◼ FINANCE Bloomberg Businessweek August 19, 201927ILLUSTRATION BY 731
THE BOTTOM LINE Low and negative interest rates may reflect a
reduction in people’s taste for spending now rather than later—but
they may also indicate that people are worried about the future.preferences,” Greenspan said in a recent Bloomberg
interview. He added that he expects people to even-
tually revert to old spending habits. “These changes
won’t be forever.”
An alternate explanation is that circumstances,
not people, have changed. For example, if people are
saving more because longevity has increased, that’s
not a personality change. It’s a rational response
to the growing chance of living past 100. Another
theory is that rather than being more patient, peo-
ple are saving more as a precaution, because they
were “scarred by the financial crisis,” says Andrea
Ferrero, an economist at Oxford University.
The notion that today’s low interest rates are a
function of oversaving seems to conflict with a rise
in some types of debt, such as student loans. In
reality, they’re two parts of the same phenomenon,
namely “secular stagnation,” says Harvard econo-
mist Lawrence Summers. Excess savings have to be
invested somewhere, and since there’s a dearth of
demand for conventional projects such as factories,
some of the money finds its way into things like pri-
vate financing of students’ educations, he says.
Rates on those loans are higher than investors can
get elsewhere.
Summers and Lukasz Rachel, a senior econ-
omist at the Bank of England, attempt to sort out
the factors contributing to low rates in a paper they
wrote for a conference this spring at the Brookings
Institution. They focus on the so-called neutral rate,
which will prevail when the economy is running at
its maximum noninflationary pace. They estimate
that the neutral rate, stripping out inflation, for six
major economies—Canada, France, Germany, Japan,
the U.K., and the U.S.—fell from 3.6% in 1971 to just
0.4% in 2017.
They conclude that government policy, often con-
demned as profligate, has actually kept advanced
economies out of a chronic slump by providing a
boost to spending. As low as interest rates are today,
they would be even lower if not for the upward pres-
sure from government policies, they say (chart).
Government deficits and the resulting increase in
borrowing push up the neutral rate by 1.2 percent-
age points, they estimate. Social security and old-
age health-care programs in the six countries add
2.3 percentage points to the neutral rate, they cal-
culate. Those programs transfer money to retirees,
who have a higher propensity to consume rather
than save their income.
But those upward pushes have been more than
offset by downward forces in the private sector. The
biggest is weak productivity growth, which, accord-
ing to one model they use, knocks 1.8 percentage
points off the neutral rate. The theory underlyingthat model is that when productivity is weak, the
economy grows more slowly. When people foresee
dimmer prospects, they save more so they don’t
run out of money when they’re old. The estimate of
1.8 percentage points is probably on the high side,
Summers says.
Weak population growth knocks more than half a
percentage point off the neutral rate, Summers and
Rachel calculate, mainly because there’s less need
for investment in housing, schools, and so on. They
also theorize that economic inequality increases sav-
ings: Rich people save more because they’ve run
out of things to buy, while people closer to the edge
need to save as a cushion against greater income vol-
atility and uncertainty. Interactions between effects
is an additional 1.1 percentage points. “For example,aging in the world of low growth is worse than just
the sum of aging and impact from growth,” Rachel
writes in an email. The authors leave a final 1.4 per-
centage points of the drop in the neutral rate unex-
plained. Summers says one factor there is probably a
reduction in the cost of production goods, “exempli-
fied by the fact that an iPhone has more power than
the biggest computers of a generation ago.”
Several commentators, including Bloomberg’s
Joe Weisenthal, have argued recently that negative
rates are just a way of charging for keeping people’s
money safe. But that’s nothing new. The reason
that idea is being talked about now is that the price
of safety is no longer masked by other factors that
used to push up rates, such as strong growth in pro-
ductivity, population, and prices. And, perhaps,
impatience. �Peter Coy, with Liz Capo McCormickRising government debt
Social security
Old-age health careWeak productivity growth
Weak population growth
Longer retirement
Length of work life
Inequality
Interactions between factors
Unexplained in paperNeutral rate in 1971 3.6%0.4% Neutral rate in 2017Pushed in Both Directions
Since the 1970s, government policies have put upward pressure on the neutral rate ...... but other forces have more than offset them.DATA: LUKASZ RACHEL AND LAWRENCE SUMMERS