Government investment: timing vs. levels

Tyler Cowen is skeptical of the argument low interest rates mean we should boost government investment: 

It is often claimed that the governments of the United States, the UK, and Germany should spend more money because they can borrow at low rates, thus raising the present expected return on the investment considered as a whole. 

Maybe, but keep in mind that the interest rates on quality government debt are down, in part, because the risk premium is up...You might think the government investments are “low hanging fruit” in terms of quality.  Maybe yes, maybe no, but the low real interest rate doesn’t signal that, rather it signals merely that people expect to be repaid. 

In this argument for more government investment, the notion of government investments as low hanging fruit is doing a lot of the work.

I think that Tyler may be conflating an argument about levels of investment with an argument about the timing of investment.

Suppose the optimal level of government investment over the next decade is $2.2T over the next 5 years (Note: I did not make this number up). That still leaves open the question of timing. Should we do all $2.2T next year and then zero over the following 4 years? Or should we space it out evenly? Because capital (which you create by investment) is durable, we have a lot of flexibility in choosing when to make investments, even if how much investment we need is fixed.

The correct timing depends on the interest rate. Remember, in a world where government capital is not a perfect substitute for private capital, government bonds are net wealth, and there is no Ricardian Equivalence. So it's best to do your investing when government capital is cheap. In other words, when the interest rate on government debt is low. For the purposes of timing, it doesn't matter why the interest rate is low. If the interest rate is low because of risk premia, that's fine. It's still a great time to do whatever investing that you need to do. This is true even if the current average level of public investment is just right (or even if it's slightly too high!).

So the interest rate argument for government investment is all about timing, not levels. "More investment right now" does not necessarily mean "more investment overall". If you need to make some hay, the correct time to make it is when the sun is shining.

Update: Tyler writes to point out that rates are expected to stay low for quite some time, weakening the case for shifting investment forward. This is true, but I think there are good reasons to believe that rates will not go any lower; even if the yield curve is pretty flat right now, the low level of interest rates probably limits the downside risk.