In Summer, 2016, I moved from the University of Michigan to the University of Colorado Boulder. This Spring, Nick Flores and Maria Oliveras organized an inaugural public lecture for me as the Eugene D. Eaton Jr. Professor of Economics. I took on the tough question of how to restore American Growth, a question closely related my post two days ago, "Why Is Productivity Growth So Low? 23 Economic Experts Weigh In|FocusEconomics."
Watching a bit of the video, I am pleased with how the talk turned out. Restoring American growth is a tough problem, and I wanted to be clear, so the talk is a long one, but I think one that will reward well the time of those who watch it. If I were to write a book about restoring American growth, this is the outline I would begin with in figuring out how to write it.
I have to apologize for the slides themselves being washed out in the video by the lighting in the room. I explain the point of the slides well enough, you should be able to follow anyway. But the ideal way to watch this is probably to have the video in one window on your computer and to have the slides open in another window. Or if you are lucky enough to have two computers of any form (or be able to borrow), you might want to have the video going on one computer screen and the slides open on another.
FocusEconomics included me among the 23 experts asked the question "Why is productivity growth so low?" You can see my answer above and all of our answers at this link. Here is the list of economists offering their takes, in the order they appear in the article:
- Mike Norman
- Karl Denninger
- James Picerno
- Daniel Lacalle
- Alden Abbott
- Constantinos Charalambous
- Timothy Taylor
- Dean Baker
- Carola Binder
- John Cochrane
- Livio Di Matteo
- Colin Lloyd
- Elliott Morse
- Mike "Mish" Shedlock
- George Selgin
- David Andolfatto
- Jeff Miller
- Antonio Fatas
- Miles Kimball
- Neven Valev
- John Quiggin
- David T. Flynn
- Steve Keen
FocusEconomics sets up the question well at the beginning.
In his April 14, 2017 Wall Street Journal essay "The Profound Connection Between Easter and Passover," R. R. Reno wrote:
The Passover Seder recalls and celebrates the resurrection of the people of Israel.
Today we tend to think of slavery strictly as an injustice, which of course it is, and some modern Seders treat the Passover as the triumph of justice over oppression. But this is not the traditional view. In the ancient world, slavery was not just a hardship for individuals but a kind of communal death. An enslaved nation can survive for a time, perhaps, but they have no future. A people in bondage is slowly crushed and extinguished.
In section 17 of his 2d Treatise on Government: “On Civil Government,” John Locke makes the same comparison between being enslaved and death:
And hence it is, that he who attempts to get another man into his absolute power, does thereby put himself into a state of war with him: it being to be understood as a declaration of a design upon his life: for I have reason to conclude, that he who would get me into his power without my consent, would use me as he pleased when he had got me there, and destroy me too when he had a fancy to it; for nobody can desire to have me in his absolute power, unless it be to compel me by force to that which is against the right of my freedom, i. e. make me a slave. To be free from such force is the only security of my preservation; and reason bids me look on him, as an enemy to my preservation, who would take away that freedom which is the fence to it; so that he who makes an attempt to enslave me, thereby puts himself into a state of war with me. He that, in the state of nature, would take away the freedom that belongs to any one in that state, must necessarily be supposed to have a design to take away every thing else, that freedom being the foundation of all the rest; as he that in the state of society, would take away the freedom belonging to those of that society or commonwealth, must be supposed to design to take away from them every thing else, and so be looked on as in a state of war.
The deep reason that enslaving is like murder is that human beings have purposes. And those purposes are a large share of the meaning of their lives. Take away the freedom someone needs to accomplish and much of the meaning of their life is taken away.
Of course there are heroes of inner resistance who refuse to be slaves inwardly even when outwardly they are in chains. Some who were in Hitler's Concentration Camps managed to do this. Nelson Mandela managed to do this. And Jesus managed to do this.
On the other hand, there are many who are outwardly free, but inwardly are in chains. There are many dramatic examples of this, but I'd like to talk about a more quotidian example of inner chains I see regularly in everyday academic life among the Econ.
For most who go into academia, the salary they will get in academia is lower than they could get outside. So most who go into academia make that choice in part out of the joy of ideas, a burning desire for self-expression, a genuine fascination with learning how the world works, or out of idealism—the hope of making the world a better place through their efforts. But by the time those who are successful make it through the long grind of graduate school, getting a job and getting tenure, many have had that joy of ideas, desire for self-expression, thirst for understanding and idealism snuffed out. For many their work life has become a checklist of duties plus the narrow quest for publications in top journals. This fading away of higher, brighter goals betrays the reasons they chose academia in the first place.
For those who are still nearer the beginning than the end of the gauntlet of graduate school, getting a job and getting tenure, please make a plan for how you will keep alive through the years ahead the joy of ideas, the desire for self expression, the thirst for understanding, the idealism that burn bright within you now! Do what you need to for your career, but promise yourself that your concessions to the system will be temporary. Don't lose your soul in the process of fulfilling degree requirements, getting a job and getting tenure.
For those of you who already have tenure, and can recognize your worklife even a little bit in the description "a checklist of duties plus the narrow quest for publications in top journals," please find a way to break your inner chains before time makes them thicker and stronger! Then help others to break their chains or to steer clear of these inner chains altogether.
It is not as if publishing in top journals is in the opposite direction from the higher, brighter goals we had at the start, but as Jesus said:
Enter through the narrow gate. For wide is the gate and broad is the road that leads to destruction, and many enter through it. (Matthew 7:13)
Treating publishing in top journals as the end itself is off target. It is the broad road that leads to the destruction of much of your potential for joy, self-expression, understanding and doing good in the world. Putting the higher, brighter goals first—with publications as only one of several tools for achieving those goals—is the narrow gate to joy, self-expression, understanding and doing good.
My new colleague at the University of Colorado Boulder, Philip Graves, pointed me to this wonderful snippet. I can't vouch for its truth, but I want it to be true:
Louis Brandeis graduated from the Harvard Law School at age 20 with the highest grade point average in that school’s history and, after other academic triumphs, was appointed Supreme Court justice. When Brandeis was studying law at Harvard, an anti-Semitic professor by the name of Peters always displayed animosity towards him. One day Prof. Peters was having lunch at the University dining room when Brandeis came along with his tray and sat next to him. The professor said, “Mr. Brandeis you do not understand. A pig and a bird do not sit together to eat.” Brandeis looked at him and calmly replied, "Don’t worry, professor. I'll fly away," and he went and sat at another table.
Peters, decided to take revenge on the next test paper, but Brandeis responded brilliantly to all questions. Unhappy and frustrated, Peters asked him the following question: "Mr Brandeis, if you were walking down the street and found a package, a bag of wisdom and another bag with a lot of money, which one would you take?" Without hesitating, Brandeis responded, "The one with the money, of course." Peters, smiling sarcastically, said, “Just like a Jew. Unlike you I would have taken the wisdom." Brandeis shrugged indifferently and responded, "Each one takes what he doesn't have."
Prof. Peters hate for the Jewish student came to a finale when he scribbled on his student’s final exam the word "idiot" and handed it back to him. A few minutes later, Louis Brandeis got up, went to the professor and said to him in a dignified but sarcastically polite tone, "Prof. Peters, you autographed the exam sheet, but you did not give me a grade...”
The title to this post is a link. Via Makoto Shimizu, who has translated many of my posts on monetary policy into Japanese here. Be sure to read my post "Negative Rates and the Fiscal Theory of the Price Level" in conjunction with this interview. For more background, see "How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide," which in addition to links about negative interest rate policy generally, contains several links to posts about Japan's policies.
"I urge you with all the capacity that I have to reach out in a duty that stands beyond the requirements of our everyday lives; that is, to stand strong, even to become a leader in speaking up in behalf of those causes which make our civilization shine and which give comfort and peace to our lives."
—Gordon B Hinckley, President of the Church of Jesus Christ of Latter-day Saints from 1995-2008. speech at Brigham Young University, Sept. 17. 1996. (via Linda Hoffman Kimball)
I liked this piece. I recommend you read the whole thing, but here is a taste:
The good news is, if our traffic problem is one of driver frustration and not one of travel time or total volume, we can improve things much more easily than we can alter absolute travel time or total volume. Changing the latter two things is a Sisyphean task, given the reality of induced demand and Marchetti's constant. But fixing the frustration piece? The toolkit is right in front of us, as evidenced by the experience of driving on well-designed two-lane urban streets that already exist. In this context, we drive at a moderate but steady speed, an experience which doesn't feel chaotic or unsafe, and which offers lively streetscapes and scenery to look at.
This realization leaves us free to advocate for high-quality, compact development—development which creates destinations that are pleasant to spend time at on foot, and that reduces the need to hop in a car in the first place—without adopting the misguided fear that such development is going to unleash Carmageddon.
Markus Brunnermeir and Yann Koby's paper "The Reversal Interest Rate" has a title and an abstract so intriguing for those interested in negative interest rates that I need to discuss it. Here is the abstract:
The "reversal interest rate'' is the rate at which accommodative monetary policy "reverses" its effect and becomes contractionary. The reversal interest rate depends on various factors: (i) banks' asset holdings with fixed (non-floating) interest payments, (ii) degree of interest rate pass-through to loan rate and deposit rate, (iii) amount of bank's whole sale funding. Quantitative easing (QE) increases the reversal rate. QE should only employed after interest rate cut is exhausted. Moreover, low interest rates beyond the time when fixed interest rate mature undo its effectiveness, suggesting a different forward guidance policy.
Ruchir Agarwal and I had a chance to talk to Markus Brunnermeier at the Bank of International Settlements when we went to present our paper "Breaking Through the Zero Lower Bound" there on November 17, 2016.
Markus was very gracious in our conversation. Ruchir and I explained our interpretation that the Markus and Yann's "reversal interest rate" was all about the effects of low interest rates on bank profits and therefore bank balance sheets. (This is along the lines of my post "What is the Effective Lower Bound on Interest Rates Made Of?") Markus agreed with that interpretation, and with the idea that central banks can help counteract the profit and balance sheet effects of negative interest rates with other policies.
What this means is that the reversal interest rate can be pushed down as low as needed if steps are taken to to keep bank balance sheets healthy. One possible step to maintain bank profitability and bank net worth in a negative interest rate environment is to reduce the paper currency interest rate, so that banks are able to lower the rates they pay depositors without having to worrier about depositor flight into paper currency. This approach is in line with what I write in "If a Central Bank Cuts All of Its Interest Rates, Including the Paper Currency Interest Rate, Negative Interest Rates are a Much Fiercer Animal."
Another possible step to maintain bank profitability and bank net worth is for the central bank to effectively make transfers to private banks. Tiered interest on reserve formulas in which higher interest is paid on reserves up to a certain level is one way to do this. The Swiss National Bank and the Bank of Japan both do this. Loans from the central bank to private banks at below market interest rates are another way to effectively make transfers to the private banks. The European Central Bank does this. Thus, effective transfers from the central bank to private banks are already current policy for many central banks that have used negative interest rates. So this is a highly relevant type of policy.
I talk about an interesting variant on the tiered interest on reserves approach in these posts:
- How to Handle Worries about the Effect of Negative Interest Rates on Bank Profits with Two-Tiered Interest on Reserves Policies
- Ben Bernanke: Negative Interest Rates are Better than a Higher Inflation Target
- The Bank of Japan Renews Its Commitment to Do Whatever it Takes
- Why Central Banks Can Afford to Subsidize the Provision of Zero Rates to Small Household Checking and Savings Accounts
It seems likely that inventive central bankers could easily come up with other mechanisms for effectively transferring funds to private banks to keep their profits and net worth healthy, and so avoid a binding reversal interest rate. Thus, though the concept of a "reversal interest rate" is quite intriguing, it is not a serious barrier to negative interest rate policy. Rather, the concept of a "reversal interest rate" points to the operational importance of central banks keeping an eye on bank profits and bank balance sheets when lowering interest rates.
In keeping with an attention to bank balance sheets, it can't be emphasized too much that negative interest rate policy is highly complementary with high capital conservation buffers for banks that keep banks from making their balance sheet weaker by paying dividends or buying back stock unless the balance sheet is very strong to begin with. On this, see
- Why Financial Stability Concerns Are Not a Reason to Shy Away from a Robust Negative Interest Rate Policy
As I wrote in "John Locke: Theft as the Little Murder" in his 2d Treatise on Government: On Civil Government, John Locke often used murder as a metaphor for other crimes. In section 16 of his 2d Treatise on Government: “On Civil Government,” he uses a similarly extreme case to bolster the legitimacy of punishment: considering the case of a determined, deadly, and irreconcilable enemy and comparing such an enemy to a dangerous lion or wolf:
The state of war is a state of enmity and destruction: and therefore declaring by word or action, not a passionate and hasty, but a sedate settled design upon another man’s life puts him in a state of war with him against whom he has declared such an intention, and so has exposed his life to the other’s power to be taken away by him, or any one that joins with him in his defence, and espouses his quarrel; it being reasonable and just, I should have a right to destroy that which threatens me with destruction: for, by the fundamental law of nature, man being to be preserved as much as possible, when all cannot be preserved, the safety of the innocent is to be preferred: and one may destroy a man who makes war upon him, or has discovered an enmity to his being, for the same reason that he may kill a wolf or a lion; because such men are not under the ties of the common-law of reason, have no other rule, but that of force and violence, and so may be treated as beasts of prey, those dangerous and noxious creatures, that will be sure to destroy him whenever he falls into their power.
The logic as stated is for a situation of your life or mine. You could walk away and defuse the situation. I cannot, because you would pursue me. So it is legitimate for me to do whatever it takes to incapacitate you so you cannot kill me, including killing you, if that is necessary.
In cases of lesser danger, the significance of this passage is in justifying doing what is necessary to deter someone from preying on the innocent with impunity—especially if that deterrent action harms only the guilty. I discuss the principles for these cases of lesser danger in the two posts