Build, Build, Build—Anything but a Wall

Michael Gentile, Johns Hopkins University:

Protectionist sentiment, in the form of a lost British bulldog and a dust bunny haircut, has whispered economic growth into shudders of what’s to come.  The political uncertainty that’s resulted has shrouded our policy perspective to the immediate term, to a liquidity trap and a paralyzing fixation on debt.  In our distraction, we are missing an opportunity.  Given the crumbling state of our national infrastructure, government spending is not a choice of ‘if’ but of ‘when’.  And given today’s rare absence of borrowing cost and the futility of our other tools, the time to spend is now.

Political uncertainty pares the private sector’s confidence that the policies in place will still exist one or four years from now; in turn, it depresses investment.  As the amount of capital in play diminishes, so does economic growth, which further destabilizes the political system and so on again.  In the end, our levels of production fall short of both our past and potential marks, forcing us borrow to resist a decline; the national debt will, contrary to our intentions, increase with even heavier interest payments.

The futility of short-sighted thinking is even better represented today by the near-zero nature of our benchmark interest rates.  By leaning on the purchase of bonds rather the means of production, we’ve backed ourselves into a very unsustainable corner.  The game of limbo that the Fed has entertained since hiking rates in December only hints to how long it’d take to inch us back to our conventional 2-4% rates.  Our only chance of borrowing like we once did is to grow like we once did—to spend.  Only then will our economic fundamentals tell a story with which the American people are comfortable.

To be fair, $19 trillion of national debt is no small weight to drag around, nonetheless to add to.  But, as Nobel Prize winning economist Paul Krugman insists, the U.S. is more than large enough to handle it.  In his determination of our ability to service said debt, he found that the federal debt interest payments only amount to 1.3% of GDP.   Yet again, that percentage is not fixed, but a product of the bottom of a curve, of today.  It’ll never be so easy again to owe money, yet we’ve never been so hard against it.

Today’s circumstances are not only prime for discounts, but for the spread of benefits.  Due to the low interest rates not only domestically but throughout the world, an influx of money into the economy would spill over into private investment and across national borders.  This is known as a multiplier effect, in which a $1B contribution is persistently re-spent in diminishing proportions by the other actors of the economy that come into contact with it.  As a result, that $1B contribution ends up adding much more than $1B in output by the time the program ends, thus offsetting the debt it incurs.  Furthermore, the globalization of the stimulus props the world economy onto a higher platform and effectively leads to a larger pie to pull from.

Besides the short-term anxiety of debt, the sentiment that most encumbers our economic actors from exploiting today’s multiplier effect is our snowballing push-back against globalization.  Due to the turmoil of Brexit and Trump’s plan to close off American borders, the multiplier effects appears lesser than it otherwise should be.  If these xenophobic trends continue to infiltrate the global marketplace, a fiscal stimulus would not ring long enough to justify its commitment.  It’d fall flat, silent.  Again, the downside of our political situation proves palpable.  This past month, the International Monetary Fund estimated a 3-6% yearly contraction of global output, in the event that protectionism’s spook were to come to fruition.

A more complex point of content lies in the competence of our governmental institutions—or at least, in our trust of them.  As seen in the presidential debate, a language of scandal and blunder has belittled the credibility of our politicians and thereby the worth of taxation.  In this sense, Americans increasingly see the federal government as unfit to invest their money.  And after a decade of expenditure in the Middle East and on universal healthcare, much of the fear has been justified.  However, these negative experiences and the biases that they’ve fostered do not correlate with the plan of fiscal loosening at hand, because today’s subject of spending is not optional, nor partisan.  These are our roads and bridges and buildings.  They’ve paid out in full over the past several generations—America’s alleged era of Greatness.  New flowers will not bloom until the tired soil is replaced.

In light of these arguments, all that’s left for our political system to achieve is confidence.  The redemption of American exceptionalism begins with the acknowledgement that we are the ones that changed our approach and that we are the ones that have normalized it.   Our country was built on governmental spending—not on the avoidance of debt but on the capitalization of it.  It was built on our willingness to put power into the hands of independent economic actors.  By since transitioning our guidance to monetary policy, we’ve replaced those independent actors with the Federal Reserve, an institution without self-interest and without profiteering incentives and, thus, without the most basic ingredients of capitalism.

To put off the necessary on account of the time not being right is no more than procrastination at its crux.  The nature of waiting is itself an experiment in uncertainty.  Perhaps, the conditions for government spending will grow even more favorably with time, but history suggests that there is not much room to go in the easing direction—or that the amount of room won’t offset the damage done by putting it off longer.  Certainly, many of us would never have expected this farcical of a political climate a decade ago.  The only way we’ll be able to anticipate the next decade is to take it into our own hands—to build our future piece-by-piece and take down the walls that keep us from doing so.

 

 

 

 

 

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