In 1981, the discount rate was 14%.
In May of last year, it was 3%.
It is now 0.25%.
In May of last year, it was 3%.
It is now 0.25%.
Why does this matter?
The discount rate tells you how much to discount future revenue. It tells you how much a million dollars you get a decade from now is worth today.
If your discount rate is 26%, it is worth only $100,000. You wouldn't want to invest more than $100k for the one million in a decade.
But if your discount rate is only 0.25%, that million dollars in a decade is worth $975,000.
The discount rate answers the question, "How much should I discount the future?" Or, put differently, "How much should I invest now in the future?"
The discount rate essentially tells you whether the future is expensive or cheap. Do you have to pay a million dollars now for $100,000 in a decade? That's an expensive future. Do you have to pay a million dollars now for nearly a million dollars in the future? That's an affordable future.
We should invest a huge amount because of this low discount rate. This means making a few changes to our current deficit.
We now have an outrageously high deficit. This is for two reasons. The massive tax cut Trump passed in his first year gave us a trillion dollar deficit. Then COVID added $3 trillion more to that deficit.
So what should we do next year?
First, we lower the deficit in two ways. The first cut will occur naturally. Subsidies for COVID will be paltry by yearend compared to this year. That will automatically lower the deficit from 2020.
Second, we reverse the Trump tax cuts for the rich. Trump's tax cuts created an absurd situation in which the folks in the top 2% are actually paying less than folks in the bottom 20%. At no previous point in history have the bottom 20% and the top 2% paid the same tax rate, much less have the top 2% paid a LOWER tax rate than the bottom 20%. That has to change for so many reasons not the least because it is just so stupid.
So, these first two steps will lower the deficit. Then we invest heavily in the future, raising the deficit back up again. Why? Because of our very, very low discount rate, those investments promise record returns. Never have future investment returns been worth so much.
What kind of investments should we make?
Childcare. Invest heavily in the development of the kids who - as adults - will be the ones working while us old codgers collect social security.
Infrastructure. Freeways (our investment in freeways as a percentage of GDP was twice as high between 1950 and 1979 as it has been since), airports, trains, sewage and electrical grids that have a smaller carbon footprint.
Alternative energy. Nuclear fusion. Solar grids. Windmills.
Healthcare. Not only money spent to keep everyone healthy but money spent to improve our level of care through research, development and money spent to increase the productivity of our healthcare workers.
Education. In the early 1900s, we made high school normal and free. Time to do the same with university. Additionally, we need to invest comparable sums in every 18 to 23 year old, whether in the form of an education at something like a state university, trade schools, capital equipment they could use for work, or even simple investments that began paying a dividend to supplement income for low-wage workers.
R&D. It's time to invest about $3.5 billion into each cabinet level department within the federal government. Why $3.5 billion? That's about what we invest in DARPA, which accounts for a big amount of DoD's R&D. Time to match those investments for the Departments of Energy, Education, Interior, Agriculture, etc.
We've never had more cheap capital or more great opportunities for investment. Running up a deficit to make these investments will not only be a great boon short-term (imagine how many jobs we'd create by upgrading our infrastructure or hiring childcare workers or employing researchers in a variety of fields) but would give us record returns in the future.
Because the discount rate is so low, the future has never been worth more. With a future that cheap, we should buy as much of it as we can afford. It's a great time to stock up on future possibilities.
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