As I have said a few times on this blog, my sense is that the real cause of the recent financial crisis was too much money. There was so much capital sloshing around world markets that investors could not think of anything better to do with it than lend it to people who could not pay it back, like poor American homeowners, Irish builders, and the Greek government. During my vacation I had a long conversation about this with a relation of mine who runs a real estate investment company, a very smart fellow who has made a fortune in the business. He agreed with me that there really was too much money; I think he said, "capital accumulation was too rapid." He said that back in the 1980s it was easy for him to find projects that would return 20 percent on investment, but because so much money has flooded into real estate over the past 25 years, now it is hard to find projects that will return 3 percent. The crazy financial innovations of the past decade were basically a desperate attempt to somehow generate good returns in a world where there were no more good, high-yield investments. So our basic situation right now is that despite the huge losses, there is more capital in world markets than private business can find good uses for.
The situation is very different on the public side. In the US we are suffering from a gigantic shortfall of government investment -- our roads and railroads are falling apart, our airports need work, and so on. A high speed rail network across California, which I think would be a great investment, would cost $50 to $80 billion. No doubt an east coast system would cost even more. All of our subway and elevated train system could use big infusions of money, too. So the obvious thing to do with all that excess capital is to invest it in the public sector.
The main reason economists object to raising taxes on the rich is that this will impede the formation of capital, since rich people save a much higher percentage of their incomes than middle class people do. But at the moment we have, not too little private capital, but too much. So raising taxes on the rich would not create any problems on the capital side.
What I think we should do is to use a few hundred billion of the excess capital floating around to upgrade America's transportation infrastructure. Some of this would be tapped via higher taxes, the rest through bonds -- at times lately the US government has been paying a negative real interest rate on borrowed money. This would put thousands of people to work at good jobs, it would buy us something that will really make Americans better off, and it would soak up some of the excess capital that has been making terrible mischief around the world.