Krugman’s blog, 3/2/14

There were four posts yesterday.  The first was “Growth and Interest Rates:  I Appear To Be Wrong:”

In my last post I followed Floyd Norris in criticizing the CBO, which has marked down its estimates of future economic growth without marking down its estimates of future interest rates. I still think that’s a fair criticism. But I also offered a hypothesis: that interest rates fall more than one-for-one with slower growth, so that the crucial difference r-g — interest rate minus growth rate — actually falls, making debt easier, not harder, to handle.

So I’ve taken a quick and dirty look at US history, and it doesn’t seem to bear my hypothesis out. Here’s actual r-g — strictly speaking, interest rates minus the rate of growth of GDP over the previous year — since 1952:

Interest rate minus GDP growth Interest rate minus GDP growth

Postwar US history broadly breaks into two eras: a fast-growth generation after World War II, and generally slower growth thereafter. If my hypothesis had been right, r-g should have been lower in the second era than the first. Well, it looks as if the opposite was generally true, even if you ignore the spikes around big recessions.

Now that I think about it, the case of Japan — although complicated by the zero lower bound — also counts in this direction: interest rates have been low, but GDP growth even lower.

I still think that a fall in g leads to a fall in r (as it did in Japan), so that the budgetary implications are weaker than CBO seems to think. But lower growth does appear to make debt harder, not easier, to carry.

The second post yesterday was “Eco 348, The Great Recession: War Among the Economists:”

I have real doubts about whether this class — at 8:30 AM tomorrow — is going to happen. I guess I’ll be up at 6 shoveling out my driveway so I can get out if it does happen. Anyway, slides for the lecture (pdf) are posted.

Yesterday’s third post was “It’s the Gas Gas Gas:”

Mostly a note to myself: short-run fluctuations in the inflation rate are more or less entirely about gasoline prices, which affect headline and even, to some extent, core inflation via their impact on costs. The picture:

Meanwhile, gas prices have no predictive power at all for future inflation. So anyone reacting to short-run movements in headline inflation is making a big mistake.

The last post yesterday was “Comment Etiquette: A Reminder:”

Every once in a while it seems necessary to put out a reminder of what you should and shouldn’t be doing if you comment on this blog, or indeed anywhere at the Times.

First, the Times, she is a Victorian lady; no obscenities, not even the mild ones that pepper almost everyone’s conversation these days.

Second, stay on topic. If you want to regale others with your thoughts about life, the universe, and everything, get your own blog. It’s not just annoying when you treat the comment section here as a place to vent, it’s hurting the overall experience. Someone has to moderate all comments — sometimes someone at the Times, sometimes yours truly — and if you submit lots of irrelevant stuff that has to be cleaned out, you’re making life harder for everyone else.

Finally, for those who imagine that comments are being screened on other grounds, with only favorable comments appearing: Get a life! If you imagine that anyone at the Times has either the time to do this or the inclination, you have delusions of grandeur.


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One Response to “Krugman’s blog, 3/2/14”

  1. William Halethorpe Says:

    Shouldn’t rates increase faster than the rate of growth following a recession based on the level of anticipation much like in the example of worthless options cited in your link. Housing booms and mining busts, empty factories and delinquent carriers are obvious examples of the effects of retrenchment/over spending/borrowing, but we don’t have that today. If housing expands at the most current rate – new housing sales reach five year high water mark! – they are not precursors of pricing alone but of interest rates as well. No one says with certainty that prices will continue to rise. But they do agree that when they do then rates of borrowing will trend higher and it is for lenders and economists to predict where they will sail off to. So it is common sense to arrive at the belief that growth leads rates. And more often than not they do. Except perhaps following a deep recession when expectations lead purchases.

    Isn’t what u r looking for the amount not the rate of borrowing and then the rate or actual GDP. Today it’s so obvious that in the intermediate term rates will certainly outstrip growth but that’s a positive sign. Otherwise lenders would be facing closings. Of course for some lenders it is wiser to generate growth in lower interest rate environments as long as they can cycle their investments.

    Certainly u’ve made the case for the expansion of QE, and if one were to read the latest news on Q4 GDP it was significantly lower than expected almost entirely due to the lack of federal spending.

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