ANALYSIS — Oscar Wilde wrote that a cynic “knows the price of everything and the value of nothing.” But the great thing about the brave new world of negative real interest rates is the cynic doesn’t have to choose.
Yields on 30-year Treasury bonds are below 2 percent; 10-year rates have dropped below 1 percent. Lenders are willing to lose money after inflation to lock their money away safely for decades. These are uncharted waters, the kind of rock-bottom rates the U.S. didn’t see in the depths of the financial crisis and which are more prevalent in creaky, aging economies like Europe and Japan.
And it’s all thanks to the COVID-19 pandemic that is killing thousands and shutting down global travel, business activity and consumer confidence. With more and more economists now calling a recession this year, investors can’t get enough of safe haven debt backed by Uncle Sam.
And it’s not just foreigners. American households, mutual funds, pensions, banks and the Federal Reserve have scooped up nearly $6 trillion in T-bonds over the past decade, with the Fed accounting for almost one-fourth of the increase through its bond-buying programs intended to drive yields down and flood the financial system with money. As a share of U.S. debt held by the public, foreign ownership is down to 41 percent from 48 percent a decade ago.
It’s enough to get policymakers thinking they shouldn’t let this crisis go to waste.
Paid leave policies, allowing poor kids dependent on free and reduced-price school lunches to get their meals someplace else and other initiatives are supported by both parties. Republicans may begrudgingly go along with increased federal support for Medicaid — typically close to 30 percent of state budgets — as the coronavirus economy slams state tax receipts.
What’s unlikely to pass soon are two more expensive things that have bipartisan support, or have in the past: Some kind of big counter-cyclical tax cut, and a major program to fix crumbling roads, bridges, subways and other infrastructure.
President Donald Trump would eliminate or sharply reduce payroll taxes that take a hefty bite out of the first $137,700 in wages this year. That could inject up to $800 billion into the economy and could be implemented quickly. It’s unlikely to benefit the very rich since their salaries have already “capped out.”
However, it would deliver bigger dollars to a two-earner family making over $200,000 a year than a household at the median U.S. income of about $60,000, who’d be more likely to spend it and get that cash circulating back out into the economy. And it won’t do much for retirees and tipped workers at restaurants likely to see plenty of empty tables in the coming weeks.
Tax rebates, similar to those enacted in 2001 and 2008 under President George W. Bush, are another option. California Democrat Nancy Pelosi was speaker when the last round of checks went out, delivering up to $600 per person and phasing out for higher earners. Parents with kids under 17 got an extra $300 per child. It took the Treasury several months to get the checks out, however, and a Federal Reserve survey found that only about one-fifth of respondents said they were “mostly spending” the money.
Still, rebates have Democratic support, including from Obama administration advisers Jason Furman and Jared Bernstein. And consumers appear more likely to spend lump sums than payroll tax cuts spread out over many months; one study found that only 14 percent of workers benefiting from the Obama-GOP payroll tax cuts of 2011-12 spent their windfall.
Trump likes the payroll tax plan better, perhaps because it’d be a gift that kept on giving through the November elections and around the holidays. But Democrats could call his bluff and dare him to veto a new round of stimulus checks; giving all adults up to $1,000, with an additional $500 per child, could cost about $350 billion, Furman says.
For now, Democrats seem to prefer watching Trump squirm as stock markets crater, showing little love for any big tax cut that Trump could put his name on.
On infrastructure, liberal Democrats like House Transportation and Infrastructure Chairman Peter A. DeFazio of Oregon and conservative Republicans like Senate Appropriations Chairman Richard C. Shelby of Alabama say there’s no reason to hold back — especially now. Trump is on board; it was a key campaign promise. Not only are interest rates ridiculously low, asphalt prices are way down due to the oil price crash, and inputs like iron and steel are also cheap.
But lawmakers are hamstrung by the white whale of offsetting the cost of a $1 trillion-plus package. Despite low gasoline prices, no sane member of Congress is ready to propose a gas tax increase headed into a recession — or an election. Better to rip the Band-Aid off and let the money flow — for the same reason it makes little sense to prepay the mortgage when you can arbitrage that low interest rate into higher-yielding investments.
Peter Cohn is fiscal policy editor for CQ Roll Call.