Great piece. I’m no economist so I always learn a lot.
One thing that annoys me is what Summers did here, he’s just naming current investment hotness, not thinking deeply. Like if AI is going to help avoid stagnation, could we compare it to personal computing and how did that do? (I don’t know.)
And on something I have read more about, how exactly is the electrification of almost everything/ending fossil fuels going to help? If it works, this new investment will just supersede old fossil investment and cause stranded assets—winners and losers, not gain. With electricity being more efficient we will need something like 40% less primary energy to do the same things we do today. And because of the urgency of climate, all the carrots and sticks that governments introduce to spur green investment are either debt or making markets more inefficient to force faster change. And if it doesn’t work! Climate disasters will cause more cleanup costs (debt), or abandonment of low lying areas (stranded assets), and agricultural rescues (debt), and wars (debt)…Doesn’t seem like a savior long term. Just a lot of government defaults in 2050’s or something.
“Economic theories are not like physics theories” I find this bizarre, and the way Larry Summers is talking about a "secular stagnation" as a passing trend not to be an useful framework. Maybe this is because I am a physicist! But I think we should talk of "secular stagnation" as three distinct effects:
1) Long-term (decades and centuries), developed countries have a slowing productivity growth rate as a fairly universal rule. They are starting from a higher base number, and trying to improve on a higher standard for quality of life. There is no shame in this, it's just setting a high bar for a succesful society.
2) Long-term (years and decades), the US has an aging population and insufficient fertility to replace the loss of their labor. Demographic decline is a very difficult trend to fight without immigration, and will adversely impact our living standards if we don't do something about it.
3) Short-term (months and years), the US economy is macroeconomically stimulated after decades of understimulation. We're seeing a lot latent potential unleashed, a lot of attention on previously neglected bottlenecks, a reorientation of the economy towards building, a distribution from capital to labor, but the economy does not have unlimited bandwidth to transform overnight.
We need to distinguish between growth and development.
Growth equals more consumption. We live in a finite world so infinite growth is not possible. But we can keep developing forever (more efficient production or technology).
We will need to figure out how to get stable population levels without immigration. No developed country knows how to do that yet. But we should not be shooting for always more people.
Also, Lower prices aren't always a bad thing. If technology improves and your computer gets cheaper that's a good thing.
“Economic theories are not like physics theories”, he said. “They fit for a period. So, I wasn’t contradicting myself when I went from worrying about secular stagnation to worrying about fiscal policy. I was responding to a radically changed world.”
Nope. Sorry, Larry, this is just physicists being better than economists at specifying the boundaries within which they expect a given theory to apply. The laws themselves never change, but the approximations of them that we know how to write down for more efficient use in specific contexts are more limited and circumscribed, and it's our responsibility to be clear about that.
AI has high potential to increase the supply and decrease the cost of many forms of innovation and labor, increasingly separately from anything to do with the size and age of the human population. If it does so, it will also increase demand for some specific things as well (materials, electricity). How that will shape *overall* demand and the underlying price structure of... everything else... is still in many ways an open question.
I think Summers' point still stands. Gravity is always gravity. The apple always falls when you drop it, and it always falls in the same way. Social science is messier because it's about people. Man is a political animal, etc.
Yes, but it's a difference of degree, not of kind. Gravity is always gravity, but what we use to make predictions are models of gravity. Newton's model works great at speeds much less than that of light and field strengths much less than that of a black hole. Einstein's model removes those limits but doesn't work well at distances much smaller than an atomic nucleus. There are some exceptions, but those are more pure math than physics, like the laws of thermodynamics. I could say that in economics, money is always money, and trade is always trade, but what helps me make predictions are our models of those things. Some are more sophisticated than others. They should all be applied within a mostly-understood scope of relevance. None can be as precise as those in physics (for exactly the good reasons you mention).
But my point is that Larry Summers knew all the relevant models all along. I don't think he actually changed his mind about anything here. I expect that at any point in the past decade or two, if you'd presented him with hypothetical scenarios corresponding to the current and previous economic situations, he'd know what policy prescriptions he'd make in each case, and they'd be consistent no matter when you asked. But if he never once *presented* his previous conclusions as conditional on specific metrics suggesting use of specific models, then he has to now present this as a change of mind.
And I'm not saying this to be nitpicky or to counter any of your good points in the post. I'm saying it because I genuinely believe that if we ever manage to get a world where public intellectuals and policy makers present their beliefs as either probabilistic, or conditional on specific metrics and triggers, that would be a much saner world than we have now.
I do think there's a contradiction in the idea of promoting business investment via government action while also promoting the idea of increasing government revenue via tax increases on businesses and capital gains (ie. people who invest in businesses).
One might be able to square that circle provided the regulatory environment substanitally changes to make business investment easier. But if the plan is to increase taxes on business and maintain a high level of regulation than hinders business formation and increases the costs of investment, then business investment will continue to suffer.
"2013 ... Larry Summers ... the economy is stuck with low growth, low interest rates, high unemployment, and high debt, which makes it hard to get out of the hole using either monetary or fiscal policy."
Summers is wrong. That economic situation is trivially easy to solve, via monetary stimulus. It doesn't increase the debt, unemployment declines, people going back to work increase growth. (And it doesn't matter what happens to interest rates.) Summer misdiagnosed the 2008 recession, and continued to misunderstand it in 2013. He's just mistaken.
Probably worth noting that Matt has covered this. Summers seems to have diagnosed it perfectly, there was just no political path forward to close any more of the output gap.
"Since Larry Summers has a lot of enemies, the specific account of why his transition memo didn’t recommend a larger outlay has been frequently distorted.
But as you can see here, Summers was aware all along that $850 billion in legislated stimulus would not fully close the output gap or restore full employment
I appreciate your response, but I think you didn't fully understand my comment. You are stuck in the same narrow thinking as Summers, lamenting the too-small FISCAL stimulus, and noting that you think there was "no political path" for a greater FISCAL stimulus.
Your mistake is believing that any fiscal stimulus at all was necessary. Please read my comment again. I did not advocate for greater FISCAL stimulus.
Instead, I advocated for greater MONETARY stimulus. NONE of the criticisms you mentioned apply to monetary stimulus. The central bank has no need of any "political path". Monetary stimulus is cost-free, is infinitely powerful, and can easily "fully close the output gap" and "restore full employment". (At least, when the economic problem is lack of sufficient aggregate demand, as it was in 2008.)
You (and Matt!) are overly focused on FISCAL stimulus, and have inappropriately discarded the much more effective and powerful MONETARY stimulus. But don't feel bad; you're in good company. Larry Summers made the same mistake.
That's indeed a fair question ... but the answer is actually surprisingly easy.
It's a mistake to think that monetary stimulus is "lowering interest rates". Central banks do not "set" interest rates. (At least, not the rates that we are talking about.) What they actually do is "target" interest rates. When you read that the Fed is "lowering interest rates", what they are actually doing is lowering their TARGET for interest rates. (The primary rate that the Fed targets is the Federal Funds Rate, which is a free-market interest rate that banks use when loaning money to EACH OTHER. The Fed is not directly involved in any FFR transaction at all!)
So how does the central bank achieve its target? By changing the money supply! The one concrete action the Fed can actually do, is buy (or, rarely, sell) financial assets, on the open market, at market prices, in exchange for newly created money. This Open Market Operation changes the money supply (the Monetary Base). Changing the money supply has many downstream consequences, including changing inflation, changing unemployment ... and changing interest rates.
The change in interest rates is a CONSEQUENCE of monetary stimulus (or contraction). It is NOT a significant part of the monetary policy transmission mechanism. Free market prices have no causal effect on the economy (aside from balancing supply and demand for that good). In the case of interest rates, what is balanced is the supply and demand for credit. But it is a mistake to think that a change in any free market price tells you anything about a resulting change in the quantities transacted; that would be an Econ 101 error of "reasoning from a price change". Free market prices change because either the supply curve or the demand curve changed, and depending on which one, then quantities transacted might go either up or down.
So now, with all that background, the answer to your very valid question is actually surprisingly simple. In ordinary circumstances, when the Fed says they are engaging in monetary stimulus by "cutting interest rates", what they are ACTUALLY doing is expanding the money supply sufficiently that the supply of credit increases sufficiently to lower free market interest rates into their target range. But the observed change in interest rates is an EFFECT of monetary stimulus, not a "cause".
As such, regardless of happens to interest rates, a central bank can ALWAYS engage in further monetary stimulus ... simply by continuing to expand the money supply. There is no "zero lower bound" on the size of the money supply! It's just a number. There are always bigger numbers.
After 2008, the US Federal Reserve -- which already understands all of this -- very clearly engaged in "unconventional" monetary policy. By which it did the same usual expansion of the money supply -- just the same as "conventional" monetary stimulus! -- but it no longer "explained" its stimulus via a change in interest rate target. Instead, this same money supply expansion action was called "Quantitative Easing".
So that's all it comes down to. At the zero lower bound, provide monetary stimulus through expansion of the money supply ("quantitative easing"), which actually uses the exact same actions (OMOs) and the exact same mechanism as usual monetary stimulus ... it just might not happen to have the usual effect on interest rates. (But interest rates don't matter!)
It's weird how Matt was arguing just three and a half years ago that low interest rates were a curse. Well, we solved that problem! And now, of course, high interest rates are a problem. Still looking for that sweet spot, I guess.
I get it that Matt's argument was that low interest rates led to lazy, if not dangerous, politics and that higher interest rates would force us to focus on truly valuable goals. Well, that would be great if we had a different electorate and a different pool of politicians. Instead, we'll probably just have painful consequences forced on us, whether they're terrible budget cuts or permanent higher inflation due to our inability to get anything done.
High interest rate may create AI lock in, where potential competitors can’t get VC funding so the current crop become the dominant incumbent AI companies.
I listened to Ezra Klein's interview with the head of Anthropic (https://www.nytimes.com/2024/04/12/opinion/ezra-klein-podcast-dario-amodei.html) and that convinced me that interest rates have nothing to do with locking in the dominant incumbent AI companies. Instead, the expense of compute will do that all by itself. Its cost is apparently increasing by an order of magnitude for each new generation of AI model and soon it will cost $10 billion to build the next generation, and $100 billion after that.
Not exactly conducive to mom and pop shop innovation.
Yeah, AI has capex requirements which are very different from everything else in the software space. You can set up the classic webserver-on-top-of-a-SQL-database app infrastructure for almost nothing (and thanks to the cloud providers, pretty easily), but frontier model training will set you back.
Remilitarization as an investment opportunity? Remilitarization is at best a bridge to nowhere resource allocation. What provides a greater return, an unexploded bomb or an old one?
On Summers ... I thought this was an interesting paper on how the cost of money is overlooked today. If we use the pre-1983 inflation formula - which measured monthly mortgage payments, instead of rental prices - then inflation in 2022 topped out at 15% vs. 9.1% and has had a much slower decline.
I get that. I think the point is more about how there's a large push by the chattering class to call the negative economic sentiment just ... vibes. But it's not just mortgage interest payments constraining wallet share. Credit card debt is a disaster. Interest rates are > 20%. This will snowball.
Just take a look at the first link. The "average interest rate on credit card plans (all accounts) at commercial banks" was 11.94% in 2013 and is now 21.2%. Source: U.S. Federal Reserve Board via FRED
1. I agree that is a problem which is why I am voting for Joe Biden who favors capping credit card interest rates at 15%.
2. Based on Summers’ paper we put an option for “lower rates on mortgages and credit cards” to Blueprint’s “what would you most like to see changed in the economy” question and over 60% still said lower price level.
No, they'll just drop risky borrowers. And that is the goal of capping credit card interest rate; not lowering costs for risky borrowers but instead eliminating them from the credit markets.
The system will be far safer comparable to how requiring large down payments and higher credit scores for mortgages neutralized the subprime risk after 2008.
Yeah. It's a really bad proposal. Something like 20% of the US is already "invisible" to the commercial credit markets and use pay day loans, title loans, pawn shops instead. That's a way worse outcome.
Okay, here’s my admittedly non-economist confusion around how the demographic problem interacts with the income distribution problem.
- the rich are, on average, savers
- the old are, on average, richer than the young
Are the old savers? Why? They’re almost dead! Perhaps the goal is pass that wealth on to their kids. Perhaps they just believe they’ll live much longer than they really will. But, then, how does that jive with the olds spending all of their social security checks?
Seems to me that we need to be thinking more about those who are rich and old, taxing their income sources (capital gains), means testing their benefits so we’re not cutting millionaires social security checks or paying for their healthcare, and then putting harsh caps on inheritance. Use it to do redistribution to the poor olds and, I dunno, universal pre-k so parents can work more.
But is this really the issue? That we have too many rich old people who don’t spend their money? (And there’s the obvious fact that it’s a political non-starter because the olds are a powerful voting block.)
And, another challenge is finding policies that actually drive up birth rates. While the liberal-progressives want paid maternity/paternity leave, free childcare, lots of other benefits related to having a family, everywhere that has these benefits has low fertility. So it raises the question of whether those are the kind of redistribution that we need.
Anyway, once again I’m losing the thread (doing a bunch of editing at the moment so my mind is kinda fried). But I’d love to know more about how an aging population relates to income distribution issues and how those in turn impact interest rates and investment in the future.
Right this is Klein and Moscarini's point. But the idea is that an aging society means higher life expectancies so people save more in expectation of retirement. Seperately, as Peters and Amand argue, population aging reduces business dynamism which hurts innovation.
Have you looked at the cost of old-age care? If, say, you have dementia or another condition that requires round-the-clock care at the end of your life, that will eat up hundreds of thousands of dollars/year, easily. It's a horrific problem with no obvious solution. Just because you're healthy at 65, you can't assume you won't need hideously expensive long-term care at 85 or 95.
And yes, I would assume a lot of elderly want to pass money on to their kids or grandkids.
A group of House Republicans have been talking about decreasing SS benefits for rich retirees, but Democrats like our hosting have been eating them alive.
What would have to change for demographics to be less of an issue? One, how do we get the birth rate up a bit? I think this ties to housing supply as well as overall economic vibes. Showing more progress on climate change should also help people feel more optimistic about the future, and I think this is baked in over the next two decades. More subsidies for kids also seem good, once interest rates go down a bit.
Two, how do we help older people be more dynamic? Improvements in healthcare and mitigating the effects of aging should help. As a society, I think we should also start thinking of older age as a time of freedom and opportunity, not just for retirement or hanging on to a Social Security check. I think improving our culture around aging could make a meaningful difference.
Evangelical isn't a religious term, it is a political term. Most Trump-MAGA cultists don't regularly attend church and aren't traditionally religious (they are religious to the extent they worship Trump). By religious I mean more like the New England Puritans of old.
I don't think I would want a society full of New England Puritans, though. They had many good qualities; they were hardworking, disciplined, loyal, and they valued education (extremely high literacy standards for their time!) and caring for the least of these, in accordance with the teachings of Jesus.
They were also dour, grim, and fanatically unaccepting of any deviation from their orthodoxy or any worldly pleasures, which they considered sinful. And they practiced child abuse, because children "needed to get the Devil whipped out of them." Would you like to live in a society where you can't let Goodwife Smith see you eat a piece of chocolate, or she'll report you to the town elders and they'll put you in stocks for gluttony? I wouldn't.
I think we don't know what the impact of ageing populations will be on the economy. This is an unprecedented experiment basically all the rich, developed nations are going through, and some are farther down the curve than others (e.g., Japan). Maybe technology will replace the need for new workers and a shrinking population will become increasingly rich. Maybe it will be "Children of Men" everywhere. Theories are good, but we should all admit to a large dollop of humility when it comes to predicting what's going to happen.
Young whippersnapper doesn't remember the days of cassette tapes.
And back when I was a little girl, we had these things called "landline phones" that were attached to a wall, and you had to run to pick up the phone when you heard it ring, and you couldn't take it with you when you left the house! Kids these days don't know how good they have it. Now get off my lawn!
Great piece. I’m no economist so I always learn a lot.
One thing that annoys me is what Summers did here, he’s just naming current investment hotness, not thinking deeply. Like if AI is going to help avoid stagnation, could we compare it to personal computing and how did that do? (I don’t know.)
And on something I have read more about, how exactly is the electrification of almost everything/ending fossil fuels going to help? If it works, this new investment will just supersede old fossil investment and cause stranded assets—winners and losers, not gain. With electricity being more efficient we will need something like 40% less primary energy to do the same things we do today. And because of the urgency of climate, all the carrots and sticks that governments introduce to spur green investment are either debt or making markets more inefficient to force faster change. And if it doesn’t work! Climate disasters will cause more cleanup costs (debt), or abandonment of low lying areas (stranded assets), and agricultural rescues (debt), and wars (debt)…Doesn’t seem like a savior long term. Just a lot of government defaults in 2050’s or something.
“Economic theories are not like physics theories” I find this bizarre, and the way Larry Summers is talking about a "secular stagnation" as a passing trend not to be an useful framework. Maybe this is because I am a physicist! But I think we should talk of "secular stagnation" as three distinct effects:
1) Long-term (decades and centuries), developed countries have a slowing productivity growth rate as a fairly universal rule. They are starting from a higher base number, and trying to improve on a higher standard for quality of life. There is no shame in this, it's just setting a high bar for a succesful society.
2) Long-term (years and decades), the US has an aging population and insufficient fertility to replace the loss of their labor. Demographic decline is a very difficult trend to fight without immigration, and will adversely impact our living standards if we don't do something about it.
3) Short-term (months and years), the US economy is macroeconomically stimulated after decades of understimulation. We're seeing a lot latent potential unleashed, a lot of attention on previously neglected bottlenecks, a reorientation of the economy towards building, a distribution from capital to labor, but the economy does not have unlimited bandwidth to transform overnight.
We need to distinguish between growth and development.
Growth equals more consumption. We live in a finite world so infinite growth is not possible. But we can keep developing forever (more efficient production or technology).
We will need to figure out how to get stable population levels without immigration. No developed country knows how to do that yet. But we should not be shooting for always more people.
Also, Lower prices aren't always a bad thing. If technology improves and your computer gets cheaper that's a good thing.
Low inflation as such isn't a problem I agree, the issue is when it's a symptom of weak demand which keeps the labor market full of slack.
I'll agree to that. People sitting around unemployed is a big problem
Fantastic piece, Milan.
“Economic theories are not like physics theories”, he said. “They fit for a period. So, I wasn’t contradicting myself when I went from worrying about secular stagnation to worrying about fiscal policy. I was responding to a radically changed world.”
Nope. Sorry, Larry, this is just physicists being better than economists at specifying the boundaries within which they expect a given theory to apply. The laws themselves never change, but the approximations of them that we know how to write down for more efficient use in specific contexts are more limited and circumscribed, and it's our responsibility to be clear about that.
AI has high potential to increase the supply and decrease the cost of many forms of innovation and labor, increasingly separately from anything to do with the size and age of the human population. If it does so, it will also increase demand for some specific things as well (materials, electricity). How that will shape *overall* demand and the underlying price structure of... everything else... is still in many ways an open question.
I think Summers' point still stands. Gravity is always gravity. The apple always falls when you drop it, and it always falls in the same way. Social science is messier because it's about people. Man is a political animal, etc.
Yes, but it's a difference of degree, not of kind. Gravity is always gravity, but what we use to make predictions are models of gravity. Newton's model works great at speeds much less than that of light and field strengths much less than that of a black hole. Einstein's model removes those limits but doesn't work well at distances much smaller than an atomic nucleus. There are some exceptions, but those are more pure math than physics, like the laws of thermodynamics. I could say that in economics, money is always money, and trade is always trade, but what helps me make predictions are our models of those things. Some are more sophisticated than others. They should all be applied within a mostly-understood scope of relevance. None can be as precise as those in physics (for exactly the good reasons you mention).
But my point is that Larry Summers knew all the relevant models all along. I don't think he actually changed his mind about anything here. I expect that at any point in the past decade or two, if you'd presented him with hypothetical scenarios corresponding to the current and previous economic situations, he'd know what policy prescriptions he'd make in each case, and they'd be consistent no matter when you asked. But if he never once *presented* his previous conclusions as conditional on specific metrics suggesting use of specific models, then he has to now present this as a change of mind.
And I'm not saying this to be nitpicky or to counter any of your good points in the post. I'm saying it because I genuinely believe that if we ever manage to get a world where public intellectuals and policy makers present their beliefs as either probabilistic, or conditional on specific metrics and triggers, that would be a much saner world than we have now.
I think the AI effect potentially dominates all the rest.
AI is interesting to me because it potentially resolves at least part of the Baumol's Cost Disease problem for services.
Or at least it creates a bifurcation in services between those that AI is good for and those that we still really want humans for.
Good piece overall!
I do think there's a contradiction in the idea of promoting business investment via government action while also promoting the idea of increasing government revenue via tax increases on businesses and capital gains (ie. people who invest in businesses).
One might be able to square that circle provided the regulatory environment substanitally changes to make business investment easier. But if the plan is to increase taxes on business and maintain a high level of regulation than hinders business formation and increases the costs of investment, then business investment will continue to suffer.
"2013 ... Larry Summers ... the economy is stuck with low growth, low interest rates, high unemployment, and high debt, which makes it hard to get out of the hole using either monetary or fiscal policy."
Summers is wrong. That economic situation is trivially easy to solve, via monetary stimulus. It doesn't increase the debt, unemployment declines, people going back to work increase growth. (And it doesn't matter what happens to interest rates.) Summer misdiagnosed the 2008 recession, and continued to misunderstand it in 2013. He's just mistaken.
Probably worth noting that Matt has covered this. Summers seems to have diagnosed it perfectly, there was just no political path forward to close any more of the output gap.
"Since Larry Summers has a lot of enemies, the specific account of why his transition memo didn’t recommend a larger outlay has been frequently distorted.
But as you can see here, Summers was aware all along that $850 billion in legislated stimulus would not fully close the output gap or restore full employment
<memo Table 1>"
https://www.slowboring.com/p/obama-mostly-got-things-right
I appreciate your response, but I think you didn't fully understand my comment. You are stuck in the same narrow thinking as Summers, lamenting the too-small FISCAL stimulus, and noting that you think there was "no political path" for a greater FISCAL stimulus.
Your mistake is believing that any fiscal stimulus at all was necessary. Please read my comment again. I did not advocate for greater FISCAL stimulus.
Instead, I advocated for greater MONETARY stimulus. NONE of the criticisms you mentioned apply to monetary stimulus. The central bank has no need of any "political path". Monetary stimulus is cost-free, is infinitely powerful, and can easily "fully close the output gap" and "restore full employment". (At least, when the economic problem is lack of sufficient aggregate demand, as it was in 2008.)
You (and Matt!) are overly focused on FISCAL stimulus, and have inappropriately discarded the much more effective and powerful MONETARY stimulus. But don't feel bad; you're in good company. Larry Summers made the same mistake.
Sincere question: how does the Fed go about doing monetary stimulus when at the zero lower bound?
That's indeed a fair question ... but the answer is actually surprisingly easy.
It's a mistake to think that monetary stimulus is "lowering interest rates". Central banks do not "set" interest rates. (At least, not the rates that we are talking about.) What they actually do is "target" interest rates. When you read that the Fed is "lowering interest rates", what they are actually doing is lowering their TARGET for interest rates. (The primary rate that the Fed targets is the Federal Funds Rate, which is a free-market interest rate that banks use when loaning money to EACH OTHER. The Fed is not directly involved in any FFR transaction at all!)
So how does the central bank achieve its target? By changing the money supply! The one concrete action the Fed can actually do, is buy (or, rarely, sell) financial assets, on the open market, at market prices, in exchange for newly created money. This Open Market Operation changes the money supply (the Monetary Base). Changing the money supply has many downstream consequences, including changing inflation, changing unemployment ... and changing interest rates.
The change in interest rates is a CONSEQUENCE of monetary stimulus (or contraction). It is NOT a significant part of the monetary policy transmission mechanism. Free market prices have no causal effect on the economy (aside from balancing supply and demand for that good). In the case of interest rates, what is balanced is the supply and demand for credit. But it is a mistake to think that a change in any free market price tells you anything about a resulting change in the quantities transacted; that would be an Econ 101 error of "reasoning from a price change". Free market prices change because either the supply curve or the demand curve changed, and depending on which one, then quantities transacted might go either up or down.
So now, with all that background, the answer to your very valid question is actually surprisingly simple. In ordinary circumstances, when the Fed says they are engaging in monetary stimulus by "cutting interest rates", what they are ACTUALLY doing is expanding the money supply sufficiently that the supply of credit increases sufficiently to lower free market interest rates into their target range. But the observed change in interest rates is an EFFECT of monetary stimulus, not a "cause".
As such, regardless of happens to interest rates, a central bank can ALWAYS engage in further monetary stimulus ... simply by continuing to expand the money supply. There is no "zero lower bound" on the size of the money supply! It's just a number. There are always bigger numbers.
After 2008, the US Federal Reserve -- which already understands all of this -- very clearly engaged in "unconventional" monetary policy. By which it did the same usual expansion of the money supply -- just the same as "conventional" monetary stimulus! -- but it no longer "explained" its stimulus via a change in interest rate target. Instead, this same money supply expansion action was called "Quantitative Easing".
So that's all it comes down to. At the zero lower bound, provide monetary stimulus through expansion of the money supply ("quantitative easing"), which actually uses the exact same actions (OMOs) and the exact same mechanism as usual monetary stimulus ... it just might not happen to have the usual effect on interest rates. (But interest rates don't matter!)
That was exceptionally well written.
It's weird how Matt was arguing just three and a half years ago that low interest rates were a curse. Well, we solved that problem! And now, of course, high interest rates are a problem. Still looking for that sweet spot, I guess.
I get it that Matt's argument was that low interest rates led to lazy, if not dangerous, politics and that higher interest rates would force us to focus on truly valuable goals. Well, that would be great if we had a different electorate and a different pool of politicians. Instead, we'll probably just have painful consequences forced on us, whether they're terrible budget cuts or permanent higher inflation due to our inability to get anything done.
High interest rate may create AI lock in, where potential competitors can’t get VC funding so the current crop become the dominant incumbent AI companies.
I listened to Ezra Klein's interview with the head of Anthropic (https://www.nytimes.com/2024/04/12/opinion/ezra-klein-podcast-dario-amodei.html) and that convinced me that interest rates have nothing to do with locking in the dominant incumbent AI companies. Instead, the expense of compute will do that all by itself. Its cost is apparently increasing by an order of magnitude for each new generation of AI model and soon it will cost $10 billion to build the next generation, and $100 billion after that.
Not exactly conducive to mom and pop shop innovation.
Yeah, AI has capex requirements which are very different from everything else in the software space. You can set up the classic webserver-on-top-of-a-SQL-database app infrastructure for almost nothing (and thanks to the cloud providers, pretty easily), but frontier model training will set you back.
Remilitarization as an investment opportunity? Remilitarization is at best a bridge to nowhere resource allocation. What provides a greater return, an unexploded bomb or an old one?
A bomb that you can still use to deter your enemies?
This exchange immediately made me think of this scene from "Iron Man": https://www.youtube.com/watch?v=YBC1Qob27sM&t=33s
Well done. Good overview of the topic, judicious snark, and use of the serial comma as befits a civilized man.
Great post Milan.
On Summers ... I thought this was an interesting paper on how the cost of money is overlooked today. If we use the pre-1983 inflation formula - which measured monthly mortgage payments, instead of rental prices - then inflation in 2022 topped out at 15% vs. 9.1% and has had a much slower decline.
https://www.npr.org/2024/02/28/1234554967/inflation-cost-of-living-economy-mortgages-auto-loans-larry-summers
It’s a good paper but there’s a reason the methodology change, which is that using mortgage payments means that a rate hike would mechanically increase inflation. https://www.fullstackeconomics.com/p/why-the-government-took-home-prices-out-of-the-consumer-price-index
I get that. I think the point is more about how there's a large push by the chattering class to call the negative economic sentiment just ... vibes. But it's not just mortgage interest payments constraining wallet share. Credit card debt is a disaster. Interest rates are > 20%. This will snowball.
https://www.cnbc.com/2023/09/21/credit-card-interest-rates-near-loan-shark-territory-advisor-says.html
https://www.cnbc.com/2023/11/09/average-credit-card-balances-top-6000-a-10-year-high.html
Credit card interest rates have always been > 20%. IIRC most have been 20.99 to 24.99% since forever.
Just take a look at the first link. The "average interest rate on credit card plans (all accounts) at commercial banks" was 11.94% in 2013 and is now 21.2%. Source: U.S. Federal Reserve Board via FRED
Data as of Oct. 6, 2023
Hum…I could have sworn it was 20% since the 90s.
Good thing I thought it was 20% or I would have spent more 10 years ago.
Two points:
1. I agree that is a problem which is why I am voting for Joe Biden who favors capping credit card interest rates at 15%.
2. Based on Summers’ paper we put an option for “lower rates on mortgages and credit cards” to Blueprint’s “what would you most like to see changed in the economy” question and over 60% still said lower price level.
Capping credit card interest rates would mechanistically increase risk for banks.
No, they'll just drop risky borrowers. And that is the goal of capping credit card interest rate; not lowering costs for risky borrowers but instead eliminating them from the credit markets.
The system will be far safer comparable to how requiring large down payments and higher credit scores for mortgages neutralized the subprime risk after 2008.
Yeah. It's a really bad proposal. Something like 20% of the US is already "invisible" to the commercial credit markets and use pay day loans, title loans, pawn shops instead. That's a way worse outcome.
I'm genuinely suprised that the government wants to become Dave Ramsey.
Okay, here’s my admittedly non-economist confusion around how the demographic problem interacts with the income distribution problem.
- the rich are, on average, savers
- the old are, on average, richer than the young
Are the old savers? Why? They’re almost dead! Perhaps the goal is pass that wealth on to their kids. Perhaps they just believe they’ll live much longer than they really will. But, then, how does that jive with the olds spending all of their social security checks?
Seems to me that we need to be thinking more about those who are rich and old, taxing their income sources (capital gains), means testing their benefits so we’re not cutting millionaires social security checks or paying for their healthcare, and then putting harsh caps on inheritance. Use it to do redistribution to the poor olds and, I dunno, universal pre-k so parents can work more.
But is this really the issue? That we have too many rich old people who don’t spend their money? (And there’s the obvious fact that it’s a political non-starter because the olds are a powerful voting block.)
And, another challenge is finding policies that actually drive up birth rates. While the liberal-progressives want paid maternity/paternity leave, free childcare, lots of other benefits related to having a family, everywhere that has these benefits has low fertility. So it raises the question of whether those are the kind of redistribution that we need.
Anyway, once again I’m losing the thread (doing a bunch of editing at the moment so my mind is kinda fried). But I’d love to know more about how an aging population relates to income distribution issues and how those in turn impact interest rates and investment in the future.
Right this is Klein and Moscarini's point. But the idea is that an aging society means higher life expectancies so people save more in expectation of retirement. Seperately, as Peters and Amand argue, population aging reduces business dynamism which hurts innovation.
"Are the old savers? Why? They’re almost dead"
Have you looked at the cost of old-age care? If, say, you have dementia or another condition that requires round-the-clock care at the end of your life, that will eat up hundreds of thousands of dollars/year, easily. It's a horrific problem with no obvious solution. Just because you're healthy at 65, you can't assume you won't need hideously expensive long-term care at 85 or 95.
And yes, I would assume a lot of elderly want to pass money on to their kids or grandkids.
A group of House Republicans have been talking about decreasing SS benefits for rich retirees, but Democrats like our hosting have been eating them alive.
What would have to change for demographics to be less of an issue? One, how do we get the birth rate up a bit? I think this ties to housing supply as well as overall economic vibes. Showing more progress on climate change should also help people feel more optimistic about the future, and I think this is baked in over the next two decades. More subsidies for kids also seem good, once interest rates go down a bit.
Two, how do we help older people be more dynamic? Improvements in healthcare and mitigating the effects of aging should help. As a society, I think we should also start thinking of older age as a time of freedom and opportunity, not just for retirement or hanging on to a Social Security check. I think improving our culture around aging could make a meaningful difference.
Become a more religious society.
If "more religious" = "more like the stereotypical MAGA-loving Evangelical," then I'm sorry, but the cure is worse than the disease.
Evangelical isn't a religious term, it is a political term. Most Trump-MAGA cultists don't regularly attend church and aren't traditionally religious (they are religious to the extent they worship Trump). By religious I mean more like the New England Puritans of old.
You make a great point re: MAGA.
I don't think I would want a society full of New England Puritans, though. They had many good qualities; they were hardworking, disciplined, loyal, and they valued education (extremely high literacy standards for their time!) and caring for the least of these, in accordance with the teachings of Jesus.
They were also dour, grim, and fanatically unaccepting of any deviation from their orthodoxy or any worldly pleasures, which they considered sinful. And they practiced child abuse, because children "needed to get the Devil whipped out of them." Would you like to live in a society where you can't let Goodwife Smith see you eat a piece of chocolate, or she'll report you to the town elders and they'll put you in stocks for gluttony? I wouldn't.
Scott Alexander had a great piece on the four groups of immigrants that settled the colonies, including the Puritans: https://slatestarcodex.com/2016/04/27/book-review-albions-seed/
Correlation is not causation. Example the US and Iran have the same 1.7 birth rate.
Iran isn't as religious as its leadership/government is.
Which isn’t the question. The question is about the average American vs the average Iranian.
My old manager is Persian and he absolutely despises, as he calls it, the Islamic Republic.
Selection bias.
Do you have evidence that the average Iranian is more religious than the average American?
In a society run by a theocratic government, wouldn't you expect the majority of the population to at least appear religious even if they weren't?
I think we don't know what the impact of ageing populations will be on the economy. This is an unprecedented experiment basically all the rich, developed nations are going through, and some are farther down the curve than others (e.g., Japan). Maybe technology will replace the need for new workers and a shrinking population will become increasingly rich. Maybe it will be "Children of Men" everywhere. Theories are good, but we should all admit to a large dollop of humility when it comes to predicting what's going to happen.
Not just rich ones. China and Eastern Europe are having it, and India is about to have below replacement fertility.
"In my lifetime alone, we’ve gone from iPods to iPhones to ChatGPT." Adorable.
Good piece, I learned a few things from this post.
Young whippersnapper doesn't remember the days of cassette tapes.
And back when I was a little girl, we had these things called "landline phones" that were attached to a wall, and you had to run to pick up the phone when you heard it ring, and you couldn't take it with you when you left the house! Kids these days don't know how good they have it. Now get off my lawn!
/mutters grumpily, shakes fist at sky
And not picking it up when it rang was unthinkable.
Ah to have been born at the turn of the century.
You know you're getting old when the phrase "the turn of the century" evokes fin-de-siecle Vienna in the 1900s, not, you know, America in the 2000s.
Yeh, when you read something like, “The first consumer WiFi routers were released at the turn of the century.” Wait, what?
Bliss it was in that dawn to be alive
But to be young was very heaven.