Imagine if you were a business owner and investors were lining up to loan you money for 10 years with the expectation of receiving, in return, less purchasing power than they are providing you with today. What would you do? If you are like most executives, you would recognize that you essentially have access to “free money” and take advantage of this cheap capital to make investments that can yield positive returns to your business. Yet, with negative real 10yr. treasury yields, the US Treasury is being presented with exactly this opportunity and Mitt Romney has said in no uncertain terms that we should reduce our rate of borrowing and turn these investors away. If we took advantage of this historic opportunity instead, we could reduce the deficit long-term, and stimulate growth, without cutting spending or raising tax rates.
Economist Lawrence Summers has already made some great recommendations as to what sorts of investments should be made. As of June 2012, the General Services Administration, alone, leases over 197 million square feet of space at a current annual cost of over $5.4 billion (subject to increases over time). Summers argues that we should issue debt to purchase, rather than lease, some of this space. Since commercial buildings generally do not have rental yields below the sub 3% nominal interest rates on 30 year treasuries, the government could likely buy these properties while making a finite series of payments lower than the rents that it would otherwise pay indefinitely. Summers also recommends that the federal government “should accelerate any necessary maintenance project – issuing debt leaves the state richer not poorer, assuming that maintenance costs rise at or above the general inflation rate.” Barack Obama has already argued for increasing and bringing forward investments in upgrading our aging infrastructure. Yet, Mitt Romney and Paul Ryan believe we should reduce our spending today and ignore what Summers argues is a clear arbitrage opportunity.
Beyond arbitrage, cheap capital can also generate returns when it is invested in growth. We should be expanding federal small business lending programs that have provided much-needed capital to our nation’s small businesses. Government can take advantage of its own lower borrowing costs to keep net costs constant while passing along lower rates to businesses and/or providing them with greater access to capital. These programs give small businesses the loans they need to make capital investments, and hire American workers in their communities, and can help grow GDP from the bottom-up.
Past government investment in research and development spawned the computer, consumer electronics, and Internet industries, all within the last 70 years. According to a recent McKinsey study, the Internet, alone is responsible for $1.6 TRILLION in annual contribution to global GDP, as of 2009. Nuclear power was made possible as a result of government investment in R&D and government subsidies and loan guarantees related to plant construction. Medical technology has advanced considerably over the last decades thanks, in part, to substantial government investment in basic research, including the human genome project. Romney has pointed to unsuccessful clean-tech investments as examples of why government should not “pick winners and losers” and has argued for reduced investment in medical research, cleantech, and other promising technologies. With access to cheap capital, we should be pursuing a portfolio approach to these technologies that can help us stimulate growth. We need to grow our way out of our fiscal problems; austerity didn’t work during the Great Depression and it isn’t working in Europe. So long as the government can generate a rate of return on these investments (from increases in gross tax receipts that result from an increase in GDP, etc.) that is greater than 0 over the next 10 years, when adjusted for inflation, we will actually come out ahead while creating jobs and capturing a leadership position in these important markets.
Robert Kennedy once said that “All of us might wish at times that we lived in a more tranquil world, but we don't. And if our times are difficult and perplexing, so are they challenging and filled with opportunity.” In fact, it is the lack of tranquility, and investors’ resulting “flight to safety”, that presents our country with this unique opportunity. We would be foolish to squander it in the name of failed austerity programs and anti-government ideology.
Commenters and Tweeters: what investments would you make with #FreeMoney?