Invest In America By Letting America INVEST.
You may have read a recent post of mine entitled: “Do We Really NEED To Be Concerned About The Debt.” Needless to say many disagreed, a few somewhat animatedly, so I decided I should further support my claim that America should be spending.
First, before you start posting that we are in a spiral of debt and need to get out of it, future generations yadda yadda – as I have highlighted, the debt is important. Please read further.
Reason 1: It’s never been a cheaper time to borrow!
In the aforementioned article, I wrote:
Treasury rates, the yield the government pays for its debt, are 0.70% for a 5-year bond, 0.35% for a 3-year and 2.97% for a 30-year. Compare 10-year bond rates to countries who are in real trouble, Spain (5.69%) and Italy (4.92%), the United States rate (1.79%) is tremendously low.
That probably wasn’t a fair assessment given our financial times. Our treasury rates are NEGATIVE. This means that the yield we pay on treasury rates are lower than the rate of inflation. So it is actually CHEAPER to invest with a 0% rate-of-return than to keep it sitting in the bank. (Current inflation rate estimates are somewhere between 1.4-2%.)
There hasn’t been many points in time where the United States could have said that. Given the crisis overseas, everyone wants to put their money in the dollar. People worried about companies shipping jobs overseas and capital flight should see this as a godsend, at the expense of others, we can prop up our economy.
Reason 2: It can help get us out of the recession!
Some of you may not be Keynesians, but that is okay you don’t have to be (forget demand multipliers). If we were to invest in projects that generate positive returns in high-growth sectors, we can see real and effective economic progress. We can use our unique position to shield ourselves from the spillover of the Eurozone crisis and keep the American economy strong, at least till the dust settles.
When the economy grows, so do government tax receipts. The predicament countries in the Eurozone face is how to increase receipts with an economy is contracting… lets not be Europe.
Reason 3: We can actually improve our Fiscal position by investing!
Logic suggests that countries regarded as havens that can borrow long-term at a very low-cost should be rushing to take advantage of the opportunity. This is a view that should be shared by those most alarmed about looming debt crises, because the greater your concern about the ability to borrow in the future, the stronger the case for borrowing for the long-term today.
Furthermore, if we can invest in projects that generate positive rates of returns we can actually see our deficit decline and prospects improve. One might be thinking can the government do anything that is productive? The answer is yes, and I will get to that.
The problem is the massive amount we need to invest to fix our deficit problem. Lets assume we can borrow at a zero real interest rate, and want to see our massive deficit reduced by $100 billion. If we can invest in projects that generate a reasonable rate of return, lets say 4 percent, it would take $2 trillion in investment to fill that gap. To fix the deficit entirely? Make it 20-25 trillion.
We obviously cannot borrow that much, nor find productive projects to take up all that investment. But we can make a dent, lets say another $1 trillion. The great thing is we should see residual effects from this expansion – projects have multiple years of life. Even if the government can get 1% back in revenues, we reduce the deficit. This leads into reason 4.
Reason 4: We are innovative and productive!
A 4% rate of return is not difficult to achieve if we invest in people with ideas and the resolve to complete their projects. In the business world, many firms don’t even start a project unless the rate is much higher than 4%. This means that there are many projects we don’t undertake. If the government gave out minimal interest loans to these firms, and to entrepreneurs, we could see some real growth and improvement of our fiscal position.
The study, authored by Dr. Everett Ehrlich, a leading business economist and former Clinton-era undersecretary of commerce, found that the NIH directly and indirectly supported nearly 488,000 public and private sector jobs, and generated $68 billion in new economic activity in 2010 alone. Meanwhile, NIH research grants in FY 2010 cost the taxpayers only $26.6 billion.
The Human Genome project is another amazing one.
Public investment of $3.8 billion spread between 1988 and 2003 yielded $796 billion (three-quarters of a trillion dollars), in economic output, and created nearly 4 million job-years over the 23-year period between 1988 and 2010. In 2010 alone, while it costing the government nothing, this farsighted, bipartisan investment in genomics research added $67 billion to U.S. gross domestic product, created $20 billion in personal income for American families, and sustained 310,000 public and private sector jobs.
This equates to a 1,250% (yes, thousand) return on public investment over 23 years, when we treat public benefit as if it were revenue.
Reason 5: It can improve our creditworthiness!
We all remember the day when we lost our AAA credit rating, we could perhaps get that back if we actually borrowed more. Summers also pointed to the fact that we can, and should be, restructuring our debt. Just like people do to pay their credit cards with a low rate 30-year refinanced mortgage, the government should do the same. We can delay the strain of our debt obligations for the long-term, 10-30 years down the road, to give time for the economy to recover and to see our projects come to fruition.
The result is an improvement of our credit worthiness, and a further lowering of our interest rates (if possible). We would effectively be lowering our payments, our deficit would improve, and as a result we would be seen as less of a risk. Giving projects time to play out, will also improve our long-term debt problems as we allow receipts to come in.
Furthermore, the government could use some of these loans to buy assets. The government currently leases buildings, and pays for venues etc. that all hits the deficit. The government could borrow to invest in their own infrastructure and end these payments. This adds assets on the balance sheet and saves the government money in the long-run. Given the condition of negative interest rates, even if it is a wash, the government would do well by buying assets.
Reason 6: We have projects needing completion!
There are existing infrastructure projects that need to be completed. We have multiple public works projects, rail, highway, energy etc. that can be given immediate attention. Further, we can fund existing liabilities with our long-term debt. Getting very briefly into entitlements, we could help finance them through long-term loans paid for with increased proceeds from these projects and other investments we make.
Reason 7: We shouldn’t wait until markets rebound and we have to pay more to borrow!
The time is now, we are at historically low rates and they wont get any lower. If we wait to fund our upcoming projects we will be paying more for them. Any rational firm would be taking advantage of this, noting increases in the coming years, by locking in these low rates. Why not the government? It is completely and utterly irrational for them not to.
What do you think? Please Share!!