CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Robert Samuelson's Confusion on Real Interest Rates

Robert Samuelson's Confusion on Real Interest Rates

Print
Monday, 15 November 2010 06:02

Robert Samuelson is beating up on Japan in his column today. While its economy has certainly had troubles in the last two decades, the picture is not quite as bleak as he seems to believe. Its rate of productivity growth (the most important measure of economic dynamism) since 1995 has been almost identical to the average for the OECD and within 0.2 percentage points of the rate in the United States. Furthermore, since depreciation is a large and growing share of U.S. output (primarily because computers become obsolete quickly) it is likely that a net measure of output would show Japan and the United States having virtually the same productivity growth over this period. Net productivity is the measure that is relevant for living standards, since you can't eat depreciation.

It is also worth noting that Japan's unemployment rate is just 5.0 percent. It never rose above 6.0 percent over the last two decades.

However Samuelson's biggest error is that he fails to understand the problem that deflation, or more correctly low inflation, poses for Japan's economy. While he rightly ridicules the idea that consumers would delay purchases to buy items of like cars to buy them at a price that is 0.5 percent lower the following year, this is not the main way that low inflation harms the economy. 

In an economy operating below capacity, it would be desirably to have very low real interest rates to boost investment. This means that the cost of borrowing is low relative to the return on investment. Because interest rates can't go negative, it is impossible for real interest rates to fall as much as would be desired given the weakness of Japan's economy. It would be ideal if it could keep its nominal rates at their current near zero level, while inflation rose to 3.0 or 4.0 percent.

The other reason why inflation would be desirable is that it would allow homeowners to get out from under their debt burdens. If wages rose 3.0-4.0 percent annually in step with inflation, the burden of a fixed mortgage debt would be eroded through time. Also, if house prices rose in step with inflation, consumers would gain equity in their homes.

However, the problem in both of these cases is that the rate of inflation is too low. The fact that it crosses zero and is negative is of no special importance. The problem is low inflation, not deflation.

Comments (13)Add Comment
...
written by izzatzo, November 15, 2010 6:25
See Bubba, he understands negative interest rates, erosion of fixed debt with targeted inflation and most important of all, how unedible depreciation contributes to a declining living standard.

No damn wonder we're starving. We have to eat cake instead of computers.
Who Knew? Japan's Real Problems: Excess Regulation & Policy Uncertainty
written by Paul, November 15, 2010 10:01
According to Bobby:
"Neither the White House nor Congress seems to understand that growing regulatory burdens and policy uncertainties undermine business confidence and the willingness to expand. Unless that changes, our mediocre recovery may mimic Japan's."

Bobby spends the whole time discussing deflation and stimulus, but then concludes that excess regulation is the problem. Apparently, Wall Street bankers need less regulation, not more!
...
written by andrew hartman, November 15, 2010 11:17
keeping interest rates well below the inflation rate may have attractions,
but it robs savers. why is it ok to ignore this?
Low interest rates desirable??
written by Ralph Musgrave, November 15, 2010 11:24
.
“In an economy operating below capacity, it would be desirably to have very low real interest rates to boost investment.” I'm not sure about that.

First, “an economy operating below capacity” is ususally an economy in recession, and during recessions there is normally an excess of capital equipment lying idle. In this situation, there is no big need for extra investment.

Second, investments made in the basis of “very low real real interest rates” are investments that do not make sense at more normal rates of interest. I.e., those investments just don’t make sense, period.
..
written by mich, November 15, 2010 1:18
Exactly right, Andrew Hartman. I think it's because economists don't care if their model is just. In their first order models the easiest thing to do is spread the losses (the collapse of a bubble caused by mismanagement, speculation, fraud, theft, you name it) over to the savers.
So don't count on economists to do the right thing, "money: storage of wealth", "crime doesn't pay", and all that; too hard.
Saving appears to be very expensive. The price of freedom?
inflation, fixed income, zero sum effects....
written by pete, November 15, 2010 2:09
Well, sure, lock mortgage investors in at low rates, and then inflate like mad, allowing homeowners to have the real value of their debt lowered. Of course, this would cause, as in the late 70s, serious effects to the financial sector, the other side of all the fixed income instruments. Try again. The ONLY rational reason to have any inflation is that nominal prices are sticky down, a behavioral problem, not a real problem. Trying to manipulate winners and losers by messing with the inflation rate is simply a disastrous idea.
moral confusion
written by Andy Harless, November 16, 2010 4:22
Where do people get the idea that "savers" have some sort of divinely sanctioned entitlement to have their wealth protected by the government? On the contrary, those who lay up treasure for themselves on earth (and refuse to do anything productive with that treasure) are a bunch of selfish, self-righteous cowards who deserve to be slapped in the face by the proverbial Invisible Hand. They should rightly count on the effects of moth and rust and not on the availability of some sort of government-guaranteed artificial gold that (unlike real gold) does not become dear to purchase when it is in high demand. How is it more morally acceptable to take away the livelihood of millions of workers than to take away the privilege of a safe, positive return on wealth from those who are lucky enough to have that wealth and too timid to do something useful with it?
...
written by liberal, November 16, 2010 7:30
pete wrote,
The ONLY rational reason to have any inflation is that nominal prices are sticky down...


Wrong. Economic history suggests that it's very likely that we might have to resort to inflation to erode the massive debt overhang afflicting so many citizens.

Do I like that? No; and I'm sympathetic to the saver argument. But if an empirical look at history shows that it's the only way out of the mess, then inflation would be a good thing.
...
written by liberal, November 16, 2010 7:35
andy harless wrote,
How is it more morally acceptable to take away the livelihood of millions of workers than to take away the privilege of a safe, positive return on wealth from those who are lucky enough to have that wealth and too timid to do something useful with it?


Huh? There's a legitimate reason to save: to address mismatches in income and consumption over one's lifetime. And people with a modest amount of wealth can reasonably desire to put their savings in relatively safe investments.

Furthermore, your pitting the savers against the workers is simply wrong. The beneficiaries of low risk-free rates aren't workers---companies still aren't hiring or investing. The beneficiaries are banks, who conduct a lucrative carry trade. They're essentially getting free money from the Fed; it's a surreptitious form of recapitalization, and the Fed does this often when banks are effectively insolvent.

So money from petty savers is basically stolen and given to banks to repair their balance sheets.

Much better would be to seize all insolvent banks, wipe out their shareholders, give their bondholders massive haircuts, and then reprivatize them.
...
written by pete, November 16, 2010 10:49
Liberal wrote "Economic history suggests that it's very likely that we might have to resort to inflation to erode the massive debt overhang afflicting so many citizens."

Yes this has really worked well???? I guess I have to assume you are kidding...this is exactly a prescription for disaster. I think the logical mistake made here is completely ignoring that unexpected inflation causes wealth transfers, but does not alter wealth. So, rightly stated, some with fixed debt, say 30 year mortgages, will see a wealth gain as the real value of their mortgage falls. Of course, whoever is on the other side of these mortgages, say, pension funds, will suffer corresponding losses...the only social gain (on a national, but not international level) will be the effect on debt held by non citizens, such as the small amount held by China, Japan..etc. Bottom line, an unexpected inflation rate causes transfers, but does not magically add wealth.
...
written by liberal, November 16, 2010 12:30
pete wrote,
Bottom line, an unexpected inflation rate causes transfers, but does not magically add wealth.


Huh? Of course it doesn't magically add wealth. Do you usually act like you're lecturing to 8 year olds?

The point is that (a) the economy won't function well with this much debt, and (b) there are very, very few ways to unleverage.
I CHORTLE at the
written by Jeffrey Edelman, November 16, 2010 2:08
notions of uncertainty as affecting any real-world economy, ever.

What is Japan if not a place of absolute certainty when it comes to the future. Businesses know things in Japan are going to be exactly the same next year as they were the year before, etc.

Uncertainty is just a buzz term for fretting that the ultra wealthy might have to pay 3% more on their marginal rates.
...
written by Andy Harless, November 16, 2010 11:12
liberal wrote:
Huh? There's a legitimate reason to save: to address mismatches in income and consumption over one's lifetime. And people with a modest amount of wealth can reasonably desire to put their savings in relatively safe investments.


Of course they can reasonably desire that. That doesn't mean that government policy must be designed to provide it. I use moralistic language to counter the moralism of others, who use words like "rob" and "just" to imply that savers are somehow entitled to government protection.

Furthermore, your pitting the savers against the workers is simply wrong. The beneficiaries of low risk-free rates aren't workers---companies still aren't hiring or investing. The beneficiaries are banks, who conduct a lucrative carry trade. They're essentially getting free money from the Fed; it's a surreptitious form of recapitalization, and the Fed does this often when banks are effectively insolvent.


I'm confused by this. First of all, I thought we were talking about inflation. (That's what the post was about, and I was reacting to comments that complained about the effect of inflation on savings.) How does inflation help the banks? It certainly helps operating businesses and gives them an incentive to hire, thereby helping workers. That's not happening now, but the Fed has specifically disavowed any attempt to produce above-normal inflation, so the present circumstances are not an example.

Second of all, if we're not talking about inflation, then what are we talking about? All I can figure is that you're talking about ordinary monetary policy, which does produce a profitable carry trade for banks but is also usually successful in stimulating employment. Indeed it seems quite absurd to me to argue against ordinary monetary policy on the grounds that it hurts savers without helping workers. And it seems bizarre to argue that, because ordinary monetary policy has reached the limits of its effectiveness, we should therefore backpedal and raise interest rates again for the benefit of savers. That would clearly be bad for workers.

Or are you talking about QE? If so, the carry trade argument makes no sense, because QE reduces the carry.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives