Scott Walker's Capital Budget Will Dampen Economic Recovery

John Kovari, a UW-M doctoral candidate in Political Science, offers a solid guest posting about Scott Walker's proposed capital budget - - a lesser-visible spending plan separate from Walker's policy-laden operating budget that has received far more publicity.

Kovari has worked in community development and was staff aide to Milwaukee Common Council member Michael Murphy.

I am happy to publush it below:

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Walker's infrastructure cuts will cost jobs

While Gov. Scott Walker’s controversial actions regarding public employees in the 2011-12 operating budget has dominated the news lately, it’s Walker’s less visible $1.1 billion capital budget that has me more disappointed and worried.

Walker is calling for a 29% decrease in capital projects (i.e. infrastructure) over the next two years, presumably to curb state costs.

The problem is that the state’s capital budget is integrally tied to the performance of the state’s economy, and the cuts will actually muddle Wisconsin’s recovery.

Although the capital budget is relatively tiny – making up less than 0.5% of the state’s GDP – it can still have a major impact on the state’s output.

Economists and political scientists have studied budgets enough to know that public spending (especially in infrastructure) positively impacts the economy.  In fact, public spending on capital projects is often deemed more significant than annual operating budgets in growing the economy.  Please read Aschauer (1989) and Gramlich (1994) for details.

In short, the value of new infrastructure is directly capitalized into Wisconsin’s economy, because that infrastructure is worth something and jobs are required to build those projects.  I’ve explored this topic with regard to local County budgets here as well.

Unfortunately, this makes Walker’s infrastructure cuts seem counter-productive.

I understand that the state’s revenues are down, the economy’s in a slump, and “we’re broke.”

But my argument here is that cutting the capital budget so drastically will actually dampen Wisconsin’s recovery.  Three short but major points to support my argument:

First, Walker’s capital cuts are so drastic that they are typical of what budgeting academics call a “punctuation.”  Yes, that’s the technical term.  And there’s evidence that negative punctuations hinder economic growth (in terms of jobs, unemployment, and personal income).  Businesses love infrastructure, and their investment usually follows the public investment.  Drastic cuts undermine that relationship.

Next, in a survey of municipal and county administrators I conducted along with UW-Madison economist Steve Deller and UW-Oshkosh political scientist Craig Maher, we found that there is little success in abating fiscal stress by cutting or delaying capital projects and/or maintenance.

Third, and perhaps most importantly, Walker’s tax breaks won’t have the intended stimulative effects unless the state’s projects and services are kept constant.  Cutting both services and taxes will wash economically.  Thus, when the state’s infrastructure budget is cut by nearly one-third, it’s going to offset the benefit of the tax cuts.

Gov.  Walker beefed up the 2010 County capital budget in an attempt to stimulate job growth.  It would make sense that he would do the same as Governor.  Unfortunately, less infrastructure spending will only lead to slimmer job growth.  Here’s hoping the Legislature will review the bad economics of this move and establish a stronger capital budget.