Boosting investment

For the past several years central banks/governments have tried to bolster the economy.

Short-term interest rates have been cut to almost zero. In addition, uncongenial methods were used, such as “quantitative easing” – literally printing money to buy bonds. Also interest rates were to be kept low for a prolong period.

All of these steps are without-precedent efforts to prevent a repeat of the 1930s. Certainly, the past decade has been less painful than the dirty 30s. The jury is out on the question of whether or not these policies were the right thing to do.

Perhaps it would have been preferable to let things run the usual course and provide relief to curb personal suffering.

The effects of this government intervention have been startling.

Asset prices, primarily houses and share prices, have soared. The stock markets have reached levels unjustified by fundamentals, and by most criteria are far above average valuations.

Furthermore, more and more investors/speculators once again are using borrowed money to purchase houses and shares that ordinary individuals would/should shun.

Despite this program, capital investment and job creation remain disappointing. It was hoped that the response would be different; that lower interest rates should entail profit for businesses.

Then, the resulting higher house prices should lure home buyers to take on bigger mortgages, and encourage more construction of homes as well as office buildings and plant expansion. Yet, these changes have been disappointing. The reasons are complex.

U.S. economist Lawrence Summer stated that we are in a period of “secular stagnation” where people are just plain reluctant to invest. People’s memories of the past decade may linger and thus limit a willingness to invest.

Some right-wing politicians believe that government regulation impinges on any plans for expansion. Those views certainly have merit. In any event, what should be done nowadays?

Clearly, red tape and regulation must be overhauled. Tax reform must be a central element. Eliminating or reducing the capital gains tax would encourage investment and obviously provide funds for that.

However, primarily governments should embark on a program of public investment – bridges, roads, underground wiring and sewage repairs. That could be funded by a lend-spend program, toll roads and low-interest bonds for municipalities to spend on worthwhile, money-making projects.

This program is needed anyway, and it would stimulate economic growth; all kinds of capital spending would reduce unemployment. These tools should be used forthwith.

Perhaps these measures are not definitive panaceas, but are worth trying.

Too, logically they should bolster the economy and thus raise government revenues, thus not increasing budget deficits, but substantially lowering them.



Bruce Whitestone