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So how do we judge good investments? And do deficits matter?
Kemmsies shares some insights into this debate. In a normal economy government investment is usually 15 to 20 percent of GDP. In China, investment (when both private and government activity are combined) is 50 percent of GDP. Looking at the economies from another persepctive, in the Eurozone, the debt-to-GDP ratio required by the 1992 Maastricht Treaty is 60 percent. Here, where the economy is doing better, the U.S. debt to GDP ratio is 100 percent; while Japan’s is a whopping 250 percent.
While we cannot ignore deficits in the long term, making investments that increase production to meet growing demand are far too important in the short term to cut in the name of deficit reduction. Investments must be judged on the basis of increasing capacity for production and exports (both of which will help us pay down the debt over the long run). This generally means that transportation and education will deliver the biggest bang for the buck.
And lest we fear that only countries with natural resources can be successful, we should consider post-war Japan. Japan invested in transportation and education and became great innovators and the second largest economy. Currently, Japan is third, behind China and the United States. Unfortunately, they have had some major setbacks coupled with demographic realities — an aging population — that have taken a toll. But they have bounced back before and likely will again.
There is already a new economic order rising from the ashes of the 2007–2009 collapse. America can once again be a leader in shaping this new reality. But much will depend on our political leaders having a productive dialogue about how to take the near term good news to the next level and begin subsidizing production over consumption.
Listening to Kemmsies’ presentation it was impossible to guess if he was a Democrat or Republican. A refreshing respite from what passes as political debate.
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