With the yield dropping below zero on U.S. Treasury debt, it doesn’t really cost the federal government anything to borrow money. Sure, we have to pay the money back eventually, but as Ezra Klein explained very well yesterday, as a practical matter, the United States is being offered “free money.”
To put it mildly, this realization offers an extraordinary opportunity for federal officials to make necessary investments at a very low cost. We haven’t seen in a chance like this in a long while, and we won’t see it again anytime soon.
Usually, the U.S. government has to pay quite a bit to borrow money. In January 2003, for instance, the interest rate on a seven-year Treasury was about 3.6 percent, which gave investors a yield of more than two percent after accounting for inflation. Right now, the interest rate is 1.52 percent, or minus-0.34 percent after accounting for inflation.
Here’s what this means: If we can think of any investments we can make over the next seven years that have a return of zero percent — yes, you read that right — or more, it would be foolish not to borrow this money and make them.
The case is even stronger with investments we know we will need to make over the next decade. The economy will get better, and as it gets better, the cost of borrowing will rise. The longer we wait, in other words, the more expensive those investments will become.
In a sane political environment, this would be perceived as extraordinarily news. Indeed, policymakers should be pinching themselves with the good fortune — they know the nation has important investments to make; they know they’d prefer to keep borrowing costs to a minimum; and they know they’re effectively being offered free money. Washington can use that free money to create jobs and improve crumbling infrastructure, with the satisfaction of knowing it’s never been more cost effective to do so.
And yet, this won’t happen, for the same reason worthwhile measures nearly always don’t happen — Republicans have a direct role in the policymaking process, and their philosophy tells them public investments are “bad.” What matters, the GOP says, isn’t putting free money to good use, investing resources we’re going to have to spend eventually anyway; what matters is tackling the fiscal mess Republicans are largely responsible for creating.
And why does the GOP believe deficit reduction matters? Because their ideology tells them larger deficits lead to higher interest rates, which hold back the economy. This might be slight more coherent if interest rates weren’t below zero.
This is why we can’t have nice things.
