a dollar crisis. But contrary to current conventional wisdom, cutting the budget deficit would not necessarily lead to a reduction in the current account deficit. As our experience of the last two decades shows, budget deficits do not closely correlate with current account deficits. In fact, the two often move in opposite directions: The budget deficit increased in the early 1990s as the current account deficit narrowed; and the current account deficit increased dramatically in the late 1990s as the budget deficit went into surplus.

Deficit hawks also want to cut the deficit in order to lower interest rates and prevent government borrowing from crowding out private investment. But lower interest rates would not do much to stimulate more investment when the cost of capital is already low by historical standards, or when companies are overflowing with cash and have ready access to relatively low-cost credit. In fact, in such an environment, cutting the budget deficit might lead to more speculation and asset bubbles rather than real investment, as happened in the late stages of the tech boom. And if deficit reduction does little to stimulate new private investment, it also means it will do little to counter a possible housing-related slowdown, or create better jobs for working Americans, or strenghten America’s underlying productive economy.

By contrast, public investment, beginning with a program to rebuild our public infrastructure, is ideally suited to those challenges. It is the fastest and most reliable way to create good jobs. But it is also the best way, in an economy with ample capital and low interest rates, to stimulate new private investment and thus set off a new cycle of investment, innovation, and productivity growth.

A program of public investment, however, need not increase public spending significantly. This is especially true of a program that focuses on public infrastructure investment. If properly structured to involve government guarantees for state and local long-term bonds, this type of program could rely almost exclusively on private financial markets to fund a variety of state and local infrastructure projects. Such a program of government guarantees would lower the cost of borrowing for many infrastructure needs and would thus stimulate important new public infrastructure projects carried out by private contractors. This program might also entail the creation of a federal agency that would select among municipal, state, and regional infrastructure projects that would best meet criteria for cost effectiveness, public need, and job creation. Because such a program would rely mainly on federal guarantees, it would not increase the budget deficit (although it would technically increase the national debt), but rather it would ensure a wise use of public and private resources.

However it is financed, a public infrastructure investment program could be quickly designed, easily implemented, and adjusted to fit the economy’s needs. Moreover, such a program would have almost immediate benefits in terms of job creation, income growth, and private investment. This increased economic activity in turn would generate new tax revenues and thus more than offset any increase in public spending. And what is true in the short term is even more so over the longer term–economic activity and innovation build off each other, creating a virtuous cycle.

In this way, increased spending on public investment and stronger economic growth would offer a better way of ensuring America’s future standard of living than would a strategy of cutting the budget deficit first. Indeed, the American way of securing our future is not by "nickel and dime-ing" public investment but by investing robustly to improve productivity and grow the economy. That philosophy has worked well in the past, and it will work even better today.