Robert Shiller: The Austerity Crowd is All Wrong, Government Should be Borrowing More Now
Senior Editor, CNBC.com
In a piece that is sure to rile up the critics of government spending and borrowing, Yale professor Robert Shiller argues that governments should be taking advantage of historic lows in real long term interest rates by massively increasing borrowing and spending.
"[L]ow long-term real interest rates appear to reflect a general failure by governments over the years to use the borrowing opportunities that the inflation-indexed markets present to them. This implies an arbitrage opportunity for governments: borrow massively at these low (or even negative) real interest rates, and invest the proceeds in positive-returning projects, such as infrastructure or education.
Opportunities for governments to do this exceed those of the private sector, which in many cases continue to be constrained by slow economic growth. Moreover, unlike private firms, governments can count as profits on their investments the benefits of positive externalities (benefits that accrue to everyone).
Surely, governments’ levels of long-term investment in infrastructure, education, and research should be much higher now than they were five or ten years ago, when long-term real interest rates were roughly twice as high. The payoffs of such investments are, if anything, higher than they were then, given that many countries still have relatively weak economies that need stimulating.
It is strange that so many governments are now emphasizing fiscal consolidation, when they should be increasing their borrowing to take advantage of rock-bottom real interest rates. This would be an opportune time for governments to issue more inflation-indexed debt, to begin issuing it, or to issue nominal GDP-linked debt, which is analogous to it."
The weakest part of Shiller's argument is not his case for borrowing money. It may make sense to borrow when rates are very low. It's his case for spending it: the government has no way to measure whether it is investing in positive-returning projects. It's clear that Shiller is not talking about government making investments that will actually earn money for the government.
Shiller gives away the game a bit when he notes that governments can count positive externalities as benefits of their investments. This makes the positive return thing so fuzzy as to make it almost untestable. For instance, the government can invest in money losing windmill power generation but claim that it is producing a positive externality of energy independence.
And where it is testable, those positive externalities typically are absent. Take his example of education, which arguably has one of the worst expected marginal returns on investment right now.
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