Wednesday, July 27, 2011

Cheaper-Than-Free Money: Why the U.S. Government Should Be Borrowing and Spending Even More, Not Less

First off, I've not forgotten that we're in the middle of a huge, more than a little crazy fight over the debt ceiling at the moment. I also recognize that projected US deficits and debts are a real long-term problem for the United States. As you'll see below, however, the financial markets and I both agree 1) that U.S. debts and deficits are not a problem in the short- and medium-term and 2) that the U.S. should be borrowing and spending more in the short- and medium-term than it is right now.

As a data-driven decision-maker, I let the numbers tell me the best course of action, and the numbers are currently saying that instead of trying ways to spend less and cut the debt, the U.S. government should instead be borrowing and spending even more money than it is now. It barely even matters on what - just so long as it is a relatively productive use of the money - such as building high-speed rail projects to connect all major U.S. cities; refurbishing the U.S.'s crumbling airports; resurfacing every U.S. highway; implementing electronic medical records - think big people!

Why would I say that in the middle of a fight that has the Republicans and Democrats tripping over each other to see who can cut more government spending? Simple - the real interest rate on (some kinds of) government debt are currently negative:


This is a big deal, and difficult to wrap one's head around. Karl Smith explains:

Suppose the government had two choices. It could either pay for infrastructure improvements as it went along out of tax revenue or it could borrow money build the infrastructure now and then repay the money with tax revenues.
Ordinarily the question would be, does the advantage of building quickly outweigh the cost of the interest.
However, right now the interest cost is negative. The government saves money by borrowing now rather than waiting and paying cash.
 Matt Yglesias notes:
In a sane political environment, Washington would be obsessed with the question of how much can get done within this window. How many projects is it logistically possible to complete quickly enough to take advantage of the cheapness of debt. Instead, we’re attempting to resolve thorny and ideologically freighted questions about the long-term trajectory of the welfare state even though resolving these issues won’t change anything about the present environment. It’s weird. It’s sad.
Yup. Instead of taking advantage of an amazing opportunity in which investors are not only willing to give the government money for free, but are willing to pay the government in order to get the government to borrow money, Congress is instead doing their best to cut spending and borrowing - which is the exact opposite of what the market is telling the U.S. government to do, at least as evidenced by interest rates.

And the benefits of borrowing and spending cheaper-than-free money are not even counting the benefits that would come about from increased employment, since persistent unemployment is a far greater danger to the U.S. economy than debt is in the short- and medium-term.

I suspect this ridiculous, completely political and manufactured debt ceiling "crisis" will close this window of opportunity quickly, but this is just one more measure of Congress's utter dysfunction - that they refuse to take advantage of money that is cheaper than free.

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