“My view is that all of this is wrong, and sensible people should think of the low interest rates as positively harmful.”
This is _potentially_ true in the political economy sense you describe above, but I think this is very dismissive of the enormous benefit low interest rates provide to borrowers — typically people without means and small businesses — at the relative expense of the wealthy. They also provide strong incentives for holders of capital to fund innovation with substantial social spillovers for income rather than rely on stable low-risk yields to support their lifestyles like in earlier decades. The set of trade offs is quite complex.
I feel like there was a lot of discourse about Matt leaving Vox to writ hotter takes about PC culture, but I am not sensing the real reason is the editors there were limiting the number of articles he wrote with Federal Reserve data. If true this is an excellent turn of events. This was a really interesting article, I had always been thinking of low interest rates as a missed opportunity to invest in useful things, but had not thought about the consequences in the political economy.
Left wing populism has the same constraint as right wing populism, which means that at the moment there is no constraint. The problem is the left has internalised the idea to be responsible (partly because a lot of the elite left is, like Biden, old enough to remember when you were punished by the bond vigilantes if you didn't behave responsibly). We need to keep remind ourselves that due to a global savings glut, there are free lunches left and right.
Big fan of Child Allowance. I have 5-kids... though two are grown.
I lived in Germany for a while and got Kindergeld, roughly $300 per child, per month. Pretty awesome.
I don't understand why Republicans don't co-opt the idea. Married adults with kids are more likely to vote Republican than Single Adults. Its the absolute essence of a pro-family values package.
I love the idea, just to see all you single hip millennials get jealous.
I assume a fuller discussion of the tie between rates and inflation is coming, and when it does, I would love to see you address the way negligible inflation parks wealth with elderly savers, and higher inflation would help younger debtors - student loans would evaporate into an inflating currency, young families could outgrow their mortgages.
Thank you for reminding readers that it's only the annual debt payment that matters, not the total national debt or even the annual deficit. The only thing that creates trade-offs is the annual debt service. So many media outlets report on the huge national debt amount, or the debt-to-GDP ration, or the annual deficit, as if any of those matter in a country that can create its own currency and never has to worry about dying or filing for bankruptcy. Unlike a household, the debt never actually needs to be paid off. You just need to make those annual payments to assure investors that you stick to your promises. And if you look at the Y-axis in that chart you shared, that's an incredibly low interest-payment-to-GDP ratio. Not something we should really be concerned about.
One thing you didn't mention though is that the interest payment itself is just another way of spending money into economy. It goes to bond investors, which includes pension funds, IRAs, 401ks, usually the safer types of investments that many middle class people have. So when thinking about trade-offs, it's not like the interest payment is "wasted" like the media tends to characterize it. It's an actually spending of federal dollars into the economy that has real long-term benefits by making people more financially secure. We can argue about the trade-off between that use of money versus targeted short-term aid and stimulus, but it's not wasted.
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.
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.
My background in economics is limited to extremely mediocre performance in a single undergraduate class. So I am likely misunderstanding or ignorant of something fundamental. But if the Fed sets interest rates and rates on corporate bonds mirror the Fed's rate, then how can interest rates change based on population growth? Or, are you referring to interest rates changing in terms of what interest rates the Fed is required to set because too high inflation makes it necessary?
Interesting piece Matt! Just wanted to clarify the fundamental move though:
"In theory, low-interest rates could be a huge opportunity for some kind of gigantic leftist debt-financed Green New Deal. But in practice what's been happening is they give the populist-right an edge over a Democratic Party that is led by the center-left, rendering the leftist vision influential in the takes game but irrelevant in Congress."
I get that on the right, you're saying low interest rates warp the tradeoff that otherwise would exist b/w cultural traditionalists and big business. I'm a bit confused on the left though. Are you saying low interest rates dangle the carrot of GND to the progressives, but center-left Dems are never going to bite, so it's a political non-starter?
If that's the case, it seems instead of concluding low interest rates are therefore bad and we should instead work to lift them, one could instead find ways to sell a GND type of package to center-left dems? Just strikes me that a world of low interest rates is one that govts should take advantage of to push through massive fiscal.
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 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.
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.
Would improving our energy grid as well as investing in higher efficiency energy uses raise interest rates at all? Or more generally what policies do you think would raise interest rates while also achieving our climate goals.
“My view is that all of this is wrong, and sensible people should think of the low interest rates as positively harmful.”
This is _potentially_ true in the political economy sense you describe above, but I think this is very dismissive of the enormous benefit low interest rates provide to borrowers — typically people without means and small businesses — at the relative expense of the wealthy. They also provide strong incentives for holders of capital to fund innovation with substantial social spillovers for income rather than rely on stable low-risk yields to support their lifestyles like in earlier decades. The set of trade offs is quite complex.
I feel like there was a lot of discourse about Matt leaving Vox to writ hotter takes about PC culture, but I am not sensing the real reason is the editors there were limiting the number of articles he wrote with Federal Reserve data. If true this is an excellent turn of events. This was a really interesting article, I had always been thinking of low interest rates as a missed opportunity to invest in useful things, but had not thought about the consequences in the political economy.
Left wing populism has the same constraint as right wing populism, which means that at the moment there is no constraint. The problem is the left has internalised the idea to be responsible (partly because a lot of the elite left is, like Biden, old enough to remember when you were punished by the bond vigilantes if you didn't behave responsibly). We need to keep remind ourselves that due to a global savings glut, there are free lunches left and right.
Big fan of Child Allowance. I have 5-kids... though two are grown.
I lived in Germany for a while and got Kindergeld, roughly $300 per child, per month. Pretty awesome.
I don't understand why Republicans don't co-opt the idea. Married adults with kids are more likely to vote Republican than Single Adults. Its the absolute essence of a pro-family values package.
I love the idea, just to see all you single hip millennials get jealous.
I assume a fuller discussion of the tie between rates and inflation is coming, and when it does, I would love to see you address the way negligible inflation parks wealth with elderly savers, and higher inflation would help younger debtors - student loans would evaporate into an inflating currency, young families could outgrow their mortgages.
Thank you for reminding readers that it's only the annual debt payment that matters, not the total national debt or even the annual deficit. The only thing that creates trade-offs is the annual debt service. So many media outlets report on the huge national debt amount, or the debt-to-GDP ration, or the annual deficit, as if any of those matter in a country that can create its own currency and never has to worry about dying or filing for bankruptcy. Unlike a household, the debt never actually needs to be paid off. You just need to make those annual payments to assure investors that you stick to your promises. And if you look at the Y-axis in that chart you shared, that's an incredibly low interest-payment-to-GDP ratio. Not something we should really be concerned about.
One thing you didn't mention though is that the interest payment itself is just another way of spending money into economy. It goes to bond investors, which includes pension funds, IRAs, 401ks, usually the safer types of investments that many middle class people have. So when thinking about trade-offs, it's not like the interest payment is "wasted" like the media tends to characterize it. It's an actually spending of federal dollars into the economy that has real long-term benefits by making people more financially secure. We can argue about the trade-off between that use of money versus targeted short-term aid and stimulus, but it's not wasted.
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.
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.
You really went this whole article without mentioning MMT : )
My background in economics is limited to extremely mediocre performance in a single undergraduate class. So I am likely misunderstanding or ignorant of something fundamental. But if the Fed sets interest rates and rates on corporate bonds mirror the Fed's rate, then how can interest rates change based on population growth? Or, are you referring to interest rates changing in terms of what interest rates the Fed is required to set because too high inflation makes it necessary?
Interesting piece Matt! Just wanted to clarify the fundamental move though:
"In theory, low-interest rates could be a huge opportunity for some kind of gigantic leftist debt-financed Green New Deal. But in practice what's been happening is they give the populist-right an edge over a Democratic Party that is led by the center-left, rendering the leftist vision influential in the takes game but irrelevant in Congress."
I get that on the right, you're saying low interest rates warp the tradeoff that otherwise would exist b/w cultural traditionalists and big business. I'm a bit confused on the left though. Are you saying low interest rates dangle the carrot of GND to the progressives, but center-left Dems are never going to bite, so it's a political non-starter?
If that's the case, it seems instead of concluding low interest rates are therefore bad and we should instead work to lift them, one could instead find ways to sell a GND type of package to center-left dems? Just strikes me that a world of low interest rates is one that govts should take advantage of to push through massive fiscal.
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 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.
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.
Would improving our energy grid as well as investing in higher efficiency energy uses raise interest rates at all? Or more generally what policies do you think would raise interest rates while also achieving our climate goals.