America Must Invest

Why a large-scale investment program is possible

Before the breakdown of Bretton Woods, there were hard constraints on how much the government could spend and on how much money the Fed could create.

If the government spent too much, as it did during the 1960s and 1970s, it overstimulated the relatively closed US economy and caused inflation. The large increase in government borrowing pushed up interest rates and “crowded out” the private sector. Moreover, increased government stimulus caused dollars to flow overseas as increased consumer demand pulled more imports into the US and as foreign investment by cash-rich US banks and corporations expanded. Large dollar outflows could not be tolerated because, up until August 1971, the governments of other countries had the right to exchange the dollars they accumulated for gold; and any significant loss of gold would threaten the Fed’s ability to continue backing dollars with gold.

At the same time, the Fed’s freedom to create money was constrained by the legal requirement that it hold gold to back the money it created and by the likelihood that increased money creation would lead to high rates of inflation.

All these constraints were eliminated after the US stopped backing dollars with gold following the breakdown of the Bretton Woods system and once the US started running large trade deficits with the rest of the world from the early 1980s.

Afterwards, the government found that allowing the trade deficit to widen meant that it could spend much more freely without causing inflation because importing goods from abroad, with no concern for the balance of trade, permitted the United States to circumvent the domestic bottlenecks in the labor market and in an industrial capacity that had always led to inflation in the past. At the same time, the Fed was no longer required to back dollars with gold and was therefore free to create as many dollars as it wished, so long as the increase in the money supply did not cause inflation, which it no longer did because the surge in imports from low wage countries drove prices down.

As a result of these changes, the policy options available to the government and the Fed changed radically. During the 1960s and 1970s too much government spending and too much money creation led to double-digit inflation in the US. After the US began running large trade deficits in the early 1980s and as globalization gained momentum, inflation rates fell steadily regardless of how large the government’s budget deficits became or how much money the Fed created.

These developments mean that we are living in a completely new policy environment. In the old world of gold-backed money and balanced trade, large budget deficits and excessive money creation did more harm than good. That is no longer the case. In the world in which we live, large-scale government investment in new industries and technologies financed by large-scale money creation has the potential to deliver a technological revolution that would not only generate much higher rates of economic growth, but also solve many of the world’s most intractable problems and radically improve the wellbeing of everyone alive – all without creating high rates of inflation.

Why a large-scale investment program is necessary

There are three main reasons the United States government must invest on a very much larger scale than it does at present.

The first and most compelling reason is that it must because it can. A multi-trillion-dollar investment program is certain to produce technological breakthroughs that will improve the lives of every American – and everyone else as well. It is now possible for the United States government to invest trillions of dollars in new industries and technologies at little to no cost. Consequently, the cost-reward tradeoff is overwhelmingly favorable. The cost is very close to zero. The rewards include a vast improvement in health and wellbeing, as well as greatly enhanced national security. It would be extraordinarily foolish for the US government not to fully exploit the opportunities open to it at this unique moment in history.

Second, our economic system is driven by credit growth. Capitalism has evolved into creditism. The crisis of 2008 occurred because the private sector was unable to take on any more debt. A surge in US government borrowing and spending prevented a collapse into a new Great Depression. The government is going to have to continue to borrow and spend to make total credit grow and to make the economy expand. It would be far wiser for the government to borrow to fund a large-scale investment program, rather than to borrow to finance unnecessary wars or excessive consumption.

Finally, China is on the brink of overtaking the United States as the world’s leading economic and technological superpower because it invests much more than the United States does, not only as a percent of GDP, but in absolute amounts. If China surpasses the United States technologically, it won’t be long before it becomes the world’s dominant military power as well. When China rules the world, it may be a benign ruler, overseeing a long era of peace and prosperity. On the other hand, it may not be. World history teaches that countries with great technological superiority rarely treat inferior powers kindly.

An artificial intelligence arms race has begun. Within 20 years, AI is likely to reach parity with human intelligence. After that, it will accelerate at an exponential rate. The country that gets there first will have the rest of the world at its mercy. The US government must ensure that the United States is that country. Pax Americana has not been flawless. However, it has overseen a 75-year period of general peace and facilitated an extraordinary expansion of prosperity around the world.

The rationale for the US government to undertake a multi-trillion-dollar investment program would be irresistibly compelling even if no strategic rival to the United States were visible on the horizon. The fact that China is certain to overwhelm the United States technologically, economically, and militarily before the middle of this century if current trends continue makes such an investment program urgently necessary for reasons of national security as well.

How much to invest?

The United States government should invest as much as possible, as quickly as possible. The United States could easily finance a $10 trillion investment program over 10 years. But would that much investment over a decade cause the economy to overheat and lead to unacceptably high rates of inflation? If so, then the investment program could be slowed down until the capacity bottlenecks that caused the inflation were overcome. All capacity constraints are temporary. With sufficient investment, they can be quickly resolved.

We might discover that the US economy could absorb that level of investment over 10 years without any significant stress. In that case, then more than $10 trillion should be invested.

The correct approach is for the government to set ambitious goals and to invest as much as possible and as quickly as possible to achieve them. There is no doubt that the government could invest multiples of what it is investing now. Extraordinary benefits could be expected if it does.

Which industries to target

The industries and technologies to target for increased investment should be decided after wide-ranging consultation with scientists in the public sector (including those from DARPA, the National Science Foundation, NASA and the Departments of Health and Human Services, Energy and Defense), as well as with business leaders and scientists in the private sector (including those from the leading US tech and pharmaceutical giants).

Artificial intelligence, quantum computing, genetic engineering, biotech, nanotech, renewable energy, neural sciences and robotics stand out as likely candidates.

How to structure the investments

There are two ways the federal government could organize such a large-scale investment program.

First, some projects could be carried out entirely by the federal government, just as NASA was during the 1960s. That method succeeded then. NASA sent a man to the moon in less than a decade. Today, there is much talk of the private sector tech giants investing in “moon shot” projects that they expect to produce extraordinary returns in the future. The original “moon shot” was accomplished by the federal government – 50 years ago. There is no reason that fully government directed projects could not be successful again now.

Alternatively, the federal government could use a venture capital model to drive this program. The government could set up joint venture companies with thousands of the United States' most promising scientists and entrepreneurs. The government could then fund those companies lavishly in exchange for a 60% equity stake. The scientists and entrepreneurs would own 40% of the equity and they would manage the companies.

Over time, many of those companies would make extraordinary technological breakthroughs and produce life changing products that would make their shares incredibly valuable. As they do, they could be listed on Nasdaq, with the government (i.e., the American taxpayer) receiving 60% of the payout. Not only would the government eventually fully recover the investment it made in those companies, the profits and the capital gains might very well be high enough to pay off the entire national debt, or to abolish the income tax or both. This is no pipedream. If one of these extraordinarily well-funded companies were to discover a cure for cancer or Alzheimer’s, which, with enough funding it almost certainly eventually would, it could well become the most valuable company in the world when listed on Nasdaq.

The government should adopt both these approaches: fully government-controlled investment projects and government funded joint ventures with the private sector. A government agency beat the private sector to the moon. Let the government sector and the private sector compete to see which will be the first to cure all the diseases, perfect quantum computing and master artificial intelligence.

Government sharing in the profits

In recent decades, government investment in R&D has produced extraordinary breakthroughs that the private sector adopted and derived enormous profits from. For instance, as Mariana Mazzucato documents so brilliantly in her book, The Entrepreneurial State, most of the technologies that make smart phones smart resulted from federally funded research programs – technologies such as semiconductors, GPS, touch screen technology, the voice recognition utilized by Siri and Alexa and, of course, the internet itself.

Similarly, federal government funded research contributed to the creation of the algorithm that Google used to make its search engine the world’s best. Google search now has 93% global market share and Google’s parent company, Alphabet, is one of the most valuable companies in the world.

Up until now, however, the federal government has not received a fair share of the profits that have been derived from the research it funds. The share of taxes paid by corporations has continued to shrink thanks to the success of the corporate lobbyists they pay in Washington. In 2018, corporate taxes amounted to only 1% of GDP, whereas the average from 1934 has been 2.6%.

Going forward, a structure will have to be put in place that ensures the federal government will earn income from licensing fees when the private sector adopts and profits from the technologies that government investment brings forth. That would greatly reduce the cost of this investment program and finance additional investment in the decades that follow.

Conclusion

The next two chapters describe how and how much the United States invests currently. They also show why the current level of investment is sorely inadequate. Subsequent chapters show how the dangerous deficiencies in US investment can be remedied and detail the extraordinary benefits that will result once they are.

Richard Duncan is the author of four books analyzing the causes and the effects of the economic crises that have brought the global economy to the brink of collapse during recent decades.

His first book, The Dollar Crisis: Causes, Consequences, Cures, forecast the global economic crisis of 2008 with extraordinary accuracy. It was an international bestseller. The Money Revolution: How To Finance The Next American Century, is his latest book.

Since 2013, Richard has published Macro Watch, a video-newsletter that analyzes the forces driving the economy and the financial markets in the 21st century.

For more information about Macro Watch, visit Richard’s website here.

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