THE discussion is starting on how to spend the peace dividend. Where should the money saved from cuts in military expenditures this decade go? Should the freed-up resources be channeled to the private sector? Or should the composition of government spending be altered? Should more revenues be used for deficit reduction, education and training, government-sponsored research and development, environmental improvements, or infrastructure?
``A crucial theme of the 1990s will be reinvesting in the economy in order to compete better with major industrial countries, such as Germany and Japan,'' says David Aschauer, an economist with the Federal Reserve Bank of Chicago.
Mr. Aschauer has done some research indicating that the return from federal investment in the nation's infrastructure is outstanding. Here's an example. Washington decides to spend $1 billion on a new highway. The gross return to the nation the first year after completion will be about $500 million. Trucks and cars will get to their destinations in a shorter time with less damage to their vehicles. Businesses will become more efficient and productive. Some companies or towns will be less isolated from their markets, perhaps able to offer their services to customers farther away and thus able to specialize to a greater degree.
Depreciation of this highway reduces the return in subsequent years. But Aschauer figures the ultimate return on that $1 billion will be around $5 billion. That would be far higher than most private sector investments offer, with, perhaps, the exception of research and development. R&D can provide an even greater return if the ``spillover'' effect is included, that is, the benefit not only to the company doing the research but to competitors and others who subsequently make use of the R&D.
Aschauer's findings are so favorable for infrastructure investment that they are controversial. The returns are too high to be real, the critics say. Exaggerated or not, they were a focus of a conference yesterday organized by the Federal Reserve Bank of Boston in Harwich Port, Mass., entitled: ``The Third Deficit: The Shortfall in Public Capital Investment.''
Undoubtedly, his work will be cited by the highway construction industry in the coming year as it lobbies Congress for an extension of the federal highway program. Sometime in 1991-92 workers will finish the last segments of the interstate highway network.
``That will bring to an end an era of road-building that began with Dwight D. Eisenhower in 1956 and has dominated infrastructure spending since that time,'' notes George Peterson of the Urban Institute, another speaker at the conference.
By the end of September 1991, he says, Congress must set new priorities and incorporate new principles of cost sharing with the states for the highway program.
Numerous politicians and press reports trumpet the need for more spending on roads, airports, garbage disposal systems, clean air and water, and other infrastructure projects. Mr. Peterson refers to ``direct evidence'' that households are willing to foot the bill. Over the past six years, he notes, 79.7 percent of all state and local infrastructure bond proposals, by value, have passed. Californians, for instance, have just approved raising gas taxes in order to spend $15.5 billion on highways over 10 years.
Aschauer figures that another paper prepared for the conference by the Boston's Fed's chief economist, Alicia Munnell, confirms his results. She looks at state and local public spending on roads, sewers, waterworks, and other infrastructure and calculates the gross return as about 30 percent, or approximately the same as for investment by private business. (Remember, this is gross return, not net return after depreciation and other deductions are taken.)
The Chicago economist believes that the ``spillover'' benefits of local and state spending to other states or localities would boost the return to close to 50 percent. Mrs. Munnell isn't so sure.
Whatever the case, she holds that the nation will be devoting more of its attention to the current $2 trillion in outstanding stock of public investments and the question of additions to it in the years ahead. ``It's an exciting area,'' she says.