Buchanan Colloquium on Capital Budgeting at NYU

Thursday, April 15, 2004

Neil Buchanan (Rutgers-Newark) presents "What is Fiscal Responsibility?
Long-term Deficits, Generational Accounting, and Capital Budgeting" at the NYU Colloquium
on Tax Policy and Public Finance. Here is the conclusion:

"The traditional debate about budget deficits witnessed a divergence between the
economic analysis, which saw that deficits are poorly measured in the U.S. and argued
that certain deficits are beneficial for the economy, and the political view that every
deficit is evidence of moral failure. This unusual stalemate is currently on hold, as the
brief era of surpluses gave way to the (hopefully even more brief) era of terror, leading to
a decreased emphasis on fiscal orthodoxy.

In addition, an alternative approach to budgeting, Generational Accounting, has
emerged. Designed to correct some of the weaknesses of annual budgeting, GA purports
to provide an “early-warning system” to allow us to correct our long-term fiscal
imbalances before it is too late. Unfortunately, this theory is based on highly contestable
assumptions, makes questionable analytical choices, and is inherently incapable of
providing the useful baseline that its proponents promise.

Instead, a modified system of capital accounting should be used to guide
economic policy. This would emphasize case-by-case analysis, allowing legal analysts to
compare the likely costs and benefits of policy proposals while keeping a clear eye on the
importance of government investment in our future prosperity. If political concerns
about the potential abuse of capital budgeting prevent the federal government from
adopting an explicit capital budget, the best response would be to continue to rely on the
current (admittedly imperfect) budget measures, which at least provide some useful
guidance regarding the immediate effects of our fiscal policies."