I’m not seeing how bringing back a political mindset that allowed Reagan to weld together business and cultural conservatives back when interest rates were really high is a winning strategy.
Interesting perspective on low rates and who has the global savings glut. It’s as if the entire planet was NIMBY
You say “ The deficit exists as a purely abstract political football.” but then go on to say that if interest rates were high, it would matter and impact ability to do things like tax cuts without doing a trade off. This seems to imply there is a threshold, below which adding to the deficit doesn’t matter AT ALL and above which adding to the deficit matters A LOT. What is that threshold and why does going about it suddenly change everything?
"The CBO is thinking too much about the federal budget (that's their job, after all) and not enough about the underlying drivers of interest rates — mostly population growth."
Did you mean "underlying driver" and not "indicator"? I'm not sure of the basis for the causal relationship implied here.
There’s kind of a weird and surprising (to me anyway) similarity between your argument and Reagan’s. Reagan’s view was that government spending was bad, but that it’s politically difficult to cut spending, so let’s slash taxes and put a gun to the government’s head to change the politics and force them to starve the beast. Your argument is fairly similar: Create a potential crisis on the immediate horizon to change the politics and force people to make tough politically unpopular choices. And I think it’s important to remember that Reagan was wrong. The political system just started running deficits and no one was actually forced to start making tough choices (despite high interest rates at the time). I’m not totally sold that higher interest rates would change our political dynamics or congressional negotiations just by virtue of making the consequences more harmful. It seems like a real risk is that the country just ended up getting more harm from our current dynamics persisting.
Totally random but do you think immediate deduction of capital expenditures in the tax code or immediate depreciation (as the GOP wants), in combination with a high property tax gets us a de facto land value tax?
I also think it's worth mentioning how messed up it makes markets - with nothing to discount, future projects in completely unreasonable ways into the present, and money just flows directly into already over-valued equity assets which are not bonds. It's a really weird time...
The NPV of the 75-year shortfall for Social Security is ~$16.8 trillion. If we allow the SS Trust to hold a full range of private debt & equity ETFs (not unlike the Treasury-Fed facility this year that's buying corporate bond ETFs), could the Treasury begin borrowing an extra trillion per year to expand the Trust and begin closing the Social Security shortfall?
It seems like we could grow the debt, stimulate the economy, and test the interest rate elasticity for massive public debt issuance--all in service of closing the Social Security shortfall that greatly concerns the Simpson-Bowles crowd.
In other words, could a plan for massive borrowing to pre-fund the SS Trust solve the fiscal problems of Social Security that most concern deficit hawks while stimulating the economy & normalizing interest rates?
The framing that we need to increase population to increase interest rates to fix our politics is pretty wild, and in particular the argument low interest rates are a major factor in what's wrong with our politics needs a little more fleshing out.
The assertion is made -- without much evidence I feel -- that our politics work better when politicians/coalitions face difficult tradeoffs. Is this true?
"The essence of politics in an era of stubbornly low interest rates is that there’s no tension between cutting taxes for rich people and business owners and doing anything else that you might like to do."
Doesn't this mean that low interest rates are pushing us towards bipartisan compromises where everybody gets what they want? And is that what we are seeing in reality? Doesn't seem like it to me, seems like our politics are broken for other reasons.
To think about the bigger picture, this argument seems like the tail is wagging the dog. Deciding something that shapes society at such a fundamental like *how much population growth do we want?* on the basis of how it affects our political coalitions is backwards! We should try to structure our politics to be capable of doing good policy to achieve social outcomes we want.
The weird thing to me about all the deficit worries is if govt spends too much and gets into too much debt then the only real problem is inflation goes up. (Interest rates only go up if Fed tries to combat inflation by raising them right?) But inflation going up fixes the exact problem of the debt so it's a problem that solves itself. That's what happened after ww2 right? Maybe the problem is the 2 % inflation target. Surely dealing with high inflation for a while is better than grinding unemployment. In a way isn't inflation a backdoor wealth tax anyway? Taking money off people with a lot of savings and giving it to those in debt.
This is persuasive but there's another angle I'd like to see discussed. What happens to Italy?
Back in 2011 I spent a lot of time posting on Facebook about how China and the European Union were both on the verge of collapsing under unmanageable burdens of government debt. I wasn't the only one making those predictions; lots of people who know more economics than I do were arguing the same way. But it didn't happen.
In the case of China it's easy to see why the doomsday predictions were wrong. Chinese debt is in Chinese currency, so in a certain sense it isn't real. In a worst-case scenario it can always be inflated away, without causing the domestic financial system to collapse. But in the case of Europe things are a little different. Eurozone government debt is effectively "hard-currency" and it's a genuine budgetary constraint for eurozone member states... but Europe has benefited from the same dynamic as the US, with interest rates falling so low that the repayment burden has been drastically reduced. Negative rates on government debt have now reached Greece, of all places:
So here's the problem I see with Matt's analysis. I get that Biden needs to do what's best for Americans--and in any case running the economy as hot as possible will reduce the risk of Trump or some neo-Trump replacing him, which is good for the rest of the world. But when Treasury rates rise significantly above zero, what happens to the carrying cost of Italian sovereign debt? It seems as if low interest rates are the deus ex machina that's kept the eurozone from collapsing, so getting rid of them will have predictable side effects.
High USD interest rate will lead to extreme devaluation of other currencies especially EUR and will be an amazing boon to the Eurozone export industries.
"But they are generally still thinking with a prudence mindset: what’s the least-bad tax giveaway I can make in exchange for the most awesome spending?"
Trading full depreciation deduction for an expanded CTC seems like exactly this. Where do you see the distinction?
Do you think Senate Republicans will really deal? For example if Biden offered a $2T tax cut do you think he could get a $4T stimulus / social spending for Democratic priorities?
I have no data to support this, but I suspect a fair amount of inequality is driven by low interest rates. The only place to get any return on your savings is on Wall Street.
Why not go to low inflation as the causality mechanism for reactionary populism, rather than real interest rates (which are driven by population growth)? Nominal interest rates are low because real interest rates are low AND inflation is low. I think it's a lot easier to explain distrust in institutions and the collapse of the American working family in a debt-addled, two-income trap, etc. environment by lack of inflation.
One might say that the last historical debate about economic populism revolving around bimetallism and the "Cross of Gold" is actually much more precise than the current one - the populists actually knew what they wanted was debt relief through inflation, they actually pinpointed the policy mechanism that would get them what they want, and actually made it salient politically!
Now the policy mechanism for stimulating inflation is fiscal stimulus which conservatives have successfully transformed into a proxy of the ethnoculture wars rather than advocating for silver-backed dollars. The problem is that regressive tax cuts are inefficient at stimulating inflation compared to other measures, but maybe the real political calculus tradeoff should be to figure out how much inflation you can get out of any given deal and optimize on that axis.
I’m not seeing how bringing back a political mindset that allowed Reagan to weld together business and cultural conservatives back when interest rates were really high is a winning strategy.
Interesting perspective on low rates and who has the global savings glut. It’s as if the entire planet was NIMBY
Counterpoint https://www.washingtonpost.com/outlook/2020/12/08/debt-interest-rates-biden-budget/
You say “ The deficit exists as a purely abstract political football.” but then go on to say that if interest rates were high, it would matter and impact ability to do things like tax cuts without doing a trade off. This seems to imply there is a threshold, below which adding to the deficit doesn’t matter AT ALL and above which adding to the deficit matters A LOT. What is that threshold and why does going about it suddenly change everything?
"The CBO is thinking too much about the federal budget (that's their job, after all) and not enough about the underlying drivers of interest rates — mostly population growth."
Did you mean "underlying driver" and not "indicator"? I'm not sure of the basis for the causal relationship implied here.
There’s kind of a weird and surprising (to me anyway) similarity between your argument and Reagan’s. Reagan’s view was that government spending was bad, but that it’s politically difficult to cut spending, so let’s slash taxes and put a gun to the government’s head to change the politics and force them to starve the beast. Your argument is fairly similar: Create a potential crisis on the immediate horizon to change the politics and force people to make tough politically unpopular choices. And I think it’s important to remember that Reagan was wrong. The political system just started running deficits and no one was actually forced to start making tough choices (despite high interest rates at the time). I’m not totally sold that higher interest rates would change our political dynamics or congressional negotiations just by virtue of making the consequences more harmful. It seems like a real risk is that the country just ended up getting more harm from our current dynamics persisting.
Totally random but do you think immediate deduction of capital expenditures in the tax code or immediate depreciation (as the GOP wants), in combination with a high property tax gets us a de facto land value tax?
I also think it's worth mentioning how messed up it makes markets - with nothing to discount, future projects in completely unreasonable ways into the present, and money just flows directly into already over-valued equity assets which are not bonds. It's a really weird time...
On responsible irresponsibility:
The NPV of the 75-year shortfall for Social Security is ~$16.8 trillion. If we allow the SS Trust to hold a full range of private debt & equity ETFs (not unlike the Treasury-Fed facility this year that's buying corporate bond ETFs), could the Treasury begin borrowing an extra trillion per year to expand the Trust and begin closing the Social Security shortfall?
It seems like we could grow the debt, stimulate the economy, and test the interest rate elasticity for massive public debt issuance--all in service of closing the Social Security shortfall that greatly concerns the Simpson-Bowles crowd.
In other words, could a plan for massive borrowing to pre-fund the SS Trust solve the fiscal problems of Social Security that most concern deficit hawks while stimulating the economy & normalizing interest rates?
The framing that we need to increase population to increase interest rates to fix our politics is pretty wild, and in particular the argument low interest rates are a major factor in what's wrong with our politics needs a little more fleshing out.
The assertion is made -- without much evidence I feel -- that our politics work better when politicians/coalitions face difficult tradeoffs. Is this true?
"The essence of politics in an era of stubbornly low interest rates is that there’s no tension between cutting taxes for rich people and business owners and doing anything else that you might like to do."
Doesn't this mean that low interest rates are pushing us towards bipartisan compromises where everybody gets what they want? And is that what we are seeing in reality? Doesn't seem like it to me, seems like our politics are broken for other reasons.
To think about the bigger picture, this argument seems like the tail is wagging the dog. Deciding something that shapes society at such a fundamental like *how much population growth do we want?* on the basis of how it affects our political coalitions is backwards! We should try to structure our politics to be capable of doing good policy to achieve social outcomes we want.
The weird thing to me about all the deficit worries is if govt spends too much and gets into too much debt then the only real problem is inflation goes up. (Interest rates only go up if Fed tries to combat inflation by raising them right?) But inflation going up fixes the exact problem of the debt so it's a problem that solves itself. That's what happened after ww2 right? Maybe the problem is the 2 % inflation target. Surely dealing with high inflation for a while is better than grinding unemployment. In a way isn't inflation a backdoor wealth tax anyway? Taking money off people with a lot of savings and giving it to those in debt.
This is persuasive but there's another angle I'd like to see discussed. What happens to Italy?
Back in 2011 I spent a lot of time posting on Facebook about how China and the European Union were both on the verge of collapsing under unmanageable burdens of government debt. I wasn't the only one making those predictions; lots of people who know more economics than I do were arguing the same way. But it didn't happen.
In the case of China it's easy to see why the doomsday predictions were wrong. Chinese debt is in Chinese currency, so in a certain sense it isn't real. In a worst-case scenario it can always be inflated away, without causing the domestic financial system to collapse. But in the case of Europe things are a little different. Eurozone government debt is effectively "hard-currency" and it's a genuine budgetary constraint for eurozone member states... but Europe has benefited from the same dynamic as the US, with interest rates falling so low that the repayment burden has been drastically reduced. Negative rates on government debt have now reached Greece, of all places:
https://www.bloomberg.com/news/articles/2019-10-09/greece-draws-negative-yield-for-first-time-in-3-month-bill-sale
So here's the problem I see with Matt's analysis. I get that Biden needs to do what's best for Americans--and in any case running the economy as hot as possible will reduce the risk of Trump or some neo-Trump replacing him, which is good for the rest of the world. But when Treasury rates rise significantly above zero, what happens to the carrying cost of Italian sovereign debt? It seems as if low interest rates are the deus ex machina that's kept the eurozone from collapsing, so getting rid of them will have predictable side effects.
High USD interest rate will lead to extreme devaluation of other currencies especially EUR and will be an amazing boon to the Eurozone export industries.
"But they are generally still thinking with a prudence mindset: what’s the least-bad tax giveaway I can make in exchange for the most awesome spending?"
Trading full depreciation deduction for an expanded CTC seems like exactly this. Where do you see the distinction?
So Janet Yellen made a mistake by raising interest rates and we need to get out of our low interest rate mindset.
Uhhhh . . . .
Do you think Senate Republicans will really deal? For example if Biden offered a $2T tax cut do you think he could get a $4T stimulus / social spending for Democratic priorities?
I have no data to support this, but I suspect a fair amount of inequality is driven by low interest rates. The only place to get any return on your savings is on Wall Street.
Why not go to low inflation as the causality mechanism for reactionary populism, rather than real interest rates (which are driven by population growth)? Nominal interest rates are low because real interest rates are low AND inflation is low. I think it's a lot easier to explain distrust in institutions and the collapse of the American working family in a debt-addled, two-income trap, etc. environment by lack of inflation.
One might say that the last historical debate about economic populism revolving around bimetallism and the "Cross of Gold" is actually much more precise than the current one - the populists actually knew what they wanted was debt relief through inflation, they actually pinpointed the policy mechanism that would get them what they want, and actually made it salient politically!
Now the policy mechanism for stimulating inflation is fiscal stimulus which conservatives have successfully transformed into a proxy of the ethnoculture wars rather than advocating for silver-backed dollars. The problem is that regressive tax cuts are inefficient at stimulating inflation compared to other measures, but maybe the real political calculus tradeoff should be to figure out how much inflation you can get out of any given deal and optimize on that axis.