It is simply idiotic that we are even talking about reducing the deficit right now, when it is cheaper to borrow than to pay cash. Here’s Karl Smith:
What this highlights is that real rate of return on government 5 year government securities is now negative. You want to stop and absorb that because I think it’s a bigger deal than most people realize.
Suppose the government had two choices. It could either pay for infrastructure improvements as it went along out of tax revenue or it could borrow money build the infrastructure now and then repay the money with tax revenues.
Ordinarily the question would be, does the advantage of building quickly outweigh the cost of the interest.
However, right now the interest cost is negative. The government saves money by borrowing now rather than waiting and paying cash. Let me say again because I have noticed that this goes against so much intuition that its hard for many people to wrap around when I first say it.
All the people who are worried about non-existant crowding out need to take a second to process this. We’ve got trillions of dollars worth of infrastructure repairs to make. Presumably reasonable people can agree that these repairs will have to be made at some point. If the government spends on infrastructure when growth is strong, they really will crowd out private investment. It’s better to do it now, when borrowing costs are shockingly low and the spending won’t drive up interest rates. We should be trying to get as much building done as we can during this window, because waiting will make it more expensive for taxpayers and more costly to the private sector.