My summary of Jeremy Granthams' point: The US needs to spend on infrastracture, not on own treasuries/bonds... and they should hire boatloads of builders, who'll all go and spend the cash on home improvement, restaurants, maybe also booze, hookers and other fun things like gambling. Worst thing is feeding banksters and hedgies. They seem to not spend enough. Surprising really.
His words:
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I’ve always been sympathetic to the general idea of crowding out: that government spending displaces an equal and offsetting amount of private spending. But it is an academic argument and, although it may have a grain or two of truth, it smells of the typical recent tendency in economics: to be heavy on assumptions and light on common sense and the real world.
This concept is known, after the British nineteenth century economist, as Ricardian Equivalence, but to be fair to Ricardo, there were no government statistics then, so everything had to be theoretical. The same relatively small group of taxpayers also owned most of the bonds, so one can see how Ricardo might have gotten there. But today, the government’s hiring someone is absolutely not the same as a private company’s hiring exactly the same person, for if the person is not hired, the government bears all of the costs of unemployment and the corporation none. This cost is not merely welfare, food stamps, and the loss of taxes federally and locally. It also includes the long-term cost to society of the unemployed losing their skills and becoming less employable. For lower-paid workers, these total costs may equal, on rough estimate, one-third to one-half of the cost of hiring them. In this situation, there is no equivalence. A hired worker who would otherwise be unemployed is simply a better bargain for the government. A more capitalist alternative would be to offer some or all of the government’s savings as a subsidy to employers who hire lower-skilled workers. This has been tried and, at times of severe unemployment, seems to be effective.
The real problem starts when direct governmental spending cuts into the always limited pool of skilled workers, or it is attempted when the pool of unemployed workers is only marginally above normal and the private sector has begun to hire. That is “crowding out.” None of these conditions applies now. It is intuitively obvious, at least to me, that if fiscal spending were directed only: a) to lower-skilled workers, b) when there is clearly an abnormal level of unemployment, or c) when you hire them only to do jobs with a high return to society, that we will all come out ahead and there is no equivalence. Future debt commitments are paper; current useful jobs are real life. How can we possibly be better off when the unemployed who want to work are sitting idle and depressed, as their skills decay? Be serious! With a dreadfully deteriorated infrastructure and a desperate need for improvements in energy efficiency, there is certainly a great potential supply of high societal returns waiting to be had on one hand, and an army of non-frictional unemployed ready to get to work on the other."
GMO, Quarterly Letter – Night of the Living Fed – October 2010
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