The U.S. Congress should have gaveled in an emergency session yesterday to react on the latest twist in the capital markets. Failure to do so creates unnecessary pain and will damage American competitiveness for the next generation.
I’m not talking about the stock market, which fell significantly at the opening bell, reversed most of its losses by midday and then slid at the close, finishing down over 580 points (or, to put it in more useful terms, 3.5 percent). Even if stocks dropped for the next week, the cable networks would freak out some more, but it’s not clear it would have much impact on any American without a personal valet. But the slide of the 10-year Treasury note over the past couple months represents a significant opportunity. Not that our blundering policymakers will capitalize on it by spending the free money investors want to give to them.
First, let’s go over this madness about the stock market. Nobody should confuse the actual economy with the trading pit where mostly computer algorithms, at this point, buy and sell bets on companies. As Dean Baker points out, the stock market can experience wild swings upward when the economy is bad, or plummets downward when the economy is good. The markets mostly try to predict not the future economic path but trends for corporate profits, and they’re not necessarily even good at it. Moreover, only 13 percent of Americans own individual stocks. To the vast majority of people getting through their workdays, this is a non-event.
To the extent that there’s any real-world activity causing the market volatility, it’s the bursting of the Chinese stock bubble, which happens to still be up significantly relative to last year. But a lot of new Chinese investors, many of them middle-class, rode the stock wave upwards with borrowed money. They’re in for some pain. Whether that will have any impact on the rather large Chinese economy is a different question.
China does have to figure out how to safely move from a manufacturing to a consumer-driven economy while taking the air out of its stock and real estate bubbles, a tricky situation. The country is big enough that fears of an economic slowdown – which could simply mean growth below 7 percent, a number we in the U.S. would kill for – could have an impact internationally. But the biggest consequence of that in the United States can be seen in the 10-year Treasury note.
Right now, the U.S. can borrow money for 10 years at around 2 percent – a staggeringly low number, made so by an increase in global demand for Treasury bonds. When the economic winds shake globally, investors lead a “flight to safety,” looking for any instrument that won’t lose money. And despite the tumult of the past decade, investors still see Treasury bonds as the safest investment in the world.
What this means is that investors will hand over cash to the U.S. government with effectively no interest in real terms. That makes today the best time for Congress to borrow money since a period between spring 2012 and summer 2013. Congress wasted that chance, and they are poised to do the same with this gift horse staring them in the mouth.
The flight to safety could stick around for a while. The market volatility index is at its highest point in seven years, and that could send traders to calmer waters. Plus, emerging markets like Brazil are being battered, precipitating cash flow out of those countries and, increasingly, into Treasuries. Meaning that the U.S. has time to make the major borrowing move that could change our economic position.
Significant borrowing, to repair crumbling infrastructure like bridges and water systems, or upgrade the electrical grid and broadband capacity for the entire nation, would have a seriously stimulative impact on an economy that’s already showing some labor market success. It would help arrest the persistent demand deficit that has existed in our economy since the outset of the Great Recession. Mother Jones’ Kevin Drum posted a chart last week showing that federal spending since 2007 at all levels has been sharply below the average spending following recessions, which says everything you need to know about the sluggish recovery.
The market upset will probably lead the Federal Reserve to back off raising interest rates in September, which will provide a short-term economic boost. But government spending when borrowing is cheap would sustain that boom, and is in fact the only real opportunity for economic growth in the near term. Plus, plowing that spending into investment in the future has tremendous payoffs over the long term. The money spent today will be even better than free down the road.
The lack of government debt is a problem for the world, as Paul Krugman pointed out recently. Former White House economist Jared Bernstein goes further, explaining that budget deficits lead to smoother and stronger economic growth. Our deficit is falling fast, and the government not only can handle throwing a couple hundred billion at upgrading the basic structures that make the country go, but would benefit handsomely from it.
Sadly, this is all wishful thinking with a Republican Congress that is itching to perpetuate a fight over government spending when the deadline for the next fiscal year’s budget ends next month. What makes economic sense and the course politicians end up taking have had no resemblance whatsoever over the last decade, if not much longer. So the gift investors are clamoring to bestow on us goes unaccepted, year after year.
This actively harms our economic potential over the next several years. We can’t have nice things because we’re still governed by a backwards ideology that thinks the government should run the country like a family manages their budget. But if a family could borrow money for free and use it to make all kinds of improvements in their lives, they’d jump at the chance. If we ever want to make America great again, we have to get over this dysfunction and get out our checkbook.