This is the third and, in my view, best way of responding to stagnation concerns. Consider my favorite example: debt-financed infrastructure spending. Notice several things: First, when your growth rate exceeds your interest rate -- which is surely going to be true for a long time for short-term debt -- then you can issue debt, roll over the debt to cover interest and still have a declining debt-to-GDP ratio. Further, debt-financed infrastructure increases GDP by increasing productivity, which makes us wealthier and stimulates demand in an economy that is demand-constrained. Finally, if we fix Kennedy airport today, we don’t need to fix it tomorrow. If the concern is the obligation placed on future generations, then our accounting leads us seriously astray if it teaches us to fret over the Treasury debt that will be left behind but not the deferred maintenance liability that will be left behind.
To put the point a different way. If government is going to issue more short-term debt, what it should do with the proceeds? Is it best to buy back long-term bonds where the government is borrowing on behalf of the public at record low interest rates? This is what quantitative easing does. Or is it better to invest the proceeds in real assets that will increase the economy’s capacity and diminish the need for future government investments.
I’ve emphasized infrastructure because that is probably where the most can be invested. But there are other areas, as well. I am confident that reversing the cutbacks we have made in biomedical research in recent years would pay for itself through the demand stimulus effects and through the savings in health care costs that would ultimately result.
Insofar as they are complete pains in the ass when you disagree with them (that is, when they're wrong), but utterly delightful to have on your side when you agree.