None of the above suggests that there isn’t an opportunity for well-targeted government spending. Infrastructure spending, for instance, could help improve U.S. productivity and long-term growth. But focused public-private partnerships to address the country’s aging infrastructure shouldn’t be synonymous with another massive stimulus program.
My view is that the U.S. economy is in the midst of a recovery, and growth should re-accelerate in the second quarter, or at least in the second half. That said, I would agree with those who argue that the recovery isn’t likely to take us back to the glory days of 3.5% to 4% annual growth. A massive build-up in debt is unlikely to change this, and it would probably make things worse.
Market Realist – The previous graph shows that the US has the largest negative gap between the estimated need of and actual expenditure on infrastructure development among developed markets (EFA) like Germany (EWG), France (EWF), and Japan (EWJ). An investment in infrastructure is likely to help boost productivity and contribute largely to economic growth. However, this investment should not be financed by ramping up debt levels.
The US fiscal picture is already strained by a deficit, as the above graph shows. Increasing debt levels are likely to pressurize the economy rather than induce growth. According to CBO, the US government had already spent $77 billion in excess of its revenues by the end of May 2015.
The debt-to-GDP ratio currently stands at 101.5% and is set to increase further over the next few years. As the population continues to age, tax revenues are estimated to increase by 20% by the end of 2045, while beneficiaries of welfare funds are estimated to increase by 57%. This mismatch implies an increase in government borrowing (TLT) (IEF).
The staggering level of national debt is not sustainable, and is likely to put pressure on growth in the future. It might also hamper investor confidence in US equities (SPY) (IVV) and the US dollar (UUP). Thus, increasing debt to fuel GDP growth is not the best idea and should not be the road ahead for the US economy.
Read our series on The “Great Deleveraging” that never happened: The US debt problem to learn more on the topic.