What President Obama should say tonight

The president should announce a two-part strategy: increased current borrowing combined with long-run deficit reduction.
The president should announce a two-part strategy: increased current borrowing combined with long-run deficit reduction.

Unemployment remains high because the U.S. economy’s growth rate is far below its long-run trend of 3 percent a year. Today’s over-extended consumers cannot bring the economy back to its potential output level because they are burdened with mortgages they struggle to pay and other debts. Households and businesses, uncertain about the future, want to hold safe assets such as cash and government bonds.

Is there a remedy? Is there a set of policy prescriptions President Obama, who addresses Congress tonight, should follow to reinvigorate the economy, lower unemployment and set the foundation for future growth?

Yes. The president should announce a two-part strategy: increased current borrowing combined with long-run deficit reduction.

I’m not saying this will happen in today’s political climate, just that it should as a matter of good economic policy. And if a strategy of borrowing and reducing the deficit sounds like a contradiction, it’s not. Here’s why:

Why borrow more?
The federal government should issue long-term bonds and invest the proceeds in projects that will have the immediate effect of creating jobs and producing long-term growth. The federal government can currently borrow funds at 2 percent for 10 years and 3.25 percent for 30 years.  Economic reasoning tells us that, at the margin, borrowing makes sense if the marginal cost of funds is less than the marginal benefits we receive by investing these funds.  

So, for example, Rob Grunewald and Art Rolnick of the Minneapolis Federal Reserve Bank report that investments in early childhood health and education range from $4 to $16 for every $1 invested in these programs. A bonding program that focused on scaling up existing programs would create job opportunities now and benefit the economy in the long-run by increasing the stock of human capital.

Another good candidate for public investment is the Fix America’s Schools Today (FAST) program proposed by the 21st Century School Fund and the Economic Policy Institute.  Currently, public schools face about $500 billion of deferred maintenance and repairs. The FAST program would allocate $50 billion to begin chipping away these projects.

There are a host of other infrastructure projects that could be considered: port and rail improvements to enhance the ability of U.S. firms to export their products; broadband expansion in small towns and rural areas; upgrading and repair of wastewater systems. Any and all of these would surely have a payoff greater than 3.25 percent in the long run, and would put people to work in the next six to 18 months.

An additional benefit of this plan of action is that it will meet the demand by households and firms for safe assets. Businesses, for example, are sitting on roughly $1 trillion in cash rather than investing in new equipment or hiring more workers. If this is what they want to do, let them do so by exchanging their cash for safe government securities. We can then use this cash to invest in America’s future through targeted public spending on projects that promote employment and productivity.

The precedent for this policy is the U.S. experience during the Great Depression. Alexander J. Field, an economic historian at Santa Clara University, argues that public investment in the 1930s laid the foundations for the high rates of economic growth the United States experienced between 1946 and 1973. Field demonstrates that public investment such as road building put people to work during the 1930s and improved long-run productivity growth in manufacturing and distribution.

Family budgets vs. government budgets
Increased borrowing today may sound like a crazy idea. After all, don’t we have a large national debt already?  Yes, the current debt is quite large by any measure. But it’s important to keep one key fact in mind: the government budget is different than a family budget.

Suppose that a family is deciding whether or not they should take out a loan for a new computer.  The new machine would benefit the family, but it would not increase the family’s income stream. Thus, to pay for the new computer, the family would need to spend less on other items in order to pay off the loan from the same income stream.

The situation is different for a government. If, for example, the federal government invests in early childhood health and education, this will increase our stock of human capital and lead to higher levels of worker productivity. The result will be a larger income stream from which both the new debt and the existing debt can be financed.

The president can also reduce concerns about the current debt by coupling the proposal to borrow more today with a plan for servicing the current debt. He should start by announcing that he will allow all of the Bush-era tax cuts to expire. This will reduce future deficits by between 30 and 50 percent per year, according to the Congressional Budget Office.

The diagnosis of mainstream economics is that we need to stimulate the economy while dealing with the current debt and accommodating the desire of American households and businesses to hold safe assets. President Obama should propose new borrowing to fund public investments that will enhance our human and physical capital in the long run and, in the short run, get Americans back to work.

Louis Johnston is associate professor and chair of the Department of Economics at the College of Saint Benedict and Saint John’s University.

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Comments (14)

  1. Submitted by Thomas Swift on 09/08/2011 - 09:02 am.

    I wish I had some confidence that Obama was going to unveil a cleverly wrought plan to revive our economy tonight.

    But even if he had the background or experience of a competent leader he would have to overcome the fact that while he was spending all his time, effort and political capital fiddling around with socialized medicine, the prime mover of this collapse, the housing and mortage banking industries were burning.

    Sending billions more borrowed Chinese yuan to local governments will produce exactly the same results it did last time. Leftist big city mayors like RT Rybak & Chris Coleman will spend it to prop up public employee unions good time bus rides until the farebox is empty again.

    That leaves me wishing Mr. Obama and his family a pleasant stay in the White House until Jan 1 2013.

  2. Submitted by Neal Rovick on 09/08/2011 - 09:15 am.

    The fundamental need in this economy is millions of well-paid, stable jobs. Ultimately, these sorts of jobs must be created and carried by private companies in private enterprise. Federal stimulus action can act to temporarily replace the lack of demand within the private economy, but ultimately there must be a clear way to the far side of the crisis with private business taking the lead. Otherwise, it is a bridge to nowhere.

    This is not a hiccup along a pre-ordained path, where a nudge will get us back onto the trend line. This, rather, is an existential crisis, where a lifestyle built on expanding credit and inflating asset prices hit the wall of “borrowed money must be paid back”, and “asset market prices should be affordable”. When people couldn’t even make the first payment on their mini-mansion, that’s when it all fell apart.

    This credit-based, asset-inflation model had come about to replace the income from jobs that were formerly sufficient to meet the needs of the American consumer.

    Walmart jobs won’t cut it. Texas-type job growth with mostly minimum wages won’t cut it.

    The prosperous days of America were built on jobs that provided sufficient income to independently meet family needs. We are in for an entirely different trend-line if those jobs cannot be recaptured.

    By the way, I just don’t get the other reason for creating more bonds–“the demand for safe assets”. People don’t want assets that pay 1, 2 or 3 %. They want assets that will increase in value above the rate of inflation. They want assets that will create wealth, hence the housing boom or any other asset boom. People and business chase yields–they need yields to stay ahead of the game,

  3. Submitted by Gary Grasmoen on 09/08/2011 - 09:22 am.

    More of the same? Borrowing more from our children to buy short-term government jobs? Moving more of the GDP from the private sector to the public sector? Dependence on the government certainly works in Greece and much of Europe…right?

    You’re are right about one thing on the surface…”Unemployment remains high because the U.S. economy’s growth rate is far below its long-run trend of 3 percent a year.” Dig deep and you’ll find that people are unwilling to purchase because they have less money, no job &/or are uncertain about the future. There is no optimism about better days ahead as there was during Clinton and, yes, even Bush 2–despite 9-11. Business is treated as something to be squeezed and rigidly controlled by this White House. Many small businesses don’t want to work for government and choose not to participate by not hiring. Corporations outsource–even GE, despite Immelt’s counsel to Obama.

    Want to stimulate the economy? Free it up! Let it grow and prosper in an environment where innovation will be rewarded. And please, no amount of cosmetics will beautify Keynesian economics. Let it return to the graveyard.

  4. Submitted by Neal Rovick on 09/08/2011 - 09:53 am.

    The other issue that must be face is that the places where job growth has been most vigorous have not been good for the fiscal position of the US.

    Medical, education, defense/aerospace contracting–all fields with lots of hiring in recent year. But also fields that depend in large part on government spending. As these sectors increase, the analogy of a snake eating it’s tail becomes more apt. Above trend growth MUST come from areas other than these. We NEED to be producing stuff that is wanted and purchased by people outside this country in order to maintain a position in the world economy. The three sectors mentioned above are almost exclusively for internal consumption and do not add to the net wealth of the country or improve the fiscal position of the US.

    And regardless of what other commenters may say, medical cost control is a major part of improving the fiscal position of the US. We cannot be competitive in a world where we pay twice as much for medical services than our nearest competitors and deliver the same or lesser results. Health care spending is like a tax–it’s a drag on your economy. It reflects a significant cost in dollars per hour of labor that makes our country noncompetitive. And it’s made even worse by the hodge-podge that exists that only serves to drive up costs.

  5. Submitted by Karen Sandness on 09/08/2011 - 09:58 am.

    First of all, we could slow the growth of the national debt by disengaging from those increasingly pointless wars in Central Asia and redirecting the personnel and money toward civilian needs.

    In particular, we should replace and/or supplement our automotive infrastructure with non-automotive means so that no one is forced to drive to meet their daily needs, as one is in the typical American suburb. This move will cut down on our oil consumption and preclude the need for despoiling more of the natural environment or buying from Saudi Arabia, one of the principle sponsors of radical Islam.

    In addition to reducing dependence on oil, building mass transit systems and high-speed rail would employ countless blue collar workers, in both construction and operations. Unemployed white collar workers could take care of the administrative side of things. Sure, it would cost money, but if we gave up those wars, each of which costs a couple of billion per week “off budget,” we could easily afford such a project, and then we’d have something to show for it afterwards.

    Oil is used for many other things, including plastics, and if I were president, I would fund intensive research into substitutes for non-fuel petroleum products.

    Employee or subcontracting expenses for production or services outsourced to foreign countries for reimport to the U.S. would no longer be tax deductible, only expenses for employees physically present in the United States. (Overseas subsidiaries for production or services for the host country would be considered companies of the host country for tax purposes.) This would begin to reverse the unconscionable stripping of America’s industrial base and the beggaring of its working class.

    A real national health care program, an improved Medicare with enrollment required for all ages would remove the burden of health care from companies and remove one stumbling block met by potential entrepreneurs, fear of losing health insurance. The enrollment of younger, healthier people, including all those 25-year-olds who usually suffer from nothing more serious than an occasional broken bone, would stabilize Medicare’s financing. (Army medics could be trained as nurse practitioners and physician’s assistants to meet the need for non-critical care and health monitoring.)

    I’d also raise the cap on FICA assessments for high-income people AND allow them to enjoy moderately increased benefits in return. I’d rather see wealthy people receive benefits they don’t really need than have retired blue collar workers needing to decide which utility bill to pay that month.

    These are just some suggestions for our country’s allegedly insoluble problems. The types of suggestions that one sees in the mainstream press or from right-wingers too often seem self-serving and ignorant of the circumstances that ordinary Americans find themselves in.

  6. Submitted by Ron Gotzman on 09/08/2011 - 11:29 am.

    Words that Obama will not say…

    “Shovel Ready”

    “After our 2nd summer of recovery”

    “Since my first stimulus plan failed miserably…”

    “Please pass my 2nd stimulus plan so I can pay
    off the special interest groups in order that they will be able to fund my re-election campaign.”

  7. Submitted by Jon Kingstad on 09/08/2011 - 12:15 pm.

    Professor Johnston’s essay makes sense to me but it is surprising that the fix from the income side comes only from allowing the Bush tax cuts to expire. I think other economists believe there needs to be increases on the highest brackets of income earners/wealthy to get the economy going again. Professor Johnston’s main point is that a massive injection of federal spending is needed to get the economy going again and restore jobs.

    Mr. Swift is at it again with the usual union bashing and other right wing trash talk. One thing though, Mr. Swift, get your facts right. The US foreign debt held by China is only 9.8% of the total: 53% is held by US citizens and the Federal Reserve and 47% is held by foreigners, most of them not Chinese.


  8. Submitted by James Hamilton on 09/08/2011 - 12:52 pm.

    While I may not agree with Ms. Sandness, I applaud her for offering something more than simply ideological complaints about the President, our political system and the state of the economy. I might add that those who believe a free market fixes all should consider the free market’s role in creating our current economic climate.

  9. Submitted by Annie Grandy on 09/08/2011 - 01:19 pm.

    Writers 1-4 would like to blame the economic problems and national debt on only the housing bubble. They forget that 2 very expensive wars were waged while taxes were reduced, an unprecedented occurrance, causing the national debt to spiral upwards. (I still have rationing books from WWII – everybody ‘sacrificed’ to wage war then.)

    There are more reasons to go back to the 30’s for ideas to resolve our economic problems. One is the hand water pump. People understood the concept of ‘priming the pump’ before modern plumbing came into being. It applied to economics as well as water but people understood it back then. A little water is put into the pump so that when you begin to work it, it will start to draw from the well of water to which it is attached.

    The economy worked the same way as the pump back then and would work the same way now. Creating jobs, to get money moving again instead of sitting uselessly in the wells of private corporations, by creating initial demand and providing the infrastructure to move forward worked in the past and should definitely be used again today.

  10. Submitted by Thomas Swift on 09/08/2011 - 03:16 pm.

    “The US foreign debt held by China is only 9.8% of the total…and 47% is held by foreigners, most of them not Chinese.”

    You care to take another swing at that?

  11. Submitted by Neal Rovick on 09/08/2011 - 03:33 pm.

    Annie (#9): I do not blame everything on the housing bubble. The housing bubble (and the preceding dotcom bubble) served to disguise the falling fortunes of the average American. People substituted borrowing and equity extraction for income–making up for shortfalls in income from their jobs and the increasing costs of services like health-care and education.

    The decline of fortune began in the late 70’s and early 80’s, but dropped from sight as people discovered they could borrow against the stockmarket and their houses.

    The pathetic, virtually non-existent job creation in the Bush 2 administration was only accomplished by though the largest financial and real-estate booms ever seen.

    There is no doubt in my mind that the collapse of the general economy of the masses would have been apparent all throughout the Bush 2 administration IF the housing boom had not been allowed to continuously expand throughout that administration.

    It is also quite apparent that many of the disgraces that occurred during that administration, including 2 wars, probably would not have been allowed to be executed in such a criminally expensive and careless way by America if we were as broke as it is clear that we are now.

  12. Submitted by Jon Kingstad on 09/08/2011 - 06:34 pm.

    Sorry, I thought it was pretty clear.
    Of the total US debt (100%):

    53% (held by US citizens and the Federal Reserve) + 47% (held by foreigners) = 100%

    Foreign holders of US debt:

    China: 9.8%
    Japan: 9.6%
    UK: 5.6%
    Oil exporting nations as a group, including Saudi Arabia, Oman, the United Arab Emirates, etc.,: 2.1%
    Brazil: 1.8%
    all other nations: 18.1%
    = 47%

    Got it?

  13. Submitted by Richard Schulze on 09/08/2011 - 08:08 pm.

    So what should America (and other rich countries) do? You can encourage more people to go learn finance, engineering, and other high skill professions, but the gains to be had there are marginal — most people who can do that work already do it. What do you do with the low skill white collar and blue collar workers who are facing low demand for their labor? We need to reduce the cost of hiring lower wage employees. Health care and old age pension funding needs to be taken away from employers and made strictly a matter between individuals and government, which means we will have to be honest about what each costs and how much redistribution each involves. Earned income tax credits and similar subsidies that artificially boost low wage per hour jobs should be expanded and we must NOT increase the minimum wage. This combination could easily halve the cost of hiring a low wage worker. Finally, training for skilled labor jobs need to receive the kind of subsidies that 4 year colleges do. There are still lots of jobs for various kinds of technicians in the US, and that will continue. Many students need to be directed down those paths rather than towards universities, where after 4 years and tens of thousands of dollars of expenses, the bottom third of graduates emerges with essentially no skills and no prospects.

    We’re not going back to the post-WW2 period where low skill Americans were in high demand to staff the only functioning capitalist market in the world. That was an economic and historical aberration, and because of those decades of easy prosperity for the working class, America finds itself with tax and benefit systems that in today’s more normal worldwide economy lead to unnacceptable levels of inequality. An American with the skillset of a Chinese laborer is worth little more than his Chinese counterpart. That will lead to terrible inequality unless the government changes taxation and benefit systems to better meet the needs of lower skill workers.

  14. Submitted by Kenn Space on 11/17/2011 - 04:45 pm.

    President Obama said; “Failure is not an option”. I agree with him except he did not account for reality, I say; “Failure is not an option, failure is a given.

    Capitalize On This Occupation:

    Too big to fail;

    Is failing.

    Too big to fail;

    Is not success.

    Too big to fail;

    is a failure literalized.


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