Together with Brookings Senior Fellow Louise Sheiner, I have analyzed alternative explanations for low Treasury rates and the implications of each for budget policy (Elmendorf and Sheiner, 2016). We found that most explanations imply that the country should have a higher debt-to-GDP ratio than otherwise. We find that most explanations also imply that federal investment should be higher than otherwise, and I will come back to that later. The intuition for these results is that interest rates show the direct cost to the Treasury of its borrowing and provide information about the indirect cost to the economy of Treasury borrowing—and if costs will be persistently much lower than we are accustomed to, then more borrowing, especially for investment, passes a cost-benefit test.
Pointer from Tyler Cowen.
Of course, one possible explanation for low interest rates is that growth prospects are poor. Another possible explanation is that we are in a bond bubble. If either of those turns out to be the case, then we are going to wish that we had less debt to contend with.
You and your work were mentioned in post (‘page’ in a still-being-written ‘web book’) on David Chapman’s Meaningness blog:
Debt held by the public has gone up about $10T in ten years to $14.3T. Even a one percent change in interest rates means a lot of extra money.
I apologize for going off-topic, but I would like to request another post on anti-trust given the proposed AT&T-Time Warner merger.
I seem to be coming across a lot of dismissive analysis that says these mega-mergers 1. Are usually bad for value of the new company, and 2. shouldn’t worry regulators charged with protecting consumer interests.
Well, ok, but obviously lots of companies keep trying! Obviously they think there is something to gain based on their own internal knowledge, or they are easily able to persuade skeptics with access to that same internal knowledge to, at the very least, not put up a fuss about what they know.
Yglesias says these are ‘ego-driven mistakes’, but that sounds an awful lot like the criticism that corporations are too concerned with short-term results at the cost of long-term valuations. (A kind of ‘private corporate’ version of ‘public choice’).
What’s really going on here?
In the end, the economy is resources being used to satisfy wants. Regardless of the interest rate, government competes against private interests — and their certainly more definite and likely more valuable wants — for the resources bought with borrowed funds.
Arguments could be made that obviously unemployed resources change the picture. But in general if what is being bought by the government on borrowed funds is not worth its cost at high interest rates, then it is not worth its cost at low interest rates.
This time is different is always a bad bet.
That’s why *this* time it becomes a *good* bet.
Some millennia it may, but it is never ‘this’ time, there is no potential gain in assuming otherwise, only inevitable loss in doing so.
The Japanese are effectively monetizing the debt without destroying their currency. Partially that’s because the Japanese are going to reduce oil imports to zero. The people who said the Japanese could not monetize the debt without inflation have been wrong.
>>”We find that most explanations also imply that federal investment should be higher than otherwise, and I will come back to that later.” < 1. That the benefits are greater than the costs.
I think most US gov’t investment in the last 20 years has NOT met this, altho I don’t have a good list of “projects” with their pre-investment benefit estimate, their total real cost, and their post-investment benefits.
An alternative gov’t action would be a massive set of tax reductions, so that total tax collections go down, allowing more private investment / consumption / debt reduction, with more gov’t debt creation. I’m certain that this will have the highest benefit in terms of mid-term GDP growth, and I think there are studies that show this, altho not yet definitive enough to “prove” it.
Finally, with interest rates low, why not do more money printing, and print up 50% of the budget deficit, so instead of increasing gov’t debt, the gov’t increases M1 direct money in circulation. By paying gov’t benefits & salaries in newly printed cash, for instance (tho perhaps charging $10 per direct deposit to go direct to their accounts as is now down, if they want to opt-in for that service.)
Most economists talk about a helicopter drop only in a theoretical sense — I’m sure that with inflation less than 1%, a “semi-drop” of newly printed cash to pay current bills would either have little effect (except a reduced growth of US gov’t debt), or would start pushing inflation higher — which is what the Fed has failed to achieve for the last 8 years, altho continuing to claim a 2% inflation target.
(above) 1. That assumes the benefits are greater than the costs.
I won’t claim to be an expert of interest rates. My one big thought from having worked in investment areas is that the baby boomers getting older means a huge shift in their portfolios from mostly stocks to mostly bonds, and this rebalancing will all happen automatically based on computer formulas rather then human decision as to weather the government deserves that money. I have to think that will have an affect on rates over time.