Bloomberg Businessweek - USA (2019-08-19)

◼ FINANCE Bloomberg Businessweek August19, 2019

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THEBOTTOMLINE Lowandnegativeinterestratesmayreflecta

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-

mistLawrenceSummers.Excesssavingshavetobe

investedsomewhere,andsincethere’sa dearthof

demandforconventionalprojectssuchasfactories,

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-

surefromgovernmentpolicies,theysay(chart).

Governmentdeficitsandtheresultingincreasein

borrowingpushuptheneutralrateby1.2percent-

agepoints,theyestimate.Socialsecurityandold-

agehealth-careprogramsinthesixcountriesadd

2.3percentage 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

offsetbydownwardforcesintheprivatesector.The

biggestis weakproductivitygrowth,which,accord-

ingtoonemodeltheyuse,knocks1.8percentage

points off the neutral rate. The theory underlying

that model is that when productivity is weak, the

economy grows more slowly. When people foresee

dimmerprospects,theysavemoresotheydon’t

runoutofmoneywhenthey’reold.Theestimateof

1.8percentage 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

needtosaveasa cushionagainstgreaterincomevol-

atilityanduncertainty.Interactionsbetweeneffects

is anadditional1.1percentage points. “For example,

agingintheworldoflowgrowthis worsethanjust

thesumofagingandimpactfromgrowth,”Rachel

writesinanemail.Theauthorsleavea final1.4per-

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

JoeWeisenthal,havearguedrecentlythatnegative

ratesarejusta wayofchargingforkeepingpeople’s

moneysafe.Butthat’snothingnew.Thereason

that idea is being talked about now is that the price

of safety is no longer masked by other factors that

usedtopushuprates,suchasstronggrowthinpro-

ductivity,population,andprices.And,perhaps,

impatience. �Peter Coy, with Liz Capo McCormick

Risinggovernmentdebt

Socialsecurity

Old-agehealthcare

Weakproductivitygrowth

Weakpopulationgrowth

Longerretirement

Lengthofworklife

Inequality

Interactionsbetweenfactors

Unexplainedin paper

Neutral rate in 1971 3.6%

0.4%Neutralratein 2017

Pushed 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