Monday, June 04, 2012

If Anything, We Should Be Getting Much More In Debt

Felix Salmon writes:
Just look at the amount of money which is flowing straight to corporations’ bottom lines, and not being put to good, productive work. Corporate profits now account for significantly more than 10% of GDP: that’s never happened before.

To spell this out: high corporate profits and low levels of job growth are two sides of the same coin. If things were working properly right now, companies would take their excess revenues and use them to hire more people. Instead, they’re basically just letting those excess revenues sit on their balance sheets as cash because they’re scared to invest in themselves. It’s frankly pathetic.
Felix continues on to mention something I asked a few months ago:
The solution to this problem is nothing complex — the arbitrage is sitting there in the first chart, plain for all to see. The government can borrow at 1.45%: it should do so, in vast quantities, and invest that money back into the economy itself. Take a few hundred billion dollars and use it to fix our broken infrastructure, to re-hire all those laid-off teachers and firefighters, to provide some kind of safety net for the millions of Americans who have been out of work for more than a year. Even if the real long-term return on any stimulus package was zero, the nominal long-term return would be well over 1.45%, making the investment worthwhile.
As I've written here before, we may very well look back upon this period as a time of tremendous lost opportunity. With interest rates at historic low levels, and the economy likewise at historically depressed levels, what the government should be doing (and should have been doing) is borrowing hundreds of billions of dollars at a real interest rate of less than zero to spend on long-delayed infrastructure projects, hiring workers and generally getting the economy back on its feet. Yes, classic Keynesian economics. But the crucial difference in this case is that we have an economy that truly needs such stimulus and we're fortunate to have such incredibly low rates to fund such desperately needed stimulus. It's a complete no-brainer and yet because of continued partisan intransigence, the nation suffers.

Republicans want the economy to remain in the toilet. They've always wanted this. They have nothing else to run on, so they must continue to insure that the economy does not recover. It's their only shot at ousting Obama. "Country First" -- right....


Cthulhu said...

I'm no math whiz, but this makes a helluva lot of sense. Why loan this money out to the Wall St. Fat Cats who just stick it in their annual bonuses, and NOT to rebuild the country?

Andrew said...

No, we shouldn't be getting in more debt. Japan has been spending money on stimulus for two decades to try and turn their economy around. They've spent so much money that their debt-to-GDP ratio is over 200%, and they have no growth to show for it. Their stock market recently hit a 28 year low. History shows time and time again that government stimulus prolongs a recession and depression. Austerity allows the correction to take place so that an economy can naturally turn itself around. Just look at Estonia's economy since the 2008 financial crisis. Their economy grew 7.6% last year, five times the eurozone average, because of the austerity measures they enacted --

The reason why corporations are holding so much cash in reserve is because of uncertainty in the market. The Bush tax cuts are set to expire at the end of the year, and the health care bill will force hundreds of new regulations on businesses. If you want businesses to spend money, reduce the uncertainty in the market by establishing permanent tax cuts, real spending cuts, and a new health care bill that will actually control costs instead of raise costs.

Anonymous said...

Corporations are NOT holding 10% of GDP because of any so-called uncertainty.

They are holding it because there's not enough DEMAND to spur growth. Why pay people to build stuff if no one is buying? Which is why the government SHOULD be borrowing at these historic lows to rebuild or crumbling infrastructure; it gets people working and earning money, and it builds the infrastructure which we need to get anything else done in the future.

Andrew said...

It absolutely has to do with uncertainty. The reason why there is not enough demand is because consumers are also worried about uncertainty in the market -- the Eurozone is pulling world markets down. Consumers will have to pay higher taxes on capital gains and dividends in the future. The health care bill will force consumers to buy health insurance from a list of providers that only the federal government approves, and consumers are strapped with record levels of student loan debt, credit card debt, and mortgage debt. Spending more money on stimulus to get these people working may help in the short term, but as soon as the stimulus ends, those jobs will also end, and the debt from all that stimulus will still be there. The best action to take is to remove uncertainty from the market, so consumers won't be afraid to spend money and businesses won't be afraid to expand -- establish permanent tax rates, cut spending so that we can balance the budget, and remove burdensome regulations on businesses so they can expand and new ones can start up.

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