Paul Krugman tells us that everything will be different in a low fertility economy. Because part of the way that we gain full employment is that businesses need the capital that households are saving in order to cater to the desires of that rising population that doesn’t happen in a low fertility economy.
So, in a low fertility country government will need to suck up that capital that households want to save and deploy it in order to gain that full employment.
For what we’re looking at here is a world awash in savings with nowhere to go: Households are eager to lend money out, but businesses don’t see enough good investment opportunities. (Bitcoin doesn’t count.) Well, why not put the money to work for the public good? Why not borrow cheaply and use the funds to rebuild our crumbling infrastructure, invest in the health and education of our children, and more? This would be good for our society, good for the future, and would also provide a cushion against future recessions.
Take the argument as is. Don’t try to start thinking that perhaps a low fertility economy will be one in which households save less, thus killing the problem. Partly because that’s not the point here but also because it would likely work the other way anyway.
OK. So, now, why is it that government should do this borrowing and investing?
One argument is that the returns from doing so won’t be good enough to tempt private business into doing it. But that’s an argument that the investments shouldn’t be made, that the return from doing them aren’t worth it.
OK, so government can borrow cheaper but that’s something that will fade. The original set up is, note, that the price of capital is going to fall for all for demographic reasons. That will make the typical capitalist 8% hurdle rate too high as well. This argument that there should be more investment when capital is cheap applies to everyone, not just government.
There is also the point that asking government to do it – even at their lower financing cost – is an insistence that government is going to do it only slightly more inefficiently than price business would. When we’re talking about education, as an example, that’s a difficult one to support. Just compare public school budgets and those of parochial schools.
We can even go further, say the education of children. So, households will be awash with savings that the capitalists don’t want. Our very definition of the situation we’re in is that each family has few children. Why can’t – or even why wouldn’t – households spend their cash on educating their own children? What does government have to do with this?
And that’s the real point here, the gap in the argument. Sure, we have publicly paid infrastructure, publicly financed school systems. But while these might be good for the public they’re not actually public goods, where we have a private sector financing problem. It just happens that we do these things publicly right now.
At which point why don’t we argue that – assuming everything already being argued by Krugman – government should do that borrowing and use it to produce actual public goods. Basic research for example. And success on that front would then solve all the other problems. As major new technologies – because of course government will uncover such, Mazzucato, recall? – arrive then there will be ahunger for investment capital among the capitalists which neatly solves the household savings and thus full employment problems.
Plus everyone gets richer instead of just the construction and teachers’ unions. Sounds like a plan really unless the unions was the point in the first place?