As income inequality worsens during the pandemic and climate change devastates California and Australia, GMO founder Jeremy Grantham believes the timing for a new Marshal Plan has rarely been more propitious.
In a letter to clients, the highly opinionated asset manager notes that probably the biggest problem the developed world faces is that mature economies have seen their GDP growth rates fall over the last 50 years from more than 4% to the 2% area. The effects of slower growth are corrosive to many aspects of modern life.
“Of these problems, it is the longer-term malaise that worries me most. I believe income inequality is eating away at the economy from the inside with the lack of economic progress for workers reducing demand,” he writes. “In the U.S. that is covered up temporarily to some extent by the short-term explosion of a small set of new disruptive FAANG-type companies.”
There is a solution, in his view. “This, however, is where a magic bullet comes in: We need a long, sustained and massive public works program—a second coming of the Marshall Plan, if you will—to jolt the U.S. and the global economy into a few decades of accelerated growth,” Grantham continues. “The trouble here is that much of the world has lost heart after the financial crash because it is unnecessarily concerned with debt levels.”
Grantham dismisses advocates of austerity, who emerged after the 2008-2009 financial crisis, calling their arguments a product of “double-entry bookkeeping. For every dollar owed there is a creditor to whom it is owed.”
Negative real interest rates on risk-free loans today also render a large and sustained public works program as “very advantageous” when it comes to timing.
The great waste in 2009 and 2010 in America was the “use of precious resources to bail out banks, including those who hade made large commercial bets and lost,” he writes.
Grantham cites two major reason for trillions in new government spending. The first is the pathetic state of our current infrastructure.
The second is the need to “green” the entire economy if we want any hope to maintain a stable global civilization in coming centuries. This will take tens of trillions of dollars, over several decades, on a global basis,” he argues.
He considers fears that government borrowing will crowd out the private sector to be misplaced. “The good news is that infrastructure spending, particularly green infrastructure spending, pays a respectable return on investment as far as the eye can see. If financed at negative real rates, it is the commercial bargain of all time. Even if it crowds out some ordinary commercial activities on the margin, it is still a bargain, for little of routine GDP shows a long-term societal return. And given currently depressed demand, the crowding-out effect should be small,” he concludes.