Washington Merry-Go-Round

IMMEDIATE RELEASE 17 June 2021
WASHINGTON MERRY-GO-ROUND
Today’s Events in Historical Perspective
America’s Longest-Running Column Founded 1932
It’s the interest rates, stupid
By Douglas Cohn and Eleanor Clift
          WASHINGTON — When it comes to predicting the economic future, most people are wrong most of the time. Otherwise, they would be millionaires. This may sound like a harsh indictment. But it is only contrarian thinking, and the stock market has generally rewarded contrarians.
          The roads are packed, airplanes are full, and housing prices are soaring. America is back, as President Biden likes to say. So are the naysayers. The economists who warn of inflation, and the lawmakers who worry about rising deficits are also getting their say.
          In the middle of this debate lies the fate of an infrastructure package the country sorely needs. The outcome of ongoing negotiations is unknown at this point, but lawmakers should look around and take into account what they are seeing.
          The economy is opening up, and people are taking advantage of low interest rates. A house that might have gone for close to $500,000 in an urban neighborhood is now priced at a  million, and a family with two wage earners wanting to move into a good school district is getting approved for the higher figure and higher loan. They’re getting more house, but with the same mortgage payments they would have paid for thelower priced house. It’s the interest rates, stupid.
          If American families can understand this bargain, surely the federal government won’t let this bargain slip away. Now is the time for a super-sized infrastructure package paid for with money borrowed at one and a half percent interest.
          It may not happen because of political pressures, but it is the wisest course of action, to take advantage of these low interest rates to finance and build infrastructure that can begin to address the serious problems of inequality in the country and take on the looming challenge of climate change.
          But what happens if our creditors, like China, call in these loans? That won’t happen because the loans are in the form of Treasury bills, typically 10 or 30-year T-bills. And as the saying goes, if you owe the bank a hundred thousand dollars, that’s your problem, but if you owe the bank millions of dollars, that’s the bank’s problem.
          What happens if interest rates rise? The Federal Reserve just announced that they don’t expect a hike in interest rates until 2024.
          That offers a pretty long runway for spending, and while the Fed upped its assessment of inflation this year to 3.4 percent, it didn’t see that as reason to turn off the money spigot.
          To use an overworked phrase, this is an inflection point for the U.S. economy, a chance to right the wrongs that led to the serious inequality in the country today where the richest Americans pay nothing in income taxes because America taxes work, not wealth.
          An infrastructure package would create jobs in America. Those jobs cannot be exported, and they would put money into the pockets of workers. If you could build roads with money that cost you one and a half percent interest, you would do it – so why won’t the lawmakers? They know better. In their private life, they are all taking advantage of these low interest rates, yet in their public life, they want us to believe the sky might fall if we borrow more.
          This time is comparable to the period after World War II when the GIs came home and they had money in their pockets and a chance to attend college, thanks to the GI bill and Uncle Sam. The communities they built and the families they raised went on to enjoy the longest economic boom in modern times, and it was all done on borrowed money.
          Keynesian economics is classic pump-priming. There’s nothing mysterious about putting more money into the economy which creates wealth for companies and jobs and wealth for workers and ultimately more tax revenue. We are on the brink of a boomtime economy if the naysayers don’t prevail. So, contrarians of the world unite. You have nothing to lose but the chains of your congressional naysayers.
          Douglas Cohn’s latest books are World War 4: Nine Scenarios (endorsed by seven flag officers) and The President’s First Year: The Only School for Presidents Is the Presidency.
          Twitter:  @douglas_cohn
          © 2021 U.S. News Syndicate, Inc.
          Distributed by U.S. News Syndicate, Inc.
END WASHINGTON MERRY-GO-ROUND