On Brad on Summers, Blanchard and Avent

I once decided not to do this, but I’m dumping a comment here. Brad DeLong thinks about Larry Summers and secular stagnation, Olivier Blanchard and higher inflation targets and Ryan Avent here. I can’t summarize his post but I comment here.

Oh so, you are looking for someone smarter than yourself. Good luck with that.

On the other hand, I think there is a reason for the originality of the Schiff-Nedici-Pomponius correlary. It is called the European Central Bank (or the Fed if Blanchard convinces the ECB). Now Euros are not an attractive safe in dollar terms liquid asset. But they can be easily converted into a basket of goods with a very predictable (even if slowly decreasing) value (it is the CPI basket). It is not a safe substitute for the dollar because of insane exchange rate fluctuations. The problem with SMP coin is that, while it would have a stable real value if markets were efficient, its value will not be stable at all, because markets are grossly inefficient.

Also I think that Turkey managed stable inflation over 10% without repeated 1982s or constant stuggle. I will FRED. OK not stable. Still been chugging along around 10% for around a decade with steady growth (of electricity consumption FRED doesn’t have real GDP) except for 2009.
https://research.stlouisfed.org/fred2/graph/?graph_id=154463&category_id=0

I think the Greenspan-Volcker view is irrational ideology. You recall the devotion to the gold standard in the 20s and 30s and have noted how sensible it seems in retrospect.

But back to Summers. I think there is a clear hint at what he is thinking in the phrase ” interest rates significantly below growth rates for long periods “. He is thinking of dynamic inefficiency. If interest rates are below growth rates forever, then there can be a bubble which never bursts. If interest rates are below growth rates for a long period A then there can be a bubble which lasts for a somewhat longer period B and shows no sign of being unsustainable during that long period A (because during that period the ratio of the the value of the bubble assets to GDP doesn’t have to grow and grow). I think Summers thinks that investors will find a way to inflate a bubble under such circumstances.

Back to Avent. “are we really arguing that there aren’t enough good private investment opportunities in America?” and you “Yes. We are.”

I ask why he thinks that is odd given the fact that we agree that we can only achieve moderate unemployment with negative real interest rates ? Projects which are not profitable at a zero real interest rate are not good private investment opportunities.

The Avent/Blanchard position has to be that this is unusual and due to depressed aggregate demand. Indeed Blanchard is very explicit that he thinks that a 4% target is insurance against shocks such as financial crises and that in normal times the natural unemployment rate safe nominal interest rate will be over 4%. (you not he upped up to the Leninist level of gasp 5%). Summers’s very convincing counter counter argument was that there was nothing normal about 2001-2007. I think his position is just that we have had high unemployment or a bubble (or both) for the past 15 years at least.

I think you throw up you hands not in despair of understanding the problem but in despair of finding a politically feasible solution. The risk hating sovereign wealth funds explanation works fine (the puzzle of the high income people who work very hard and don’t consume and “why are they doing that to themselves ?” is trickier, as they are private agents so we can’t just say they are not optimizing anything even though we can’t imagine what they (or should I say you?) are optimizing) . The problem is that the political limits are very narrow.

I can think of two other politically impossible solutions. One (as suggested by Avent) is to replace the Trans Pacific Partnership with a trans Pacific trade war “filter out some of them (like inward capital flows from reserve-accumulating foreign governments)” uh not gonna happen and probably not a good idea. Another is to balance the risk hating sovereign wealth funds with a US Federal risk loving sovereign wealth fund which invests in alllll risky assets driving down risk premia and making huge losses every recession and so working as an automatic stabilizer (oh and retiring the US net federal debt and making the social security and Medicare trust funds actuarily sound too). I’m fairly sure it would work fine but very sure that it is much less possible than a massive 5 year stimulus.