Beckworth interviews Summers
By Scott Sumner
David Beckworth’s recent interview of Larry Summers was a treat for two reasons; there was lots of thought-provoking discussion, and I found a written transcript of the interview. Here’s an excerpt (discussing secular stagnation):
You have a demassification of the economy. Think about Amazon rather than malls. Think about the fact that an office building for lawyers now require 600 square feet of space per lawyer where it used to require 1200 square feet of space per lawyer because they no longer need filing cabinets or paralegals to deal with the content of those filing cabinets because of the cloud. And think about the fact that the country’s leading technology companies and most valuable companies in the world, Google and Apple, have as their major business problem a surfeit of cash flow and how to manage that cash flow. All of these things taken together suggests ample reason for believing that real interest rates would have trended downwards, and that’s in fact what we have seen. And while many at the Fed were very quick to attribute low interest rates to so-called head winds, I thought by 2013 that the head winds theory was implausible and by 2017 that the head winds theory was ludicrous, that it was hard to see what head wind there was by 2017 that one wouldn’t expect to be semi-permanent.
And in fact, if you fit a trend from the late ’90s through the period before the crisis, it more or less tracks the current level of real interest rates. So I think we’re living in a world, David, where the neutral real interest rate is close to zero, where that low neutral real interest rate means a couple things. It means that we’re likely to live in a more levered, more bubble-prone economy than we have historically. Some ways the way to understand where the puzzle before the crisis was, here it was, we had the mother of all housing bubbles, we had vast erosion of credit standards and all of that was only sufficient to produce adequate growth, not overheating. And in the same way, we’re gonna have to keep interest rates low enough that we’re gonna promote high leverage, problematic credit in order to generate growth. And when, and if, and it will happen sometime, growth slows or collapses, historically the Fed has cut rates by 400 basis points in recessions and there isn’t gonna be that kind of room next time around. So that’s the kind of secular stagnation theory as I see it.
I think he’s right about the “demassification” of the economy (is that a word?), but I have a slightly different view of bubbles. Summers is probably right that low rates are the new normal, but this should lead to higher than normal asset prices, according to most standard metrics. I’ve argued that in the 21st century there will be many more examples of phenomenon that people call “bubbles”, but that bubbles don’t actually exist.
Interestingly, later in the interview Summers expresses views that are closer to my own:
I think the Fed in general has an urge to normalization, but I think it’s better for the policies to follow from the arguments, rather than for the arguments to follow from the desired policies. And I don’t see the financial stability rationale either. I’m not sure that markets are extraordinarily overvalued. If I believed with confidence that markets were a bubble, I’m not sure that would be a reason to tighten policy. It might be a reason to ease policy. ‘Cause when the bubble bursts, we’re gonna have a real problem. And so, I might as well get some stimulus into… Behind the economy. So, I don’t see the case for tightening. Things could happen in the data in the next several months that change my mind, but on the current evidence, it seems to me that you have to work a bit too hard to manufacture a case for tightening.
The Fed tightened policy in 1928-29 to address a perceived stock market bubble, and it led to exactly the sort of policy mistake that Summers worries about here.
Summers says some positive things about NGDP targeting, but at times he seems to lose the thread of the argument:
Second, I think that if you’re serious about a symmetric target, you have to be prepared to exceed the target sometimes. If now, after nine years of recovery, with years more of recovery forecast, and with an unemployment rate below 4.5%, if that’s not the moment to exceed the 2% target, I don’t know when that moment would ever come.
Actually, the time to exceed the target is during recessions. The time to fall short is during booms.
I think all those things make an attractive case for nominal GDP. On the other hand, it’s the sum of a good and a bad, and that seems a slightly awkward thing to target, and so I’m not absolutely certain that I would prefer it to a price level path target of some kind.
Maybe I’m missing something here, but I’d say the mixture of good and bad is precisely what makes NGDP targeting desirable. If you targeted something good you’d want it to be as high as possible and if targeting something bad you’d want it to be as low as possible. The fact that NGDP contains both “good” and “bad” components helps to explain why we don’t want the NGDP growth rate to be either too high or too low.