GMO founder Jeremy Grantham recently wrote that “the combination of depressed economic growth, rising inequality, negative real interest rates and now the economic impact of Covid-19 makes this the most suitable time in decades for the incoming U.S. administration to launch a major fiscal program addressing this need.” This according to an article in CityWire.
Grantham explains that economic growth in the developed world has become increasingly “less dynamic” for the last 50 years, with a fall in GDP growth from four percent a year to under 2 percent per year. “Even this slower pace of growth is threatened by longer-run problems from climate change and shorter-run problems from Covid-19,” he writes, calling for a “long, sustained and massive public works program” to combat the trend.
Grantham supports his argument with the following insights:
- A headwind for such a program is a widespread and “unnecessary” fear of debt, a byproduct of the financial crisis of 2008: “I have always believed that the significance of debt is greatly exaggerated…For every dollar owed there is a creditor to whom it is owed.”
- Liquidity concerns are a function of interest coverage, but today’s low rates make it a “very advantageous time for governments and corporations to borrow and invest. Yet many of them act as if they are intimidated by the debt ratio, as opposed to interest coverage.”
- The current U.S. infrastructure is “unusually behind schedule on maintenance and subpar in quality.”
- It is “absolutely imperative that the entire economy be greened if we want any hope to maintain a stable global civilization in coming centuries.” This, he argues, will require trillions in spending over several decades and across the globe.
- “Typical” workers have been “hung out to dry” since the mid-1970s, Grantham argues, and a public works program would address growing inequality since much of the spending on infrastructure would be industrial and labor-intensive.
- Grantham argues that public spending is required to battle China’s dominance in industrial and energy technologies, which current trends would render “unassailable.”
Grantham concludes, “Not only does green infrastructure produce a good return, jolt the economy forward, and help with inequality, it also helps create an environment where the U.S. can at least fight it out with China for leadership in what will become the dominant industries of 2050.”