Summers goes negative

November 18, 2013

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In a new speech at the IMF Economic Forum, Larry Summers said the US may be in a near-permanent slump — an assertion Peter Coy calls “deeply pessimistic”. What the US faces, Summers warns, is secular stagnation. The problem: nominal interest rates can’t go any lower, because they’re already near the zero lower bound, but the economy may need real interest rates of negative two or three percent to get back to full employment. Here’s Summers:

We may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back, below their potential.

Paul Krugman is annoyed, because he agrees with Summers, and “Larry’s formulation is much clearer and more forceful, and altogether better, than anything I’ve done”. The US economy, repeats Krugman, still needs good old-fashioned Keynesian policy like burying gold in coal mines or faking an alien attack.

The most radical part of Summers’ speech, Krugman says, is his assertion that we may need very negative real interest rates (that is, interest rates after accounting for inflation) to kickstart growth. When real interest rates go negative, monetary policy becomes less effective, says Krugman. Summers adds that rates can stay low, but QE can’t go on indefinitely, even if the economic conditions that make it necessary continue forever. If that’s true, says Krugman, “we may be an economy that needs bubbles just to achieve something near full employment”.

Ryan Avent thinks there’s far too much over-thinking going on. Inflation is far too low across the globe, and particularly in Europe, so central bankers should raise their inflation goals and “try to increase expectations of inflation”. The Fed is at least studying the possibility of increasing its inflation target above 2% to juice growth.

Tyler Cowen disagrees, saying that negative real interest rates would neither help the economy nor help return the economy to full employment.

James Pethokoukis thinks Summers is too dismissive of things like quantitative easing, or shifting to targeting nominal GDP growth rather than inflation. And, contrary to Summers’ fears of stagnation, he says the US may be in better shape than we think: current productivity metrics may not capture the full economic benefits of the IT revolution. — Ben Walsh

On to today’s links:

The Volcker Rule is now nearly 1,000 pages, still not yet a rule – DealBook

The real heroes of the world economy: Countries like Austria, Canada, Lesotho and the Philippines – Dani Rodrik

Unintended Consequences
How the digital revolution is making it increasingly hard to measure the “real” economy – James Surowiecki

Must Read
“The Pentagon is largely incapable of keeping track of its vast stores of weapons, ammunition and other supplies” – Reuters

Modern Problems
Your job, quite possibly, adds no real value to the economy – Noah Smith

Banks are piling into auto loans, and extending loans of up to 8 years – Sober Look

EU Mess
The flaw in the UK recovery story – Joe Weisenthal

Some reasons not to be bearish – Macro Man

Financial Arcana
Do stocks really trade in fractions of a penny? Sort of – Ben Walsh

The “cost of employee turnover due to various forms of workplace discrimination is about $64B per year” – Senator Klobuchar
Your semi-regular reminder that Europe’s youth unemployment situation is dismal – NYT

“A kind of Kickstarter for political assassinations” – Forbes
The DOJ and SEC to tell Congress that Bitcoin is a legitimate financial instrument – Bloomberg

Keeping Score
A reminder of who was wrong about QE – Barry Ritholtz

People have always left the NYT and they always will – Jack Shafer

People take jobs that pay a lot of money – Ryan Chittum

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One comment

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Government spending pulls real economy loan activity, which creates a multiplier effect through loan demand by creating qualified borrowers. QE is pushing on a rope. The Fed’s QE has been trying its best to push that rope, because of the congressional budget cutting. Dear lord. What could be more obvious than that.

Why doesn’t Larry do something useful, like speak up against that cretin, Grover Norquist? Speaking up about what is really wrong, instead of wringing his hands over the limpness of the Fed’s QE rope might be useful.

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