Governments Should Borrow More. Lots More.
With interest rates at record-lows, the U.S. government should borrow more to invest in infrastructure, not stop spending.
Opportunities for governments to do this exceed those of the private sector, which in many cases continue to be constrained by slow economic growth. Moreover, unlike private firms, governments can count as profits on their investments the benefits of positive externalities (benefits that accrue to everyone).
Surely, governments' levels of long-term investment in infrastructure, education, and research should be much higher now than they were five or 10 years ago, when long-term real interest rates were roughly twice as high. The payoffs of such investments are, if anything, higher than they were then, given that many countries still have relatively weak economies that need stimulating.
It is strange that so many governments are now emphasizing fiscal consolidation, when they should be increasing their borrowing to take advantage of rock-bottom real interest rates. This would be an opportune time for governments to issue more inflation-indexed debt, to begin issuing it, or to issue nominal GDP-linked debt, which is analogous to it.
This article comes from Project Syndicate.
Robert Shiller, professor of economics at Yale University and chief economist at MacroMarkets LLC, is co-author, with George Akerlof, of Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.
Photograph of road construction by Tom Brakefield/Thinkstock.