Our children and our granchildren.

Let's say that my roof leaks. By not fixing my leaky roof I am leaving my wife and daughter with less debt to pay off if something should happen to me. However, I also am leaving them with a far less valuable property. With low interest rates and qualified roofers able to work on very reasonable terms, is it really the right thing to leave the roof in its current state? Would I really be a good husband or father if instead of having the roof fixed I took out a somewhat smaller loan so that the three of us could go to Disney World instead? If I do this and something happens to me, all my wife and daughter are left with are memories of our trip and the loan to pay off. As any student who has passed a course in corporate finance can tell you, the internal rate of return on an investment is its gross return. Regardless of how expensive any project might appear to be initially, a positive internal rate of return or gross return means that over the life of the investment it is capable of being quite profitable. For example, a 2 billion dollar investment which adds on average $150 million to a company’s profits (either by lowering operating expenses or making it possible to increase revenues) each year over the next thirty years generates a gross return of about 6.3%. All else equal, if financing could be obtained at the rate that currently thirty year Treasury bonds are being sold, 3.5%, what would any savvy business manager do? Wouldn’t it be at least worth considering increasing overall profits, net of interest expense, by 2.8% a year? Of course in any well managed business there should be and will be debate about how confident management is in its estimates of cost savings and added revenues. There should also be a discussion of whether it might be advisable to wait to see if a clearer picture about what the future holds might emerge later on. Regardless of all of this, it would be exceedingly foolish to simply dismiss the proposed project out of hand as too expensive or to claim that years from now management of this company would be saddled with payments on the debt it has taken on today. Again as any student with a passing grade in corporate finance should be able to tell you, any project with a positive net return (gross return less interest expense) will yield a positive net present value; in other words it will generate more in benefits over time than it adds to costs. Now read the following passage carefully: Regardless of how expensive the stimulus package might appear to be initially, a positive internal rate of return or gross return means that over time it has the potential for making us far better off than we would be otherwise. For example, a nearly trillion dollar stimulus package which focuses on investment in education, energy efficiency, health care, and infrastructure may add billions to an economy’s earnings (either by lowering costs or expanding markets) each year for some time to come; perhaps generating a gross return of about 6.3%. All else equal, if financing could be obtained at the rate 3.5%, what would any savvy group of political leaders do? Wouldn’t it be at least worth considering increasing overall earnings, net of interest expense, by 2.8% a year? Of course there should be and will be debate about how confident those who have put forward the package are in the expected cost savings estimated and the market expansion anticipated. There should also be a discussion of whether it might be advisable to wait to see if a clearer picture about what the future holds might emerge later on. However, it would be exceedingly foolish to simply dismiss the package out of hand as too expensive or to claim that our children and our grandchildren would be saddled with payments on the debt taken on today. Again as any student with a passing grade in corporate finance should be able to tell you, any project with a positive net return (gross return less interest expense) will yield a positive net present value; in other words it will generate more in benefits over time than it adds to costs. As should be abundantly clear at the present moment, in times of uncertainty individual households or businesses are concerned with protecting themselves and their families. Therefore, they are hesitant to act, to take on risks until a clearer picture emerges and they have seen things improve. They are only too happy to join the crowd spending and generating sales, profits, financing and jobs once the crowd is big enough. As we all wait for others to move however no such forward movement is possible. What makes the government different is that while as business managers and adults running households are first concerned with the safety and security of those who have invested in their businesses and their families, the government is charged with acting in the public’s interest Investment in energy efficiency, education, health care, and infrastructure are all investments in which we can anticipate over the long-term to generate a substantial return net of the debt taken on now. If the money from the current stimulus package is spent wisely to employ the resources that the marked slowdown in private spending has made available to repair schools, to fix roads, to increase energy efficiency and so on we both stimulate total demand right now and expand our capacity to produce later on. It is true our children and our grandchildren will be paying down the debt we have taken on now. However if the money is spent wisely and employs otherwise idle resources productively our children and grandchildren will be paying this debt out of higher and more stable earnings; just like a private business that has takes on debt and invests the money profitably is able to do. Economically stronger and more efficient, future generations will have less need to struggle and borrow themselves if we do what needs to be done now.