Let's Build Lots Of New Trains And Bridges!

An interesting corollary to my comment yesterday on the flight to treasury bills is that the US Government really should start spending more money now.

I know it seems strange that the government should start spending more money in a recession with tax revenues falling, but it's true. First, the reason that T-bills are absurdly expensive (or, to put it the other way, the rate of return on T-bills is absurdly low) is that private money is extremely risk averse right now. Private money doesn't want to invest in factories or equipment or new ideas that create new jobs and expand the economy. It wants to put the money under the mattress until it feels safe. That means if we want to get out of this mess, someone needs to increase spending on things that make jobs, and that someone pretty much needs to be the government.

But the really good news about this is that it's REALLY CHEAP for the US Government to borrow money right now. Normally the bad thing about debt is that you have to pay interest so it winds up costing more in the long run. But right now, because everyone's so shit scared about the economy, the government can borrow money at or below the expected rate of inflation. If the government wanted to borrow money to build a new rail line, it could borrow money right now and basically make money on the loan by taking it out.*

Now the government could spend the money on almost anything and it would stimulate the economy. John Maynard Keynes once proposed that the government take a large amount of money and bury it deep in a mine shaft, then dig it back up again, thus employing large numbers of people and requiring the purchase of lots of equipment, etc... In a more modern vein, we could build lots of new nuclear weapons and stick them in silos in North Dakota.

Even better though, the government has a great opportunity to spend money on things that will create a positive benefit for society, things like community centers that reduce crime, rail and road links that increase commerce, expanded broadband that increases commerce and knowledge, increased building efficiency that reduces energy use, etc... If it did that, the government would not only make money on the loan and stimulate the economy by employing people, the tangible improvements would increase commerce and government revenue going forward.

It seems odd, but right now the government can borrow money really cheaply and should. Deficits be damned we need to spend money.

Matt Yglesias has more on this topic and the dangers of people who say the government needs to cut back and "live within it's means" (aka "Neo-Hooverites") here, here, and here.

*To explain: the government would, of course, pay out interest on the loan, so it would cost more in nominal dollars, but it would make money in real dollars (adjusted for inflation). If person A takes out a $100 loan at 2% annual interest over 5 years the total cost of the loan in nominal dollars (not adjusted for inflation) is $105.17. But if the interest rate over those 5 years is 3% annually, one hundred dollars of value 5 years in the future is actually $116. Thus the government would "make" and the lender would "lose" $10.83.