Martin Wolf: Listen to the Markets

As President Obama prepares for his big jobs speech, Martin Wolf, an economist and columnist for the Financial Times, cogently makes the case for government investment based not on political ideology but the empirical evidence of what the markets are saying.  He writes:

What is to be done? To find an answer, listen to the markets. They are saying: borrow and spend, please. Yet those who profess faith in the magic of the markets are most determined to ignore the cry. The fiscal skies are falling, they insist.

The markets are saying "borrow" in the form of extremely low interest rates.  Of course, borrowing for borrowing sake makes no sense, but borrowing for investment makes a lot of sense, especially when the rate of return exceeds the interest on debt.  Wolf explains:

[U]se cheap funds to raise future wealth and so improve the fiscal position in the long run. It is inconceivable that creditworthy governments would be unable to earn a return well above their negligible costs of borrowing, by investing in physical and human assets, on their own or together with the private sector. Equally, it is inconceivable that government borrowings designed to accelerate a reduction in the overhang of private debt, recapitalise banks and forestall an immediate collapse in spending cannot earn a return far above costs.

From this perspective, the focus on austerity and short-term fiscal contraction among many governments is misplaced. It reflects more than just political ideology against government, but a complete lack of faith in society to create returns on investment justified by negligible costs of borrowing. Where might society invest to generate returns above the cost of borrowing?  I can think of a few areas in addition to those mentioned by Wolf -- infrastructure, energy, skills and education.

An economic policy based on short-term investment when money is cheap coupled with a long-term plan for reigning in debt makes the most policy sense, as enhancing today's growth makes reining in tomorrow's debt that much easier.  However, political realities may simply make such a policy impossible, meaning that we will get neither a boost to short-term growth nor the benefits of investment, which means a less wealthy society in years to come, reducing political prospects for getting a handle on long-term debt.

The great irony here is that those who profess the most allegiance to market fundamentalism abandon that view when the markets are saying to governments that it is time to borrow and spend.