The earnings yield on the S&P stock index is now 7% per year. That is in real terms: an inflation-adjusted number. By contrast, the annual real interest rate on the five-year United States Treasury Inflation-Protected Security (TIPS) is -1.02%/year. Yes, there is a “minus” sign in front of that: if you buy the five-year TIPS, each year over the next five years the US Treasury will pay you in interest the past year’s consumer inflation rate minus 1.02%.
If the federal government were just an investor, that would suggest it should sell lots of TIPS and use the proceeds to buy broad stock indexes. Since the federal government is not just an investor, it instead suggests that perhaps the government should sell lots of TIPS and use the proceeds to purchase goods and services from firms and individuals in the private sector. Or if you’re a skeptic of the government’s ability to produce worthwhile public services, why not simply stop collecting taxes for a while allowing households to increase their purchases of goods and services from the private sector? Alternatively, the federal government could sell TIPS and cut checks to our 50 state governments, allowing them to choose between tax-side and spending-side policies.