“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.
Agree that while Matt mentions “high interest rates were a practical problem in people’s lives,” he doesn’t return to those risks later in the piece. Wonder if that’s because population led interest rate growth will also be a boon for economic growth and that will leave everyone better off?
I think you're right about this to a point. Low interest rates are helpful to individual borrowers in some ways and harmful in others.
A small business owner may be able to get a loan in this environment, but it'll still require a ton of collaterall and come with a hefty interest rate. Small business are risky in the best of times. For the marginal business owner that wouldn't have qualified had money been tighter, they're probably more likely to fail and blow up their wealth than end up securely better off.
You're also going to get a general bidding up of assets as all that easy money goes looking for a return. People without assets will find it increasingly difficult to accumulate them and the gap between those with no assets and those who have a 401k or own property will widen.
As I said... the trade offs are complex! However while wider availability of cheaper credit certainly will increase bankruptcies by some amount I am fairly confident it is outweighed by the vast benefit to borrowers of lower interest costs.
The asset price issue is real but the negative impacts I think are driven more by the change in rates (as rates go down asset prices rise) than the absolute level... and rates can’t go down much farther!
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.
I miss the days of the Economics of Ice and Fire. Hopefully Matt will make a return to blogging about the economics of fictional societies now that he's free from Vox's obsession with the real world. ;-)
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.
I'm not sure the left wants to be "responsible" exactly.
To me it's more like the left, for independent reasons, has a strong desire to tax the rich and cut military spending and perhaps even "defund the police." For rhetorical purposes, they then like to adopt an austerity mindset where it's like "we should be spending this money on useful social services instead." But there's actually no tradeoff here. You can hire cops AND mental health professionals. The government can build aircraft carriers AND high-speed rail.
Well, you are obviously correct. Take Sweden, for example, who managed to develop the world's fourth biggest air force (and a nuclear deterrent program that wisely was cancelled) and a welfare state in the 50:ies and 60:ies with the social democrats perpetually in government. And I think you are correct that for identity politics reasons (some) lefties always want to tax the rich and cut military spending even when there is no other point. The austerity is the point.
The left needs to move away from that mindset.
But even if the left wants to punish rich people and defense contractors for identity reasons, it begs the question why Democratic adminstrations use the freed up funds to close down deficits. This is a strong empirical pattern the last 40 years, Republican adminstrations blow up deficits and Democratic administrations bring them down. I think that being responsible and be viewed as viable at governing is part of the answer. In some ways this is also an identity politics issue. It is also part of the problem, because as you point out in the original post, successful governance these days may mean to be irresponsible, albeit in intelligent ways. This will be a challenge for lefties.
Municipal governments - which largely control police budgets - have real constraints on deficit spending in a way that is structurally different than the federal government. Stockton, California went bankrupt in 2012. Detroit went bankrupt in 2013. There is a reason that municipal bonds have much heftier coupons than treasuries.
Illinois sold10-year bonds with a 5.65% yield - in 2020.
And then, one day, you can't. You actually had the perfect economic situation for sustaining an expansive immigration policy and the consequent economic growth and rejected it. What are the odds of using this cure with higher interest rates and rising unemployment?
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.
There is indeed a nascent (ha!) "pro-natalist" movement on the right. Think Marco Rubio, who pushed the expanded CTC in the Trump tax cuts. Or Rubio, Romney, and Lee, who pushed for the use of social security benefits to fund parental leave. Ross Douthat has written at length about the problems of low fertility rates, essentially the central villain in "The Decadent Society". From that perspective, it is both an economic challenge and a cultural battlefield.
If the GOP even manages to shake of the insanity of the Trump years and reinvent itself - which is not a given! - I expect that it will emerge as a more populist party organized around supporting family formation.
part of the gop wants the government to get "down to the size where we can drown it in the bathtub", so new universal programs are out. another part of the gop doesn't want targeted programs because of demagoguery over who will be the recipients of the program. hard to build a coalition around that.
why it took so long for dems to (kinda) adopt it is baffling. maybe it's the obsession with only having targeted programs to avoid higher income people from being government recipients. who cares?
either way, 100% agree. get this universal child allowance going. ice cream party time.
Wars in the Middle East? What about nation rebuilding in the Middle east?
Rand Paul is the only voice speaking to the enormous waste of money with no tangible improvement in Afghanistan.
Electric recharging stations when they have yet to identify even one electric vehicle in Afghanistan.
Those wasteful extravagances have the Dim Dems Podesta/Blumenthal corruption contracts written all over em. So the Hawks purchase the wars with boondoogles of contract giveaways to the dems.
I like the way you think. Sound bread-and-butter stuff. But I’m concerned at this stage that rebalancing the courts might be a necessary condition for the rest.
The insanity of a Marine Corps General Mad Dawg Mattis calling for the elimination of "America First".
What? Biden is gonna let Iran get nukes, prompting every other Middle Eastern shithole country to get nukes and has a Israel hawk as SoS too? Back to regime change in Syria and targeting Assad?
How exactly is this a coherent foreign policy strategy? Is it just not emerging or is this shit as crazy as it appears?
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.
Whatever stagflation is caused by. You can only inflate away your debts if your nominal income inflates too (even better if your real income grows). If you graduate and don’t find a job, inflation isn’t really helpful.
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.
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.
If you mention MMT then the MMT People come out of the woodwork to explain that you have mischaracterized MMT. I think it's better to just say what I think.
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?
You are correct. Inflation is the problem. Matt probably should have been explicit about that, instead of taking it as a given. If rates were high in isolation, indicating a shortage of capital, you would substitute capital for labour (i.e. buy fewer machines and hire more workers), and rates would come down. The real problem is when both capital and labour are scarce. That produces inflation, and it prevents the Fed from cutting rates due to its dual mandate of price stability alongside maximising employment. As one of Matt's shows, that's what happened in the early 1980s, when the Fed deliberately caused a recession by raising rates to 15%, as it was making a concerted push against inflation.
This is a really critical point, that a lot of problems in our economy seem to be caused by persistently low inflation, or perhaps a better way to say it is that low inflation is a symptom of problems in our economy. It's like we've been stagnating for decades, with low growth and especially low productivity growth. If wages were growing, we would have inflationary pressure and the Fed would have to raise interest rates. The fact that that hasn't happened is a bad thing, because it means standard of living for most people is sort of stuck.
This is a helpful explanation -- if I've got it right, then, the chain of events would be a higher population would increase demand, which would lead to higher inflation, so the Fed would raise the interest rates. Is that right?
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 had some confusion on this point as well. Maybe I'm reading too much into it, but it seems like one unstated premise is that due to the much-discussed structural asymmetry favoring Republicans (primarily urban geographical sorting that leads to vote wasting in the electoral college and house races + small-state advantages in the Senate) a "neutral" political environment is going to favor Republicans. In a theoretically symmetrical system, there would be a more even tension between the "radical" and "moderate" groups in either party. In the current environment, though, a situation where there are no constraints on government spending due to low interest rates leads to unchecked spending on things that conservatives like (military) and broadly popular programs like Social Security and Medicare.
I think that Matt is saying population growth and low interest rates are linked and have both created a bad political environment for the center left. Fixing one problem will fix the other.
Yeah. I can accept low interest rates are breaking our politics but I'm having a hard time getting to "raising rates is good" Seems like there should be another way out of this. But as always, Matt is making a very thought-provoking argument!
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.
That's a cool article, thanks for sharing! Yeah I think it would. If I'm understanding it right, we'd raise interest rates by increasing demand for physical capital like solar panels and EVs.
The problem is that there is no adequate mechanism for all the money that's part of the global savings glut to flow from big institutions to me (a guy who would really like to put solar panels on my house but can't quite justify the cost and the HOA headache).
The government could solve that problem by doing as Saul Griffith suggests and borrowing a bunch of money, then offering it to me as a solar panel loan at a rate low enough that I'd be an idiot to not take it. Then the bankers would have their RoI, I would have my solar panels, manufacturers and electricians would have their demand, and we'd have taken a step towards raising interest rates by eating up some of that savings glut.
“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.
Agree that while Matt mentions “high interest rates were a practical problem in people’s lives,” he doesn’t return to those risks later in the piece. Wonder if that’s because population led interest rate growth will also be a boon for economic growth and that will leave everyone better off?
That may be true in aggregate (I would guess it is) but doesn’t speak to the distributional impacts on borrowers vs savers.
I think you're right about this to a point. Low interest rates are helpful to individual borrowers in some ways and harmful in others.
A small business owner may be able to get a loan in this environment, but it'll still require a ton of collaterall and come with a hefty interest rate. Small business are risky in the best of times. For the marginal business owner that wouldn't have qualified had money been tighter, they're probably more likely to fail and blow up their wealth than end up securely better off.
You're also going to get a general bidding up of assets as all that easy money goes looking for a return. People without assets will find it increasingly difficult to accumulate them and the gap between those with no assets and those who have a 401k or own property will widen.
As I said... the trade offs are complex! However while wider availability of cheaper credit certainly will increase bankruptcies by some amount I am fairly confident it is outweighed by the vast benefit to borrowers of lower interest costs.
The asset price issue is real but the negative impacts I think are driven more by the change in rates (as rates go down asset prices rise) than the absolute level... and rates can’t go down much farther!
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.
Editor: FFS Matt! ANOTHER article of monetary policy!
MY: This is censorship! I'm leaving for Substack!
I miss the days of the Economics of Ice and Fire. Hopefully Matt will make a return to blogging about the economics of fictional societies now that he's free from Vox's obsession with the real world. ;-)
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.
I'm not sure the left wants to be "responsible" exactly.
To me it's more like the left, for independent reasons, has a strong desire to tax the rich and cut military spending and perhaps even "defund the police." For rhetorical purposes, they then like to adopt an austerity mindset where it's like "we should be spending this money on useful social services instead." But there's actually no tradeoff here. You can hire cops AND mental health professionals. The government can build aircraft carriers AND high-speed rail.
Well, you are obviously correct. Take Sweden, for example, who managed to develop the world's fourth biggest air force (and a nuclear deterrent program that wisely was cancelled) and a welfare state in the 50:ies and 60:ies with the social democrats perpetually in government. And I think you are correct that for identity politics reasons (some) lefties always want to tax the rich and cut military spending even when there is no other point. The austerity is the point.
The left needs to move away from that mindset.
But even if the left wants to punish rich people and defense contractors for identity reasons, it begs the question why Democratic adminstrations use the freed up funds to close down deficits. This is a strong empirical pattern the last 40 years, Republican adminstrations blow up deficits and Democratic administrations bring them down. I think that being responsible and be viewed as viable at governing is part of the answer. In some ways this is also an identity politics issue. It is also part of the problem, because as you point out in the original post, successful governance these days may mean to be irresponsible, albeit in intelligent ways. This will be a challenge for lefties.
Municipal governments - which largely control police budgets - have real constraints on deficit spending in a way that is structurally different than the federal government. Stockton, California went bankrupt in 2012. Detroit went bankrupt in 2013. There is a reason that municipal bonds have much heftier coupons than treasuries.
Illinois sold10-year bonds with a 5.65% yield - in 2020.
https://www.reuters.com/article/usa-illinois-bonds/illinois-hit-with-fat-yields-in-800-million-bond-sale-idUSL1N2CV1QR
And then, one day, you can't. You actually had the perfect economic situation for sustaining an expansive immigration policy and the consequent economic growth and rejected it. What are the odds of using this cure with higher interest rates and rising unemployment?
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.
There is indeed a nascent (ha!) "pro-natalist" movement on the right. Think Marco Rubio, who pushed the expanded CTC in the Trump tax cuts. Or Rubio, Romney, and Lee, who pushed for the use of social security benefits to fund parental leave. Ross Douthat has written at length about the problems of low fertility rates, essentially the central villain in "The Decadent Society". From that perspective, it is both an economic challenge and a cultural battlefield.
If the GOP even manages to shake of the insanity of the Trump years and reinvent itself - which is not a given! - I expect that it will emerge as a more populist party organized around supporting family formation.
part of the gop wants the government to get "down to the size where we can drown it in the bathtub", so new universal programs are out. another part of the gop doesn't want targeted programs because of demagoguery over who will be the recipients of the program. hard to build a coalition around that.
why it took so long for dems to (kinda) adopt it is baffling. maybe it's the obsession with only having targeted programs to avoid higher income people from being government recipients. who cares?
either way, 100% agree. get this universal child allowance going. ice cream party time.
I’ve kind of stopped analyzing what Republicans really want.
I was sort of optimistic in the initial era of Trump, that maybe the Republicans would go more populist. But, you know Trump is wacko.
Quite frankly, I’ve decided the Democrats have a better chance of giving me what I want.
It’s just a matter of whether they give me what I want, without giving me what I don’t want.
My top wants.
Massive infrastructure spending
Pro labor union laws
Increase the minimum wage (I actually make a good living, but this would help my wife and my kids)
A better unemployment wage.
Higher education reform (I don’t want student debt canceled unless it includes a comprehensive plan for the future)
A reformed immigration system, along the lines of New Zealand and Australia.
UBI (Free money is free money)
Higher taxes for rich people. Not as a monetary policy, just because I don’t like rich people
Police reform. Let’s get rid of qualified immunity.
A public option health care plan
No crazy tweets
—————————-
What I don’t want
Cancel culture
Weird language terms like a LatinX (I don’t know why it annoys me, but why do we try and call people somethings they don’t even want to be called)
Videos from Hollywood B list people that have inspirational messages, and they repeat the same phrase over and over again in a montage.
Defunding the police
Student loan cancellation for the upper middle class
Higher taxes on me
Too much gun control (I know this will be unpopular in this comment section)
Electoral college reform
packing the courts
Anything that screws with my military retirement healthcare
Wars in the Middle East
Stuff to get too expensive
Wars in the Middle East? What about nation rebuilding in the Middle east?
Rand Paul is the only voice speaking to the enormous waste of money with no tangible improvement in Afghanistan.
Electric recharging stations when they have yet to identify even one electric vehicle in Afghanistan.
Those wasteful extravagances have the Dim Dems Podesta/Blumenthal corruption contracts written all over em. So the Hawks purchase the wars with boondoogles of contract giveaways to the dems.
Out of all the things, you chose that to comment?
I’m anti-lost causes
obviously. haha He can read Cletus! Gawd Dang it's a miracle.
I felt for sure my gun position would get me canceled.
I will take foreign policy any day.
If I was King, we would only fight wars in places with cute women and good beer.
(22-years in USAF)
I like the way you think. Sound bread-and-butter stuff. But I’m concerned at this stage that rebalancing the courts might be a necessary condition for the rest.
The insanity of a Marine Corps General Mad Dawg Mattis calling for the elimination of "America First".
What? Biden is gonna let Iran get nukes, prompting every other Middle Eastern shithole country to get nukes and has a Israel hawk as SoS too? Back to regime change in Syria and targeting Assad?
How exactly is this a coherent foreign policy strategy? Is it just not emerging or is this shit as crazy as it appears?
Anybody gots a pool bet on when terrorist attacks start in the US again?
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.
Yes this would be good and on the arbitrary nature of the 2 % inflation target too: https://www.nytimes.com/2014/12/21/upshot/of-kiwis-and-currencies-how-a-2-inflation-target-became-global-economic-gospel.html
Good point, we need to learn to love inflation (at least when stable, expected, and in single digits)
Great points. I was waiting for the inflation discussion as well.
Only if there is underlying economic growth as opposed to "stagflation".
I thought the enlightened view was that stagflation was really caused by the extrinsic energy shock - nothing comparable in the current picture.
Whatever stagflation is caused by. You can only inflate away your debts if your nominal income inflates too (even better if your real income grows). If you graduate and don’t find a job, inflation isn’t really helpful.
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.
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.
You really went this whole article without mentioning MMT : )
If you mention MMT then the MMT People come out of the woodwork to explain that you have mischaracterized MMT. I think it's better to just say what I think.
I think you are mischaracterizing how MMT people react to mentions of MMT.
This is the way.
Too bad you don't have to say it three times before they appear.
So MMT People are just like Libertarians?
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?
You are correct. Inflation is the problem. Matt probably should have been explicit about that, instead of taking it as a given. If rates were high in isolation, indicating a shortage of capital, you would substitute capital for labour (i.e. buy fewer machines and hire more workers), and rates would come down. The real problem is when both capital and labour are scarce. That produces inflation, and it prevents the Fed from cutting rates due to its dual mandate of price stability alongside maximising employment. As one of Matt's shows, that's what happened in the early 1980s, when the Fed deliberately caused a recession by raising rates to 15%, as it was making a concerted push against inflation.
This is a really critical point, that a lot of problems in our economy seem to be caused by persistently low inflation, or perhaps a better way to say it is that low inflation is a symptom of problems in our economy. It's like we've been stagnating for decades, with low growth and especially low productivity growth. If wages were growing, we would have inflationary pressure and the Fed would have to raise interest rates. The fact that that hasn't happened is a bad thing, because it means standard of living for most people is sort of stuck.
This is a helpful explanation -- if I've got it right, then, the chain of events would be a higher population would increase demand, which would lead to higher inflation, so the Fed would raise the interest rates. Is that right?
Yes that's right
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 had some confusion on this point as well. Maybe I'm reading too much into it, but it seems like one unstated premise is that due to the much-discussed structural asymmetry favoring Republicans (primarily urban geographical sorting that leads to vote wasting in the electoral college and house races + small-state advantages in the Senate) a "neutral" political environment is going to favor Republicans. In a theoretically symmetrical system, there would be a more even tension between the "radical" and "moderate" groups in either party. In the current environment, though, a situation where there are no constraints on government spending due to low interest rates leads to unchecked spending on things that conservatives like (military) and broadly popular programs like Social Security and Medicare.
I think that Matt is saying population growth and low interest rates are linked and have both created a bad political environment for the center left. Fixing one problem will fix the other.
Yeah. I can accept low interest rates are breaking our politics but I'm having a hard time getting to "raising rates is good" Seems like there should be another way out of this. But as always, Matt is making a very thought-provoking argument!
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.
Nuclear power plants ringing every big metro, solar panels on every roof, an EV in every garage.
Ya, there was a great piece by Saul Griffith (https://www.saulgriffith.com/blog/solving-climate-change-with-a-loan) that talked about this. Would it jive with Matt's view on higher interest rates?
That's a cool article, thanks for sharing! Yeah I think it would. If I'm understanding it right, we'd raise interest rates by increasing demand for physical capital like solar panels and EVs.
The problem is that there is no adequate mechanism for all the money that's part of the global savings glut to flow from big institutions to me (a guy who would really like to put solar panels on my house but can't quite justify the cost and the HOA headache).
The government could solve that problem by doing as Saul Griffith suggests and borrowing a bunch of money, then offering it to me as a solar panel loan at a rate low enough that I'd be an idiot to not take it. Then the bankers would have their RoI, I would have my solar panels, manufacturers and electricians would have their demand, and we'd have taken a step towards raising interest rates by eating up some of that savings glut.