Stimulate This: Three big ways to jump-start the U.S. economy.
What, if anything, can jumpstart the American economy? Most recessions are followed by big rebounds in growth, but the Great Recession hasn’t led to a Great Comeback. Three years after the recession ended, unemployment is still sitting above 8 percent. But there is a way out.
It’s not more monetary stimulus. The Fed has already taken extraordinary measures to juice the economy. Short-term interest rates near zero and “credit easing” have sent plenty of money sloshing through the markets. The problem now isn’t the supply of financing for consumption and investment — it’s demand. As William Dudley, president of the Federal Reserve Bank of New York, said in a recent speech, the rate of return in the private sector may simply be too low to encourage companies to spend and hire.
The rate of return is likely to be much higher in the public sector, however. Academic research has repeatedly shown that investments in infrastructure, higher education, and basic scientific research pay back handsomely in long-term economic activity — from 25 to 67 cents in today’s money for every dollar spent. And like many investments, they pay off most when they’ve been neglected for a long time. These investments are the supply-side foundation for future growth; they increase the economy’s productivity and its potential output of goods and services. They also have demand-side benefits in the short term, by putting people to work.
But how can the United States spend more money when its deficits are already so enormous? Actually, borrowing more to invest in these areas will not necessarily lead to higher interest rates or greater fears about the nation’s debt. Because this kind of spending helps the economy to grow year after year, it helps to ensure that the Treasury’s creditors will get their money back.
Moreover, it’s a great time to borrow and spend. The 30-year Treasury bond is currently yielding about 2.5 percent, and the 10-year note is at historic lows of around 1.5 percent. If 10 cents of the 50-cent return on these investments comes back to the Treasury as tax revenue, these investments will practically pay for themselves. The logic is simple: It’s just like taking out a big mortgage while investing in a rising stock market — borrow at low rates, invest at high rates.
Here are three ways that the U.S. federal government could invest in the economy’s future: