Interestingly, Larry sides with those of us who think monetary policy is close to ineffective at this moment, and thus neither the problem nor the source of even symptomatic relief.
... one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to undertake with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative real interest rate. There is also the question of whether extremely low safe real interest rates promote bubbles of various kinds.Most importantly, Larry thinks this is a golden moment to lengthen the maturity of government debt
Any rational chief financial officer in the private sector would see this as a moment to extend debt maturities and lock in low rates – exactly the opposite of what central banks are doing. In the U.S. Treasury, for example, discussions of debt-management policy have had exactly this emphasis. But the Treasury does not alone control the maturity of debt when the central bank is active in all debt markets.
...Any rational business leader would use a moment like this to term out its debt. Governments in the industrialized world should do so too.I've been screaming this from the rooftops for a few years now. "Lock in low rates" puts it mildly. When markets start to question whether the US will ever address our budget problems, it will be spectacularly better if we have locked in long maturity debt, and are not trying to roll over short term debt. Then long term interest rates can rise, bondholders take a hit, but we don't have a Greek, Spanish or Italian crisis on our hands. It's good insurance, and remarkably cheap at the current moment. The Treasury is trying, weakly. The Fed is offsetting all these efforts by buying up long term debt and selling short term debt.
Where we differ, of course, is on whether the government should simply restructure the existing debt to long maturities, or whether it should use these low rates to go on a borrow and spend binge. Larry:
... governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more, not less, and investing in improving their future fiscal position even assuming no positive demand stimulus effects of a kind likely to materialize with negative real rates.There is a rational argument on both sides: It is correct as a matter of economic theory that if the government can borrow at slightly negative real rates, and invest in projects with positive rates of return, then the government's overall fiscal position is better.
The question is, Are there indeed sizeable positive real return projects that our government can, and will, invest in, and realize positive returns?
Let's be clear, what counts here to "improve their future fiscal position": Can the government by borrowing spending $1 now reap more than $1 of tax revenue or realize more than $1 of spending reduction in the future? By spending $1 more now can and will the deficit really decline by more than $1 in the future, in such a clear and transparent way that bond markets see it and believe it? For this exercise, you don't get to count social benefits, external effects, stimulus and so on -- the acid test is simple: $1 more deficit now, results in more than $1 less deficit later.
And "sizeable" is important too. We are running more than $1 trillion dollars of deficits, and these are set to explode. To "improve our fiscal position" in a noticeable way, we need to cut that deficit by say $100 billion dollars. So, suppose the government can finance at zero percent real rates, and suppose that it can find projects with 5% real rate of return -- an optimistic assumption, especially risk adjusted. Still, to make a $100 billion dent in a $1 trillion deficit, that means the government needs to find $2 trillion of investment projects which give a risk free 5% return!
Where are these investment projects?
I note most of our government's "investment" projects consist of high speed rail, altenrative energy boondoggles, photovolatics that need protection from Chinese imports and so on. Say what you will about side benefits, but none of these projects has a remote chance of returning a positive return to the US Treasury. The Wall Street Journal recently reviewed health and human services "investment portfolio" to savage effect. If the Treasury gets a cent back on these it will be a miracle. As Larry himself found out when running the stimulus program, shovel-ready projects are hard to find, even if you do not want a positive rate of return to the Treasury but simply want to get money out the door.
So what does Larry have in mind as concrete positive return investments?
They should accelerate any necessary maintenance projects..
..accelerating replacement cycles for military supplies. Similarly, government decisions to issue debt, and then buy space that is currently being leased, will improve the government’s financial position as long as the interest rate on debt is less than the ratio of rents to building values..
Well, that's nice. But first of all, does any of this really produce $1 more deficit today and $1 less deficit in the future? If we do a bunch of maintenance now, does that mean we cut budgets in the future? Or will that simply mean "great, we don't have to pay for maintenance, we can use this year's budget to do new things?"
But even with that warning in mind, is there really two trillion dollars of maintenance and building leases that can be moved forward? Or is this a drop in the bucket of our budget problems?
That's the real weakness. Larry Summers, who knows the Federal Budget far better than I, writing opeds on positive return government investments, can't come up with more than accelerating maintenance and buying some leased space. How much is that? Is it even $10 billion, not the $2 trillion needed to make a difference in the budget?
That's the disagreement, make your own judgements. It's easy to think of all sorts of nice-sounding projects -- which Larry curiously doesn't mention. Roads, bridges, education, etc. Perhaps Larry has too much experience with roads and bridges to nowhere, education money down ratholes and so forth; spending that has some use, but does not produce $1.05 of new tax revenue for every $1 spent.
OK, I also question a bit analysis like this:
It is more likely that negative feedback loops are again taking over as falling incomes lead to falling confidence, which leads to reduced spending and yet further declines in income.This particular "negative [sic] feedback loop" is, to put it politely, a mechanism new to economic theory. Maybe it works. But I prefer policy involving trillions of my dollars to be based on well-worked out theories with some basis in rigorous theoretical and empirical analysis, not just the latest interesting story.
