As a political scientist and entrepreneurship professor interested in economic development in this region, I speak with a lot of local and state politicians of both parties. It may surprise you in this polarized environment that I hear a solid consensus among Democratic and Republican politicians alike when it comes to public spending.
Most politicians in this region espouse a staunch fiscal conservatism.
Common complaints are that we have too much debt and that current spending levels are not sustainable. Across a wide swath of the public – no matter from what socioeconomic status, political affiliation or profession – I hear that the city/county/state is broke, we cannot afford to fix the roads or sidewalks, higher education has become too expensive and the state cannot afford to pay for it anymore, and so on.
But there is a problem here.
Economists and savvy business people understand that not all costs are alike. Let’s review the basic equation for how profits are made. Revenues minus costs equal profits (R-C=P). When a business sells more stuff at a higher price, it makes greater revenues. Revenues (R) equal the quantity (Q) sold multiplied by the price (P) per unit sold, or (R=Q*P).
How businesses grow are by reinvesting some of the profits back into making more revenue, such as by building a new factory, hiring more workers, spending more on advertising, and so on. This is called “retained earnings” and is the foundation for healthy capitalism and a prospering private sector. These re-invested profits are in other words an investment expense.
Smart business people differentiate consumption expenses from investment expenses. The money spent to hire new workers, expand operations, buy new computer equipment, and so forth is very different than the money spent to take a lavish vacation, buy a Porsche, take a three martini lunch or a golf trip to Scotland. The latter are consumption expenses and the former are investment expenses.
Now let’s see what this differentiation means for public policy.
In the public sector, which by definition is not-for-profit, revenues must equal costs (R=C). Yet not all costs are equal. Like retained earnings in a business, some costs are investments, and are put in the service of generating future revenue streams. Other costs are consumption costs. Every public dollar spent has a range of impact on generating future revenue, all the way from no impact (a pure consumption expense, which most would call wasteful) to significant impact (for each public dollar invested, multiple revenue dollars are generated).
In the public sector, revenues come primarily from taxes, including corporate and personal income taxes, property taxes, sales taxes, and a variety of fees and fines. There are also many transfer payments across jurisdictions (funding for cities from state and federal governments). Some expenditures help generate more revenue from these sources, while other expenditures do not. Cost outlays that help generate revenue are called investments, while cost outlays that generate no additional revenue are called consumption costs.
The mistake made by the public and our political leaders alike is when all public dollars spent are treated equally.
A public dollar spent on lighting unused offices is clearly wasteful and purely a consumption cost while a public dollar spent on educating our future work force is clearly an investment. When we spend public dollars on infrastructure, education, health promotion, workforce skill development and quality of life amenities, we invest in the capacity of our jurisdiction to attract and retain productive, high quality entrepreneurs, employers and employees.
When we treat these investment dollars as consumption expenses, and undergo belt-tightening (austerity measures) which cuts off the spigot of investment in our future, we do so at our own and our children’s peril.
Investing public dollars to fully repave our pothole-infested roads is not wasteful consumption spending. We must invest, or the most productive people and organizations will not want to stay in our community or invest their private dollars here.
Similarly, failure to invest in the education, skill development and health of our people will result in our community’s bypassing significant economic opportunities in the 21st century.
If we don’t make Muncie and Delaware County an attractive, modern, cosmopolitan, healthy and fun destination for young entrepreneurs and professionals, the brain drain will continue to bleed life and hope out of this community in the coming decades. The choice is ours to make.
It begins with being clear to ourselves, each other, and our leaders the difference between wasteful consumption and critical investment expenditures. Our taxes may not need to increase if we decrease wasteful spending while making a proportional increase in investment spending. If making the necessary investments in a better tomorrow, however, requires us to pay slightly more in taxes and fees, than let’s make that sacrifice.