Blog on the Run: Reloaded

Thursday, July 14, 2011 8:56 pm

Are you a fan of efficient government? Want to improve the economy? Read on.

We all know that this country has an enormous backlog of infrastructure projects, from water and sewer to Internet, that we need to get to work on if we’re going to be globally competitive down the road. (And for those who don’t know, here’s a primer from those wild-eyed liberals at the American Society of Civil Engineers.)

Now, as with enormous backlogs of pretty much anything, paying for this stuff is going to be hugely expensive. Getting much of it done at any one time inevitably would require government borrowing. At the moment, that’s not a popular idea inside the Beltway. But if you really want government to be run like a business, what do you do? You identify current and likely future needs. If possible, you wait until the cost of borrowing money goes way down, and you put your jobs out to bid when high unemployment means wages are stagnant so you can get the most bang for your buck.

A time like now, in other words. Unemployment is high (and rising again). People need work and are more willing to work cheaply than they otherwise might have been. And the cost of borrowing? Well, here’s the real kicker.

Karl Smith, an assistant professor of public economics and government at UNC, makes a counterintuitive but deeply important point: Because the real (i.e., inflation-adjusted) rate of return on 5-year Treasury notes is currently negative, it would be cheaper to do the work now, with borrowed money, than it would be to pay cash later on:

… real rate of return on government 5 year  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.

The government will wind up paying more if it decides to pay cash for a project than it will if it decides to borrow. This is irrespective of the return on the project itself or the advantages of avoiding delays or anything like that. It is simply that the cost of borrowing is negative.

It is cheaper than paying cash.

Given that fact, plus the immediate stimulative effect to the economy that infrastructure would have and the foundation for future wealth creation that such projects would lay, we would be nuts not to borrow, and borrow big, right now, for infrastructure projects.

Unfortunately, as the ongoing debt-ceiling crisis has shown, a nontrivial percentage of the people who make these decisions really are nuts.

(h/t: mistermix)

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