Larry Summers, President Obama’s former chief economic adviser and now returned to Harvard, has a business proposition for the US economy. And though there’s a hint of a wink to it, I think he’s deadly serious. But to read it, you have to put aside for now whatever views you might retain about his previous tenures. If you can’t do that, you can stop here.
What Summers argues on the pages of the Financial Times looks like a clever way to get the Administration to do — or at least propose and campaign on — something economically helpful while positioning their party well for the elections, even though he doesn’t mention that. It’s clever, because he makes the argument from a business person’s point of view. Indeed, the wonder is that Mr. Romney, who claims only he has the right business acumen to fix the US economy, has not thought of this first.
It’s all very simple and intuitive, based on several undisputed facts: interest rates are at record lows; we have lots of projects that need funding; and doing them sooner rather than later makes economic sense.
Paraphrasing Summers: Suppose you own a business, but demand is down, and economic recovery is slow. You expect the economy to pick up eventually, but your factories and equipment are aging and much of it must be replaced before you can crank up again. Now suppose that lenders would make available all the money you wanted at virtually zero real interest rates — that is, rates at or below the expected rate of inflation. Moreover, you’re carrying a lot of debt now, and the costs of that older debt are much higher than the costs of new borrowing now. What should you do?
Summers draws the logical conclusion that any intelligent business person would leap at the opportunity provided by the virtual zero borrowing costs and do three things: refinance your currently high-cost debt, borrow now at this low interest to replace your warn out equipment, and even borrow to expand your capacity to meet higher levels of demand you have reason to expect in the foreseeable future. The one thing you wouldn’t do is nothing; you wouldn’t sit on your idle butt and miss what may be the investment opportunity of a lifetime.
So Larry continues, if the argument is that a government should learn from successful businesses, it should be following exactly the same refinance/investment strategies. Bring down your current borrowing costs by refinancing at today’s near zero rates; borrow to replace/refurbish your warn out infrastructure, and pull forward whatever investments you’d likely make in the future if you anticipated a growing economy. Make them now when it’s cheap rather than waiting until costs go up. And by the way, he credits his Harvard colleague Martin Feldstein, for noting the argument applies to replacing any type of aging equipment that government must purchase, including military. Summers:
So, what is to be done? Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more not less. They can also invest in improving their future fiscal position, even assuming that no positive demand stimulus effects are likely to materialise. At a time of negative real rates, accelerating any necessary maintenance project and issuing debt leave the state richer not poorer; this assumes that maintenance costs rise at or above the general inflation rate.
. . .
These examples are the place to begin because they involve what is in effect an arbitrage, whereby the government uses its credit to deliver essentially the same bundle of services at a lower cost. It would be amazing if there were not many public investment projects with certain equivalent real returns well above zero. Consider a $1 project that yielded even a permanent 4 cents a year in real terms increment to GDP by expanding the economy’s capacity or its ability to innovate. Depending on where it was undertaken, this project would yield at least 1 cent a year in government revenue. At any real interest rate below 1 per cent, the project pays for itself even before taking into account any Keynesian effects.
This logic suggests that countries regarded as havens that can borrow long-term at a very low cost should be rushing to take advantage of the opportunity. This is a view that should be shared by those most alarmed about looming debt crises because the greater your concern about the ability to borrow in the future, the stronger the case for borrowing for the long term today.
Of course you’ll recognize the “it’s in the public interest” version of this argument; progressives/Keynesians have been making it since the recession began, but they’ve been explaining it in terms the media is conditioned to dispute — because the shape of the earth is debated — in ways they don’t question presumptively valid business arguments. So there’s really nothing new here. What’s interesting here is the deliberate effort to frame this as a business proposition; it’s what a smart, successful business person would do.
So imagine what would happen if the Administration grabbed this one.
The Administration could claim it had a smart business strategy for putting people back to work, by growing the economy, upgrading the nation’s infrastructure, buying things now (including labor, like teachers) we know we’ll need later. Arguing from a business point of view, you note this would pay for itself over the long run. A business failing to do this would be foolish, even reckless. Then you have a bunch of the business moguls you’ve been using on your advisory panels to say, “yeah, that’s what a smart business would do.”
And how would the Republicans respond? What would “sterling businessman” Mitt Romney say? Would he denounce it with, “No, this is the wrong time to be investing in America,” even though borrowing costs have never been lower? Would he say, “America doesn’t need to be replacing infrastructure?” while you point out he never has to drive on your roads? Would he argue, “We should wait until private business can do this at much higher borrowing costs?” as you point out that leaves millions unemployed?
I can’t see any downside in the Obama team embracing this as their main argument for reelection. What’s interesting is that Mitt Romney might never advocate such a strategy before the election, but it would make sense for him to advocate it after he’s elected — something that’s becoming more likely each day Mr. Obama diddles — and then we’d get to watch the entire Republican Party except for the Tea Party zombies rush to CNN to praise this sound business strategy.