Why should we live in a low rate world?

The Economist can be very good on monetary policy.  For instance, they’ve endorsed NGDP targeting.  And then there are other times.  Check out the subtitle of their new cover story on living in a low rate world:

Central banks have been doing their best to pep up demand. Now they need help

Actually, they have not been doing their best, and it’s not even debatable:

1.   The Fed raised rates last December, and just a week ago indicated that it is likely to raise rates again later this year.  Is that doing your best to inflate?

2.  The ECB and the BOJ have mostly disappointed markets this year, offering up one announcement after another that was less expansionary than markets expected.

So no, they are not doing their best.  If at some point they do in fact do their best, and still come up short, then by all means given them help.

And what should that “help” look like?  Simple, give them more policy tools.  I.e. a higher target, or the right to buy more kinds of assets.  Whatever help they need.

And then there is this:

To live safely in a low-rate world, it is time to move beyond a reliance on central banks. Structural reforms to increase underlying growth rates have a vital role. But their effects materialise only slowly and economies need succour now. The most urgent priority is to enlist fiscal policy. The main tool for fighting recessions has to shift from central banks to governments.

Actually, the Japanese have already shown that enlisting fiscal policy does not help.  In fact, Japanese NGDP growth has picked up a bit since 2013, despite the fact that fiscal policy has become tighter.  Instead of resigning ourselves to a low rate world, why not have central banks create a higher rate world, by raising their NGDP/inflation target?  And tell the banks to actually hit their targets.  A low rate world is a choice, not some inevitable fate sent down to us by the gods.

To their credit, they realize that infrastructure spending cannot stabilize a modern economy:

But infrastructure spending is not the best way to prop up weak demand. Ambitious capital projects cannot be turned on and off to fine-tune the economy. They are a nightmare to plan, take ages to deliver and risk becoming bogged down in politics. To be effective as a countercyclical tool, fiscal policy must mimic the best features of modern-day monetary policy, whereby independent central banks can act immediately to loosen or tighten as circumstances require.

But then suggest something even less effective:

Politicians will not—and should not—hand over big budget decisions to technocrats. Yet there are ways to make fiscal policy less politicised and more responsive. Independent fiscal councils, like Britain’s Office for Budget Responsibility, can help depoliticise public-spending decisions, but they do nothing to speed up fiscal action. For that, more automaticity is needed, binding some spending to changes in the economic cycle. The duration and generosity of unemployment benefits could be linked to the overall joblessness rate in the economy, for example.

Actually, a number of studies show that extended unemployment benefits make unemployment even higher. When President Bush made unemployment benefits more generous during the 2008 recession, Brad DeLong correctly predicted that it would push unemployment 50 basis points higher by Election Day. Another example occurred in 2014, when we saw job creation accelerate by about 700,000 (from 2.3 million in 2013 to over 3 million in 2014), after the extended benefits were eliminated.  Exactly the opposite of what Keynesians like Paul Krugman expected.

I have a better idea; have the BoE adopt a more expansionary monetary policy.  Their governors will warn that this will push inflation above target. OK, but make up your mind—do you want more demand, or not?



18 Responses to “Why should we live in a low rate world?”

  1. Gravatar of dtoh dtoh
    26. September 2016 at 10:20

    Nice post. I’m glad to see you now agree that the CBs are not doing a good job. 🙂

  2. Gravatar of Kevin Erdmann Kevin Erdmann
    26. September 2016 at 10:23

    YOY nominal and real GDP growth are at 2.4% and 1.2%, and the question before the Fed is whether to raise rates now or a little later. How is every issue of every economics periodical not just a cover page with “WTF”, followed by 50 pages of “WTF, WTF, WTF…”?

    The Economist is in the Dining Hall on the Titanic complaining that their steak is overcooked.

  3. Gravatar of flow5 flow5
    26. September 2016 at 10:33

    It’s the Peter Principle. You’ve reached you level of incompetence (like Krugman).

    N-gDp targeting maximizes inflation and minimizes real-output.

    You don’t even know what money is.

  4. Gravatar of ChrisA ChrisA
    26. September 2016 at 11:02

    My suspicious mind is that some one is agitating behind the scenes for these stories promoting fiscal expansion, in the hope that they can divert some of the money their way. Maybe I am just paranoid.

  5. Gravatar of Christian List Christian List
    26. September 2016 at 12:54

    The Economist gets it wrong oftentimes. Glad that you found it out by now.

  6. Gravatar of ssumner ssumner
    26. September 2016 at 13:16

    dtoh, When did I not agree?

    Christian, Nice try. You have the mentality of a third grader.

  7. Gravatar of Gabe Gabe
    26. September 2016 at 13:26

    There goal is to keep the masses completely ignorant and full of contradictory ideas. The confusion helps their cause. Intentional destruction of the current economy and monetary system so that then next puppet politician can push forward the new global monetary system that will replace today’s sadly flawed “nationalist”/”populist” system…after the “populist” controlled scapegoat Trump is elected.

  8. Gravatar of Gabe Gabe
    26. September 2016 at 13:26

    Their not there

  9. Gravatar of Gabe Gabe
    26. September 2016 at 13:26

    it was just a test for grammar trolls.

  10. Gravatar of dtoh dtoh
    26. September 2016 at 14:23

    Scott, I thought you were defending the Fed and Bernanke saying they had respectively none and average and better than average job. Maybe I misinterpreted that as you defending their performances.

  11. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. September 2016 at 14:28

    I will be glad when the election is over and the comment section here improves.

  12. Gravatar of flow5 flow5
    26. September 2016 at 15:04

    I am the best economic prognosticator in history. I’m short stock indices as of the 23rd opening.

    September 22 at 10:27am
    No trigger. You have to use technical analysis to identify an entry point. The bi-weekly liquidity peaks @ 9/28/16. We should be dropping any time because the hierarchy of influence for the 10 month roc supercedes that of the bi-weekly #s. I’m going to re-enter my trade (went short on the close of the 21st). The seasonal drop should more than compensate for any drawdown

    If you can’t forecast, then you also can’t theorize.

    Einstein’s emphasis was primarily on the deductive approach: “The truly great advances in our understanding of nature originated in a way almost diametrically opposed to induction.” “The deeper we penetrate and the more extensive our theories become, the less empirical knowledge is needed to determine those theories.”

    I think Yale Professor Irving Fisher would agree with Einstein: “Math was nature’s playbook”.

    Yale Professor Irving Fisher: where the proper index # provides clues to the overall economies’ “price-level.

    “In my opinion, the branch of economics which treats of these five regulators of purchasing power ought to be recognized and ultimately will be recognized as an EXACT SCIENCE, capable of precise formulation, demonstration, and statistical verification.”

    — Michel de Nostredame

  13. Gravatar of Gary Anderson Gary Anderson
    26. September 2016 at 17:39

    Fiscal policy and monetarist asset buying are not the answer. The BOJ already owns half of Japan! Well, over half the ETF’s in Japan and a third of the bonds. How much do central banks have to buy? I realize it is a tool, but it can’t be the only tool.

    Fiscal spending is not the answer to growth, but our infrastructure does suck.

    Helicopter money is the answer.

  14. Gravatar of Gary Anderson Gary Anderson
    26. September 2016 at 17:52

    Low rates are permanent as long as long bonds are used as collateral in the derivatives markets.

    Trump just said he uses the laws of this nation to stiff contractors and people he owes money.

  15. Gravatar of Ray Lopez Ray Lopez
    26. September 2016 at 22:55

    Errata by Sumner:

    “For instance, they’ve [The Economist] endorsed NGDP targeting.”- in a leader? They suggested cb’s try NGDPLT but I don’t recall endorsement in a leader. Keep in mind The Economist employs many disparate voices. Disparate not desperate Scott. It’s a word, look it up.

    “That might be NGDPLT, combined with a “whatever it takes” approach to asset purchases.” – Sumner criticises BoJ/JP as ‘not doing enough’ despite printing enough money the last two decades for Japan to have 250% debt-to-GDP and despite the BofJ buying JP stocks to the point where they own 50% of all JP ETFs. What’s next, buying individual JP stocks as Zero Hedge says? Buying American stocks? Sumner’s logic is this: if a policy has failed to produce NGDP increases, by definition that policy is “too tight” and a cb should print more money. Seriously? So Bolivia, Wiedmar Germany, Greece and Zimbabwe at various points of their existence were successes? Then Sumner complains nobody takes him seriously!

    Sumner: “Actually, a number of studies show that extended unemployment benefits make unemployment even higher.” – but these studies were during normal ‘boom times’. Arguably today we don’t have a demand problem, but a supply problem, and extended UE benefits rephrased as “guaranteed minimum income’ might be OK.

    Mr. Sumner, tear down this blog!

    @Kevin Erdmann- so you claim to have a crystal ball and can tell when an iceberg will strike a ship? If the steak is overcooked, it’s right to complain. You cannot predict the future. Do you have people who think you can? Fine, set up a consultancy or newsletter and good luck.

  16. Gravatar of ssumner ssumner
    27. September 2016 at 06:20

    dtoh, Yeah, I think it’s fair to say you missed my 7 1/2 years of non-stop central bank bashing.

    Lorenzo, Don’t hold your breath, I expect it to get even worse.

    And Lorenzo’s comment is followed by flow5

    And then Gary . .

    and Gary again

    And then Ray.

  17. Gravatar of Lorenzo from Oz Lorenzo from Oz
    27. September 2016 at 16:27

    Pessimist …

  18. Gravatar of Jack’s Links – The Zeitgeist Log Jack’s Links – The Zeitgeist Log
    2. October 2016 at 18:49

    […] Scott Sumner on whether central banks are out of ammo: If you know anything about Scott you already know the answer. […]

Leave a Reply