Do you think there's anything to the argument I've heard that continually pumping money into the economy via low interest rates and deficit spending actually increases inequality in the long term because the usual suspects (wall street, big business) has a knack for soaking in up?
It seems to me that there is some element of truth to it, for sure. But the alternative of NOT pumping money into the economy as needed (as actually needed) is even worse, and we'll just have to tackle inequality through mostly-unrelated means.
Noah, I agree that the current consensus is much more pro-stimulus than in 2009. What could change that consensus is...er my article https://seekingalpha.com/article/4361570-skill-stalagmites-technology-stalactites. In that article I argue that the reason for low business investment - and thus low interest rates - is because firms are choosing not to invest more. And the reason for that is firms have a minimum return on capital hurdle, which they are loathe to go below.
Could someone help me understand how rising interest rates could pose an issue? Doesn't the federal government set the interest rates? I don't see how this is something that could happen exogenously to create an issue with sustainability of the debt
Isn't it a well-established fact at this point that even NEGATIVE interest rates don't *necessarily* cause inflation? And then there's the whole 2008-2012 (ish...I forget the exact years) near-zero interest + three rounds of QE at the same time experiment we ran which had no definite effect on inflation....
My understanding is that the primary threat FROM rising interest rates is that the debt will become unsustainable long-term if there's ever a total panic in the bond market for some reason, be it a good reason (actual civil war breaking out in the US, a massive nuclear war breaking out with mutually assured destruction out the window, or something like that) or a silly reason (something like a baseless but widespread true hysteria that a civil war is imminent/underway when it's really not.)
Part of the problem with knowing what all could trigger rising interest rates originating in the bond market SEEMS involve so much geopolitics, that those who might know the most can't tell "we the people," because it might give ideas to malicious foreign actors, perhaps.
Interest rates are always what the Fed says are. In terms of inflation, with the implementation of a Job Gty as part of a full employment fiscal policy, Inflation is easily managed in these circumstances. For example, the Job Gty/Green New Deal law should include AUTOMATIC across-the-board tax increases that kick in when certain monthly wage inflation target are hit-say for 6 months in a row. These can include:
That is a very important topic, which I'll try to cover in subsequent posts! The short answer is that no one knows, and people have a variety of wild guesses.
What about the relative rise of HANK within macro models? I doubt these bigshots would get much air time making Ricardian Equivalence arguments nowadays.
Our thinking on income/employment risk, search frictions, precautionary saving, household liquidity, borrowing constraints etc has moved on a lot since the mid-00s, even if no single element was anything new to the profession....and that's to say nothing of the firm side.
It seems like we (or policy and media macro) got stuck with a weird mix of RBC/NK rep agent thinking for a long time
The heuristic I learned in the last crisis was “rates low, unemployment high = more spending”, “unemployment low, rates high = less spending”
It’d be cool if an actual macroeconomist formalised some kind of model with that heuristic in it so we got some kind of thresholds for where to switch across. My heuristic is to just plot them both on a graph and use whichever is higher in raw percentage terms, but there’s probably a more scientific way to do it.
Interesting article! Can you point to other sources about the failures of austerity or that comment on the evolving recognition for fiscal stimulus in the face of the pandemic? I'm fine with both academic sources and stuff written for laypeople.
Certainly! I added three links to simple explanations of academic papers about the failure of austerity in the Eurozone crisis. They are in the first sentence of the paragraph that begins with "But such worries". As for evolving recognition of the importance of fiscal stimulus in the face of the pandemic, I will be writing much more about that! For now, the symposium video is great, if you have time to watch. :-)
Hi Noah, thanks for this. I'm one of those former amateur deficit hawks that have come around to the notion that things have fundamentally changed such that deficits no longer seem to matter as much, and "giving people money" is the best way to approach fiscal stimulus. However, I still have this nagging fear that while fiscal stimulus is pumping up the mean expected outcome we are simultaneously pumping up the long-tail risks as well in ways that we don't understand yet. How worried, if at all, do you think I should be?
I'm not Noah, but I think there's an element of truth to that, however small, but this is something unavoidable, and we've been on this trajectory ever since the 1970's, if not the 1930's.
And the old "gold standard" system was demonstrably highly volatile, resulted in *absolute catastrophe* once, and was abandoned for good reason, too.
I think there's very good reason to believe as long as we keep spending at levels where it doesn't cause inflation to spiral totally out of control, we're not in a higher degree of danger of the debt itself causing a disaster than we were in 2011 when the folks at S&P decided to get political and try to enforce deficit hawkery from the outside.
To wring one's hands about the lack of a unifying theory describing the necessity of a massive fiscal response: Clench your teeth and SAY IT!: MMT. The Job Gty. State the obvious.
This has been an interesting period to be alive and aware of what's happening with economics, watching the consensus in economics evolve the way the "scientific consensus" does in regular science, in response to evidence.
I'm often not a fan of Paul Krugman, but his little NYT blog really did more good in this respect over the last decade than most people will ever be able to fathom, I think. I honestly think without it, Trump's Treasury dept and the Fed would have behaved very differently. I think he changed the minds of some of the "Serious People."
Or...depressing though...they're all just waiting for Biden to get in office to unleash some newfangled pro-austerity argument they have written up in some secret drawer somewhere. LOL
Hopefully I'm just being overly cynical wondering about that.
I think the Antifa riots and looting in major cities is larger story. You can pull stories about crazy people on both sides. The riots were supported by major democrat politicians. Republicans generally condemn the crazies.
I am tempted to write a very long comment. I plan to write a blog post.
1. I won’t defend DSGE models, but I note that not all DSGErs predicted rising interest rates or inflation. In particular Michael Woodford is a very leading DSG equilibrator and he sure didn’t. The models performed terribly, but that is nothing new, you were totally disgusted by them well before 2008 ( I was disgusted by them well before 1988).
2. Fiscal stimulus does not require borrowing. The balanced budget multiplier is positive. Also transfers from the rich to the poor do cause higher spending. The idea that one must accept more debt to stimulate is based on the assumption that one can’t raise taxes on the rich
3. There is no problem with US (or Japanese or Eurozone wide) public debt. You showed extremely low *long term* interest rates. If the Treasury sells 30 year bonds, increases in interest rates over the next 30 years are trouble for the investors not the Treasury. The current debt (with interest) should be worth about 50% of GDP by 2050. It is not a problem. It is much less of a problem if more bonds are sold to fund a sovereign wealth (really Sovereign carry trade) fund.
If only this sentiment could trickle down into academic macroeconomics as well. DSGE models need to be tossed in the trash.
Do you think there's anything to the argument I've heard that continually pumping money into the economy via low interest rates and deficit spending actually increases inequality in the long term because the usual suspects (wall street, big business) has a knack for soaking in up?
It's an interesting argument, which I'll address in future posts.
It seems to me that there is some element of truth to it, for sure. But the alternative of NOT pumping money into the economy as needed (as actually needed) is even worse, and we'll just have to tackle inequality through mostly-unrelated means.
Noah, I agree that the current consensus is much more pro-stimulus than in 2009. What could change that consensus is...er my article https://seekingalpha.com/article/4361570-skill-stalagmites-technology-stalactites. In that article I argue that the reason for low business investment - and thus low interest rates - is because firms are choosing not to invest more. And the reason for that is firms have a minimum return on capital hurdle, which they are loathe to go below.
Could someone help me understand how rising interest rates could pose an issue? Doesn't the federal government set the interest rates? I don't see how this is something that could happen exogenously to create an issue with sustainability of the debt
If interest rates go up and the Fed has to resort to monetary easing to drive them back down, it could theoretically drive up inflation.
Isn't it a well-established fact at this point that even NEGATIVE interest rates don't *necessarily* cause inflation? And then there's the whole 2008-2012 (ish...I forget the exact years) near-zero interest + three rounds of QE at the same time experiment we ran which had no definite effect on inflation....
My understanding is that the primary threat FROM rising interest rates is that the debt will become unsustainable long-term if there's ever a total panic in the bond market for some reason, be it a good reason (actual civil war breaking out in the US, a massive nuclear war breaking out with mutually assured destruction out the window, or something like that) or a silly reason (something like a baseless but widespread true hysteria that a civil war is imminent/underway when it's really not.)
Part of the problem with knowing what all could trigger rising interest rates originating in the bond market SEEMS involve so much geopolitics, that those who might know the most can't tell "we the people," because it might give ideas to malicious foreign actors, perhaps.
Interest rates are always what the Fed says are. In terms of inflation, with the implementation of a Job Gty as part of a full employment fiscal policy, Inflation is easily managed in these circumstances. For example, the Job Gty/Green New Deal law should include AUTOMATIC across-the-board tax increases that kick in when certain monthly wage inflation target are hit-say for 6 months in a row. These can include:
a) Income Taxes,
b) Sales/VAT Taxes
c) Asset Value (or Wealth) Taxes
That'll cool things off pronto.
Well if inflation makes a comeback then u might in the long term see rates going up
maybe the economy too complex and too ever evolving for any grand theory to ever predict outcomes consistently over multiple generations
Hey Noah. What will put upward pressure on interest rates on US Treasuries? When might we have to worry about deficit spending?
That is a very important topic, which I'll try to cover in subsequent posts! The short answer is that no one knows, and people have a variety of wild guesses.
Interest rates are whatever the Fed says they are, so there is no need to worry about interest rates.
Could you please touch on Systemic and Structural inequality and its impact? Sometime...
I shall
What about the relative rise of HANK within macro models? I doubt these bigshots would get much air time making Ricardian Equivalence arguments nowadays.
Our thinking on income/employment risk, search frictions, precautionary saving, household liquidity, borrowing constraints etc has moved on a lot since the mid-00s, even if no single element was anything new to the profession....and that's to say nothing of the firm side.
It seems like we (or policy and media macro) got stuck with a weird mix of RBC/NK rep agent thinking for a long time
The heuristic I learned in the last crisis was “rates low, unemployment high = more spending”, “unemployment low, rates high = less spending”
It’d be cool if an actual macroeconomist formalised some kind of model with that heuristic in it so we got some kind of thresholds for where to switch across. My heuristic is to just plot them both on a graph and use whichever is higher in raw percentage terms, but there’s probably a more scientific way to do it.
Isn't that policy message what you get in the standard IS/LM model?
Interesting article! Can you point to other sources about the failures of austerity or that comment on the evolving recognition for fiscal stimulus in the face of the pandemic? I'm fine with both academic sources and stuff written for laypeople.
Certainly! I added three links to simple explanations of academic papers about the failure of austerity in the Eurozone crisis. They are in the first sentence of the paragraph that begins with "But such worries". As for evolving recognition of the importance of fiscal stimulus in the face of the pandemic, I will be writing much more about that! For now, the symposium video is great, if you have time to watch. :-)
can you write about inequality causes and solutions?
Will do!
ditto
Hi Noah, thanks for this. I'm one of those former amateur deficit hawks that have come around to the notion that things have fundamentally changed such that deficits no longer seem to matter as much, and "giving people money" is the best way to approach fiscal stimulus. However, I still have this nagging fear that while fiscal stimulus is pumping up the mean expected outcome we are simultaneously pumping up the long-tail risks as well in ways that we don't understand yet. How worried, if at all, do you think I should be?
I'm not Noah, but I think there's an element of truth to that, however small, but this is something unavoidable, and we've been on this trajectory ever since the 1970's, if not the 1930's.
And the old "gold standard" system was demonstrably highly volatile, resulted in *absolute catastrophe* once, and was abandoned for good reason, too.
I think there's very good reason to believe as long as we keep spending at levels where it doesn't cause inflation to spiral totally out of control, we're not in a higher degree of danger of the debt itself causing a disaster than we were in 2011 when the folks at S&P decided to get political and try to enforce deficit hawkery from the outside.
To wring one's hands about the lack of a unifying theory describing the necessity of a massive fiscal response: Clench your teeth and SAY IT!: MMT. The Job Gty. State the obvious.
This has been an interesting period to be alive and aware of what's happening with economics, watching the consensus in economics evolve the way the "scientific consensus" does in regular science, in response to evidence.
I'm often not a fan of Paul Krugman, but his little NYT blog really did more good in this respect over the last decade than most people will ever be able to fathom, I think. I honestly think without it, Trump's Treasury dept and the Fed would have behaved very differently. I think he changed the minds of some of the "Serious People."
Or...depressing though...they're all just waiting for Biden to get in office to unleash some newfangled pro-austerity argument they have written up in some secret drawer somewhere. LOL
Hopefully I'm just being overly cynical wondering about that.
Unrest on the left and threats of violence on the right? Reality - actual violence on the left. Silly and inaccurate comment from the author.
I think the Antifa riots and looting in major cities is larger story. You can pull stories about crazy people on both sides. The riots were supported by major democrat politicians. Republicans generally condemn the crazies.
I am tempted to write a very long comment. I plan to write a blog post.
1. I won’t defend DSGE models, but I note that not all DSGErs predicted rising interest rates or inflation. In particular Michael Woodford is a very leading DSG equilibrator and he sure didn’t. The models performed terribly, but that is nothing new, you were totally disgusted by them well before 2008 ( I was disgusted by them well before 1988).
2. Fiscal stimulus does not require borrowing. The balanced budget multiplier is positive. Also transfers from the rich to the poor do cause higher spending. The idea that one must accept more debt to stimulate is based on the assumption that one can’t raise taxes on the rich
3. There is no problem with US (or Japanese or Eurozone wide) public debt. You showed extremely low *long term* interest rates. If the Treasury sells 30 year bonds, increases in interest rates over the next 30 years are trouble for the investors not the Treasury. The current debt (with interest) should be worth about 50% of GDP by 2050. It is not a problem. It is much less of a problem if more bonds are sold to fund a sovereign wealth (really Sovereign carry trade) fund.