Does the State of California Need More “Public Investment”?

David Kersten
David Kersten is president of the Kersten Institute for Governance and Public Policy (www.kersteninstitute.org). Kersten is also an adjunct professor of public finance and economics at the University of San Francisco.

Renowned economists such as Paul Krugman, Robert Reich, and Milton Friedman often talk about the differences between “good economics” and “bad economics,” but often disagree about what these terms actually mean.

Similarly, in California politics you often hear public officials talk about the need for increased “public investment” in things such as education, health care, and infrastructure.

This begs the question about whether the State of California in fact needs more “public investment” and if so, how much more?

If you talk to some state Democrat politicians, they say that policymakers should more than double the size of California government, while some on the other side of the aisle say they would like to significantly shrink the size of California State government.

Moreover, many politicians actually appear to simply conflate “investment” with more public spending, and a “lack of investment” with less public spending.

Economists at state-funded universities, such as UC Berkeley, produce elaborate models regarding the huge benefits of more public spending, mathematically cataloguing all the projected benefits that such spending produces for society and the people of California.

But what is commonly lost in these partisan and academic debates is a discussion about the economics of what the actual return on investment (ROI) is for the current levels of state spending, as well as what the projected ROI would be for additional spending.

In the private sector, ROI is of the utmost concern with investors always seeking the greatest return on investment, and shunning investments that they deem to provide low return on investment or potentially a lost investment.

To illustrate, in California Prop. 98 education spending has increased from $49.7 billion in 2010-11 to $75.5 billion in 2017-18—a $25.8 billion or 52% increase in education spending.

Over the same period, public school enrollment actually declined by about 70,000 students—dropping from 6,289,000 students in 2010-11 to 6,220,000 in 2017-18. Student achievement scores have remained relatively abysmal, leaving California consistently in the bottom five of the 50 states for key measures of student achievement.

Yet all we tend to hear from the education community is a unified call for more funding, a lot more funding on the order of tens of billions of dollars. At the same time, we do not hear much about what benefits the increased funding could potentially provide.

With state budget season just around the corner, policymakers must ask the key questions: 1) What are we currently getting for our money? 2) What is the likely return on investment for additional spending?

In the case of education, it appears tough to justify significantly increased education funding unless such “investment” is combined with real education reform or policy measures that will provide for a better return on investment (i.e. improved student achievement, better education results).

Furthermore, spending more money on education in the absence of any policy changes to curb the well documented runaway pension and health care costs is essentially further bankrolling, at taxpayer expense, what increasingly appears to have become a “bankrupt system”—or at the very least a system that does not provide any measurable results for significant increases public investment.

Nobody disputes the value of a thriving and healthy K-12 public education system, but that’s not what we currently have in California—far from it–and a big part of the reason why is that state’s “business as usual” approach to increasing education investment with essentially no strings attached and no questions asked.

The state’s education system is only one example, perhaps the clearest, of the need for policymakers in California to consider the return on investment as a key test for increased state spending.

One area of public spending that commonly suffers from underinvestment is public infrastructure at both the state and local levels of government. Studies, as well as business leaders, commonly note the need to spend more on public infrastructure such as roads, bridges, water, wastewater, flood control, and other public brick and mortar projects.

The Governor and Legislature took action last year to remedy part of this problem by increasing gas and car taxes to fund an additional $5-6 billion per year in roads and public transit spending.

But 30% of this money went to public transportation capital and operating budgets without any guarantees of an increased return on investment, better performance and better results. Again, this money was given with no strings attached.

A lot of public infrastructure is funded at the local levels of government in California, but many California local governments report that they are having to divert significant funding away from public infrastructure projects to pay for exponentially increasing pension contributions to CALPERs and other local public pension systems.

Taking money away from public infrastructure projects to pay for what are arguably completely unaffordable public retirement costs—a “bankrupt system”–may be an acceptable business practice in California government, but it would not fly in the private sector.

Public officials in California and across the nation love to talk about the benefits and need for increased “public investment,” but rarely talk about the need for “better results” and “higher returns on investment.”

This is something that needs to change in California if the state is ever going to have a thriving public sector that adequately invests in a brighter future for all its people.

Put simply, it is not necessarily about “more public investment,” it is about “smarter public investment,” and that is a tall, but necessary order.

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