Chart of the Day: We’re missing out on low rates
If you’re looking to buy a house, from a financing perspective, you’re getting something like a historically great deal from the rates the Fed has kept so low.
But, for taxpayers, there’s a corollary to the era of low rates: now is also a great time for the U.S. government to finance large-scale projects. As Ezra Klein and many others have suggested, today’s ultra-low rates are an opportunity for the government to essentially borrow for free. When interest rates are low, it makes sense that the government would invest in building things that boost the economy, like bridges, roads and various infrastructure investments. (Klein called the failure to take advantage of low rates “a financial mismanagement on an epic scale”). Corporations, ideally, would follow suit, using low rates as an opportunity to fund ambitious new endeavors.
Because we’re gluttons for punishment, we wanted to see if either the U.S. government or private companies actually boost investment as money gets cheaper. What we found, in a very, very rough calculation, is that they generally haven’t.
What you’re looking at here is how various types of investment correspond to interest rates. That descending red line is a measure of interest rates since 1997. The blue line represents our shorthand for investment, which includes a mix of public and private investment data, pulled from FRED, plus corporate R&D.
As money gets cheaper, you’d think that the U.S. government and big corporations would move to lock in financing for investments. But since sometime in 2008, our measure of total public and private investment has actually fallen as money has gotten cheaper.
There are some big caveats. For governments, it’s quite hard to determine what counts as an economy-boosting “investment”; unemployment benefits, for example, boost the economy, but generally aren’t considered investments. We decided to use Modeled Behavior’s ”nice things" calculation — Federal nondefense investment plus state and local Investment plus private investment in structures, if you’re score at home — as a way of estimating total investment. Private R&D data comes from the National Science Board. Private investment is far, far outweighed by its public counterpart, but that likely owes to the difficulty in tracking it than anything else.
And, of course, this isn’t a comprehensive way of looking at the economic benefits of low rates. But it’s an interesting thought experiment: what if governments and corporations actually looked at low rates as investment financing? — Ben Walsh and Ryan McCarthy