Ryan Avent on Secular Stagnation

In the previous post I sort of hinted that Ryan Avent might be a bit more negative about the Summers/Krugman/Bernanke debate than he was letting on, when I suggested that he was being polite.  Marcus Nunes pointed me to a great Avent post from 2013 that makes this criticism much more explicit:

I think it’s important and welcome for someone of Mr Summers’ stature to point out how serious a problem the zero lower bound is and to note that it is not going away any time soon. But this discussion sorely needs a dose of real talk, and soon. Or nominal talk, I should say.

Just why the real natural rate of interest is so low is an interesting question. Maybe it’s down to a global savings glut, spurred by emerging-market reserve accumulation and exchange-rate management. Maybe it is a transitory symptom of widespread deleveraging. Maybe its roots are more structural in nature: a product of demographic or technological trends. I have my own suspicions, but the important thing to point out is that for the purpose of this discussion and this crisis it doesn’t matter.

The zero lower bound is a nominal problem. However low the real interest rate, an economy can keep nominal rates safely in positive territory by running a sufficiently high rate of inflation. Back in August, another eminent economist, Robert Hall of Stanford University, contributed a paper on the zero lower bound to the Kansas City Fed’s Jackon Hole conference, in which he estimated that the market-clearing real rate of interest is -4%. Now again, just why the real, natural rate of interest is currently -4% is an interesting question, but it’s irrelevant to the challenge of closing the output gap. All that matters there is that expected inflation is between 1% and 2% instead of near 4%. That’s the problem; that’s what’s keeping tens of millions of people out of work and hundreds of millions languishing in a perpetually weak economy: a couple of percentage points of inflation.

And central banks are entirely to blame for that.

So basically Ryan is saying that the real problem is nominal.

PS.  Off topic, Robin Hanson has an excellent post discussing a graph on intangible corporate assets, which played a role in my recent post on how regulation may be increasing inequality.


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24 Responses to “Ryan Avent on Secular Stagnation”

  1. Gravatar of Benjamin Cole Benjamin Cole
    4. April 2015 at 19:27

    Excellent blogging!

    This directionless fussing around by Krugman, Bernanke and Summers is embarrassing, if not worthy of a Shakespearean farce. I will not mention the Three Stooges.

    If the natural interest rate is -4%, then go to the mattresses, lock the Fed front doors, and run the money presses red hot for long, long time.

    The sad additional fact is, I suspect in today’s non-inflation-prone economy, thus is plenty of room for error on the upside. That is, the Fed might “overshoot” and hit 4% inflation, but that will be hard to do, obtained only after a lot of prosperity in Fat City, and once done easily corrected.

    Sheesh, even Fed Chair Volcker bashed the dickens out of rising double-digit 1980s inflation, in a year.

    (Side note: I recently pondered if an IT-band of 2.5% to 3.5% would work better than NGDPLT, in Historinhas. If a central bank has poor real-time data on GDP, but okay data on prices, then perhaps an IT band is okay, though a little higher than the RBA’s).

    I keep coming back to it: A peevish fixation on microscopic rates of inflation is a highly destructive monetary policy. The origins of this unhealthy monetary perversion are recent; the Nixonians and Reaganauts were not monomaniacally obsessed with prices, quite the opposite.

    Let us hope the righty-tighties secretly just hate Obama, and want him to fail, and so call for tight money.

    If the GOP should win the WH, and control both houses in 2016, there will unfold a fascinating chapter in Fed history. Will the GOP honk for tighter and tighter money, or discover the merits of a “new, Republican growth-oriented monetary policy.”

    We already know that “deficits don’t matter” come 2016. That’s a given.

    And no, the Donks are no better.

  2. Gravatar of Major.Freedom Major.Freedom
    4. April 2015 at 19:48

    The so-called “zero bound problem” is very strong evidence that the min problem throughout the economy is real, not nominal. NGDP has continued to grow at above zero rates for almost 6 years now, and yet interest rates remain at historical lows.

    The reason interest rates are so low is because the Fed has to maintain LOOSE monetary policy in order to even keep interest rates that low and NGDP growing at the rate it is.

    So-called “velocity of money” being at historical lows is also strong evidence that the main problem throughout the economy is real, not nominal.

    Actually, I should restate the above. The main problem from another perspective is indeed nominal, in that the real problems with require such loose monetary policy are themselves caused by too loose money prior.

  3. Gravatar of Ray Lopez Ray Lopez
    4. April 2015 at 20:28

    Who is Mr Ryan Avent? Why is his view important? Googling, a ruddy-complexion reporter for the Economist. OK, Scott is into faith-based economics and worship of personalities, appropriate for Catholic Easter I suppose.

    Sumner directs us to his Sep 14, 2009 Cato article, “The Real Problem Was Nominal” – choice quotes from here – “The sub-prime crisis that began in late 2007 was probably just a fluke, and has few important implications for either financial economics or macroeconomics.” (!) – not true at all. And Sumner in a footnote blames GSEs, and advocates more regulation (ugh!), but this does not explain why the housing boom was a worldwide phenomena, even in countries like Greece that have no GSEs to promote real estate. Truth is, the housing boom was largely irrational exuberance, like the stock boom was.

    “If we think of Hume’s theory in terms of the famous equation of exchange (M*V = P*Y)” – but it’s not P*Y but P*Q. Y is a proxy for Q, and an imperfect proxy at that. See economist Richard A. Werner for more.

    “Friedman simply meant that Hume thought of nominal shocks in terms of one-time changes in the price level, or NGDP, whereas Friedman suggested that what really mattered were changes in the growth rate of prices. Today we think in terms of unanticipated changes, though in practice we haven’t advanced far beyond Friedman’s focus on changes in the rate of growth.” – translation: NGDP price levels (Hume) did not work, NGDP rates of change (Friedman) did not work, so monetarists took a page out of the “Rational Expectations” school, trendy in the 70s and 80s, to add in ‘expectations’ of unanticipated changes to NGDP (and that don’t work either). Simple proposal: I will go away if Sumner provides empirical evidence that MM works. I have, in other posts, provided evidence it does not work (cites to papers by Sim, by Werner, by way of example).

    As MF says, Sumner appeals to authority (himself) a lot. Citing yourself and a ruddy-cheeked Economics reporter (who looks about 24 years old) is nothing but “faith-based economics” not “economic science”.

    Happy Easter!

  4. Gravatar of Kevin Erdmann Kevin Erdmann
    4. April 2015 at 20:41

    I just don’t understand why everyone thinks it’s a big mystery why there aren’t enough low risk securities. There is at least a $15 trillion gap in real estate assets compared to any level we would expect from long term past trends.

    http://research.stlouisfed.org/fred2/graph/?g=16yO

    So, if you want an investment with relatively stable income, you can put money in the bank or buy some treasuries, or buy real estate.

    Buying real estate is really easy. You can somehow buck the trend and qualify for a new mortgage, or if you happen to have a quarter million dollars, you can just buy a house outright. Or, if you have institutional quantities of money that can really move markets, you just need to create an entire organizational infrastructure for renting it out.

    For some reason, everyone has decided that starting in 2007, Americans began a new era where real estate values never increase again and new houses aren’t built. We’ve gone 6 years now without a functioning mortgage market and housing starts below anything the country has ever seen, and gosh darn it, we just can’t figure out why there never seem to be enough low risk investment opportunities. What a mystery!

    It’s like the Amazing Kreskin secretly put everyone in a trance.

  5. Gravatar of Benjamin Cole Benjamin Cole
    4. April 2015 at 23:22

    Kevin:

    Is the U.S. really undersupplied with residential real estate?

    On commercial, we may have too much office, ample retail, and enough warehouses.

    BTW, I think the latest issue of The Economist has an article you would like on local housing restrictions. Nobody wants cheap apartments next to their house!

    I agree with you in one regard: I think every major city in the U.S. should say you can build as high as you want in the central core. Your permits are here and pre-signed.

  6. Gravatar of Ray Lopez Ray Lopez
    4. April 2015 at 23:23

    @Kevin Erdmann– don’t know if you’re trying to be sarcastic, but in fact I do have several million dollars in cash and was going to build a new apartment complex in the DC area, but could not find a decent builder which would justify tearing down slums I already own there. I used a discount rate of 8%/yr–is that too high? Costs in the USA are still too high–and they need to come down some more (via deflation).

    OT – the thought occurred to me: who is Sumner working for in pushing his NGDPLT propaganda? Mercatus Center is staffed by rich folk (Phil Gramm’s wife works there). See this: economist Gene Epstein, in a October 13, 2010 interview, noted that of the total of 19 major and “independent” economists in the U.S., most came from either two important pressure groups for the formulation of the standards reform platform after the crisis of 2008 and who make regular appearances in the press and media, of which 13 are paid by banks and private funds, 8 were board members of banking and private equity firms, 6 work for two or more financial companies, 2 are co-founders of private capital, 2 are consultants, and 1 of them works for two banks as a chairman and a manager. Similarly, in Greek society 80% of financial analysts who appear in the mass media are directly or indirectly related to economic and political authorities.

  7. Gravatar of Ray Lopez Ray Lopez
    5. April 2015 at 01:25

    Off-topic but good: Keynesian sympathy economist Temen on the causes of the Great Depression–Peter Temin (1989), ‘The Spoils of War: The Cause of the Great Depression’–it was a lot more ‘supply side structural’ than MM and Keynesians want you to believe. Temin (1989) has emphasized the effects of the Great War, arguing that, ultimately, the war itself was the shock that initiated the Depression. The legacy of the war included””besides physical destruction, which was relatively quickly repaired””new political borders drawn apparently without economic rationale; substantial overcapacity in some sectors (such as agriculture and heavy industry) and undercapacity in others, relative to long-run equilibrium; and reparations claims and international war debts that generated fiscal burdens and fiscal uncertainty

  8. Gravatar of Ray Lopez Ray Lopez
    5. April 2015 at 01:33

    @myself – I should point out that Temin squarely puts the blame on the Great Depression on policies not structural factors, and he is anti-gold standard, but nevertheless my point stands: there were structural rigidities then–as now e.g. with declining demographics–that made the Great Depression happen. I personally think the Great Depression was a not unprecedented ‘business cycle’ depression, of the kind that also happened in the 19th century. Not much you can do, and certainly not print your way out of it.

  9. Gravatar of ssumner ssumner
    5. April 2015 at 06:41

    Ray, Congratulations on being the first commenter to use the term “ruddy” twice in one comment.

    You said:

    “OT – the thought occurred to me: who is Sumner working for in pushing his NGDPLT propaganda? Mercatus Center is staffed by rich folk (Phil Gramm’s wife works there). See this: economist Gene Epstein, in a October 13, 2010 interview, noted that of the total of 19 major and “independent” economists in the U.S., most came from either two important pressure groups for the formulation of the standards reform platform after the crisis of 2008 and who make regular appearances in the press and media, of which 13 are paid by banks and private funds, 8 were board members of banking and private equity firms, 6 work for two or more financial companies, 2 are co-founders of private capital, 2 are consultants, and 1 of them works for two banks as a chairman and a manager. Similarly, in Greek society 80% of financial analysts who appear in the mass media are directly or indirectly related to economic and political authorities.”

    That’s right, I started blogging in early 2009 in anticipation of Ken Duda funding a research position for me at the Mercatus Center in 2015.

    It must all be corrupt, because the Mercatus Center certainly doesn’t finance research with the opposing (Austrian) point of view.

    Oh wait . . .

    http://mercatus.org/research/austrian-economics

  10. Gravatar of TravisV TravisV
    5. April 2015 at 08:07

    Interesting stuff from Noah Smith and George Selgin:

    http://www.bloombergview.com/articles/2015-03-27/piketty-s-three-big-mistakes-in-inequality-analysis

    http://www.alt-m.org/2015/04/02/the-fed-and-the-recovery-or-qe-not-d

  11. Gravatar of Kevin Erdmann Kevin Erdmann
    5. April 2015 at 08:30

    That Noah Smith article is disappointing. I don’t see how a professor of finance could speculate that we might have seen the end of the equity premium with a straight face when 10 year tips are at 0.5%.
    And in discussing real estate, I don’t think he mentions owner-occupiers at all. Landlords are a relatively small part of this.

  12. Gravatar of Steve Steve
    5. April 2015 at 11:59

    “Off topic, Robin Hanson has an excellent post discussing a graph on intangible corporate assets, which played a role in my recent post on how regulation may be increasing inequality.”

    This is a fascinating topic, but I’ve found when economists do a top down analysis of intangibles it usually becomes a political Rorschach test, i.e., republicans see gov’t regulation, and democrats see corporate monopoly.

    I would humbly suggest the best way to understand this issue is to pick a collection of companies, bottom up, attempt to value them, and then try to reconcile the valuation to the accounting statement.

    I think what you will find is an unsatisfying collection of reasons for the growth of intangible value.

    A big portion of the gap is caused by an accounting profession that has gone awry. You will see writedowns of ‘impaired’ assets, but no writeups of appreciated assets (especially in energy and finance). You will see R&D (in tech and health) and SG&A (branding consumer) that is expensed rather than capitalized. And you will see lots of real estate assets that are not just held at historic cost, but also depreciated to zero, and then leveraged to a negative by debt financed share repurchase. This is true even in real estate companies, and isn’t driven by land values.

    Of course you will also see a fair amount oligopoly power, e.g., Boeing and Intel, and a fair amount of network effects, e.g., Apple and Facebook, and a fair amount of IP value, e.g., Pfizer or Disney.

    Finally, a significant amount of the value gap is the result of inflation and assets held at historic cost. You would think this would show up in the 1970s, but it actually showed up mostly in the 1990s since valuations fell during high inflation and recovered when inflation fell.

    If you want to do a study disentangling all these different effects, more power to you. Unfortunately, as I said before, most economists take a top down view and end up with a political Rorschach test.

  13. Gravatar of Steve Steve
    5. April 2015 at 12:24

    I should also add that, with high corporate tax rates, there is an incentive to expense capex, depreciate the non-depreciating, and then leverage up with debt to exploit tax deductible interest.

    In fact optimal book value is probably close to zero, since tangible assets basically represent underutilized corporate income tax deductions.

  14. Gravatar of Kevin Erdmann Kevin Erdmann
    5. April 2015 at 13:01

    Excellent comments, steve. I agree. I suspect that the share buyback issue is important here as well as the recent large cap gains in real estate. I think you’re right that monopolist and regulatory issues are secondary to more benign reasons.

  15. Gravatar of ThomasH ThomasH
    5. April 2015 at 15:36

    “And central banks are entirely to blame for [too low inflation targeting].”

    This trivially correct, but ignores the tiny “problem” that the Fed’s timid efforts to provide monetary stimulation in the form of QE met with HUGE political opposition. There is even opposition to the Fed reaching its 2% inflation target. How else does one interpret the eagerness to raise nominal interest rates when the price level is still below where it would have been if the 2% target had been met since 2008?

    You’ve got to love this report from Krugman:

    there was a Twitter exchange among Brad DeLong, James Pethokoukis, and others over why Republicans don’t acknowledge that Ben Bernanke helped the economy, and claim credit. Pethokoukis “” who presumably gets to talk to quite a few Republicans from his perch at AEI “” offers a fairly amazing explanation:

    “B/c many view BB as enabling Obama’s spending and artificially propping up debt-heavy economy in need of Mellon-esque liquidation.”

    I’m sure we could find equally insightful analysis by many Northern Euro-Zone politicians even if not as colorful as Gov. Rick Perry who facetiously threatened violence if there was any monetary stimulation.

  16. Gravatar of Don Don
    5. April 2015 at 15:45

    While I am big fan of NGDPLT in theory, I am dubious of it as a solution to our economic woes. Not because it is a bad idea, but because the Fed has proven itself psychologically incapable of hitting a target. The Fed says it targets 2% inflation, but has consistently failed to achieve its target. It has not failed for lack of means, but because of psychology. I see no reason how it would be more successful targeting for NGDPLT than IT.

    Perhaps success in Japan will help the Fed break out of its psychological box.

  17. Gravatar of ThomasH ThomasH
    5. April 2015 at 17:07

    “Who is Mr Ryan Avent? Why is his view important?” – R. Lopez

    Ryan Avent no doubt would have the same question about Ray Lopez if he’d ever heard of him.

  18. Gravatar of ssumner ssumner
    6. April 2015 at 05:21

    Steve, I agree, and as I said in my post I think there are both government factors (IP regs) and non-government factors (network effect monopolies, etc.)

  19. Gravatar of ssumner ssumner
    6. April 2015 at 05:24

    Don, You said:

    “While I am big fan of NGDPLT in theory, I am dubious of it as a solution to our economic woes. Not because it is a bad idea, but because the Fed has proven itself psychologically incapable of hitting a target. The Fed says it targets 2% inflation, but has consistently failed to achieve its target.”

    But that’s precisely the argument in FAVOR of level targeting. If they can hit their target you want growth rate targeting. If they frequently miss then level targeting is better.

    I certainly agree that NGDPLT is not a solution to our economic woes.

  20. Gravatar of Steve Steve
    6. April 2015 at 07:25

    Scott,

    My point is that accounting rules and corporate finance incentives are more important than IP/Monopoly/Gov’t regs in causing the big increase in intangible values.

    Here’s an example:
    Simon Property Group has a market cap of $63 billion, but a book value of only $5 billion. Simon owns ~200 malls, including the Burlington Mall. I doubt the Burlington Mall is worth only $25 million ($5B / 200), even in a new build construction scenario excluding the land value.

    What’s going on? Some combination of historic cost, accumulated depreciation, debt, share repurchase.

    If you look through enough companies, e.g., McDonalds or Disney or Boeing, you will find many many assets that are booked at essentially zero, and a lot of them are real estate or facilities.

    I suppose you could argue that large tracts of suitable land are hard to come by, and gov’t zoning is the cause. The problem is there are plenty of swamps that could be drained for a new theme park, and I’m sure South Carolina could find industrial zoned space given the opportunity to adopt Boeing.

    I’m just trying to bring some tangible data to bear (pun intended).

  21. Gravatar of ThomasH ThomasH
    6. April 2015 at 13:49

    I think Scott misses Don’s point. Does it matter what the target is if the Fed is not willing/is politically constrained from taking the actions needed to meet it? Arguably the NGDPL target is better because it does not suffer from the confusion that a rate of change in the price level suffers from (I’d ;ike to give it a try), but a Fed that was as timid/constrained about NGDPL as the Fed has been about the price level might be no better.

  22. Gravatar of Ray Lopez Ray Lopez
    7. April 2015 at 03:39

    Sumner: “I certainly agree that NGDPLT is not a solution to our economic woes.” (?!) – then why are you pounding the table about adopting NGDPLT? You just like to be cantankerous?

  23. Gravatar of ssumner ssumner
    7. April 2015 at 06:51

    Steve, I agree, there are many issues involved here. But IP is almost certainly important, even if other factors are more important.

    Thomas, You said:

    “but a Fed that was as timid/constrained about NGDPL as the Fed has been about the price level might be no better.”

    I did understand, but I’m not sure you got my point. It’s far, far better to consistently miss a NGDPLT by 1% than to consistently miss an inflation target by 1%. In addition, level targeting is likely to reduce the severity of the misses.

  24. Gravatar of Steve Steve
    7. April 2015 at 16:35

    Scott, I agree that IP is important, esp. in tech/health.

    I just think that IP explains well less than half of the aggregate gap between market cap and book value. Actually, I think the methodology of comparing market cap to book value is sloppy and misleading given all the accounting issues.

    My argument isn’t even with you — I believe other bloggers chose that method, not you — so I’m not trying to put words in your mouth. I just keep imagining progressive bloggers looking at a 6x gap between book and market value and arguing for moar capital taxes and I cringe. That’s all.

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