In the face of the climate crisis, the world urgently needs new infrastructure for energy, transportation, and industry. The combination of depressed economic growth, rising inequality, negative real interest rates, and now the economic impact of Covid-19 makes this the most suitable time in decades for the incoming U.S. administration to launch a major fiscal program addressing this need. Such a program would help the climate, help the economy, and even be to the long-term geopolitical advantage of the U.S.
The economy of the developed world has been steadily becoming less dynamic for the last 50 years and the GDP growth of the developed world has fallen from over four percent a year to less than two percent a year (see Exhibit 1). Even this slower pace of growth is threatened by longer-run problems from climate change and shorter-run problems from Covid-19 – which has tentacles reaching into 2022, and far beyond for some economic subsets. Work from home changes are hard to call, but at worst they may crush commercial property prices and quite possibly city apartment prices too.
Of these problems it is the longer-term malaise that worries me most. I believe income inequality is eating away at the economy from the inside with the lack of economic progress for workers reducing demand. In the U.S. that is covered up temporarily to some extent by the short-term explosion of a small set of new disruptive FAANG-type companies.
This however is where a magic bullet comes in: we need a long, sustained and massive public works program – a second coming of the Marshall Plan, if you will – to jolt the U.S. and the global economy into a few decades of accelerated growth. The trouble here is that much of the world has lost heart after the financial crash because it is unnecessarily concerned with debt levels.
I have always believed that the significance of debt is greatly exaggerated. It is double-entry bookkeeping. For every dollar owed there is a creditor to whom it is owed. And if you are concerned with liquidity, then of course it is interest coverage that counts and today’s negative real interest rates for risk-free loans, even on long dated debt, makes it a very advantageous time for governments and corporations to borrow and invest. Yet many of them act as if they are intimidated by the debt ratio, as opposed to interest coverage.