Infinite economic growth: “Keep interest rates low” (Krugman, 1998, 2010)

June 29, 2010

I believe that the engine of economic life is in the cities. Of course, it is important the national economic policy, but there probably is too much of a bias towards the national level, this is true for academics and policy makers.

I think this bias in the US comes in part after the WWII, the Manhattan Project and Annevar Bush (he basically asked to brutally fund his Ivy League schools to bring national victory through science – he was a very intelligent person), and the traditional nationalistic tendencies of the European countries (I’ll put also a little blame to the Marshall Project for funding them at national level).But anyways, the fact is a professor has more chances to succeed if he focused on the national level, (or even regional level in the case of Wales, Catalonia or Basque Country for their political-economic system – is in it a coincidence that the Regional, instead of National System of Innovation, was created in those places?), instead of cities. Also the national media plays an important role into tell citizens, that they’re not citizens of a city, but of a country. It was not until my research in Latin America for my Master thesis that I started realizing of the importance of the city-region, instead of the national level.

However, sometimes I can not avoid to think about the policies at the national-global level. Today I would like to comment on how screwed up can be the monetary policies of the Central Banks or Federal Reserve during the last decade.

I remember a decade ago, all the pressure that the Euro Zone was receiving to lower the interest rates. I remember all the economic press on how stupid the Euro was going to be with such a high interest rate. For many years Frankfurt, had to defend itself. The idea was fighting inflation and control the economy. After all, Japan had 0% interest rate for almost 15 years, and this did not help them. The American economy was growing well, and everyone though it was because of quasi-god Greenspan, who so smartly had the interest rates low.

What happen when we have low interest rates? Nobody wants to save. If you put the money in the bank they will give you a 0,5% a year, with an inflation of 2% a year, this is loosing your money. You have to spend it, as fast as you can. And yeah, consumption… and the economy grows… Fantastics isn’t? (True, much better than in the 1980s, with double digit rates.)

Wall Street also loves the idea of lower interests, for two reasons. First, because people with savings instead of putting in their savings account in the bank, they will put it in the stock market, you can make up to 10% a year!! without any effort!!. Second, the investment firms they can play, yeah play, easier with cheap money.

There is someone else who likes a low interest rate: The US government. And this is for two reasons. First because they can do all the projects they want printing money, instead of having to tax the people. Something that of course it’s against the “freedom” of the American people. Second, because they borrow so much money to foreigners (especially Asian), if they raise their interest rates, then they have to pay them back more Billions, (or is it Trillions?) in interest.

One of my heros, or one of my former heroes?

Me with the Krugman's name tag, right after his speech at the American Association of Geographers in DC last April

So, is it a good idea to low interest rates in the face of deficits and high unemployment?. This question is highly relevant in 2010. Here it is Nobel Prize in Economics, Dr. Paul Krugman answering:

“it is quite possible to reduce the deficit and increase employment at the same time. All you need to do is cut interest rates, so that private spending takes up the slack” (Krugman, 1998; The Accidental Theorist, p. 37)

This is found in the Chapter “Unmitigated Gauls: Liberte, Egalite, Inanite” in which Krugman bashes the French for maintaining relatively high interest rates. Many Anglos, (German and Spaniards too) think that one can not go wrong criticizing the French, but I have to admit that they were not that wrong, and their influence to have the ECB maintain realistic interest rates. Even though finally after all the pressure, they took it almost as low as the Fed. Which was a bad decision in my opinion.

Looking at the statement of Krugman, sounds pretty ridicule today. Yes, we have to give him that this was after the 1990s US economic growth, but are these articial low interest rates the cause of this? (hint: look at the cities), Did not these low rates contributed to the dot.com bubble? Are not these artificial interest rates the trigger of the today’s housing bubble & bust? Did they not greatly affect  the financial mess in which we are? Did not the low rates helped governments, firms and families got into a huge amounts of debt? With all my regret I have to say, yes, yes, yes, yes and freaking yes.

Yeah, Krugman and others “foresaw” the housing bubble when it was in its last throats, but that was not that hard. Heck, I myself tried to convince all my family and friends to don’t buy an overpriced house!!

Yesterday Krugman, he kept saying how wise it was to keep interest rates low. He says

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. (Krugman, The Third Depression, June 27, 2010)

This time I agree with him. That is Economic 101, from the textbooks he writes! That is when the economy is slow keep interest rates low. But WHY, WHY by the end of the 1990s??

Having expressed all these things, I have to say that I really respect and admire Krugman. Specially for stand against many of the Bush policies and supply-side economics (I think now they go by the name of Tea Party :), and the academic field for his proposition in geographical economics, importance of the cities, and his efforts to bring together Economists and Geographers. And of course because his theories convinced the Swedes to give him that golden medal :)

 

I believe that the engine of economic life is in the cities. Of course, it is important the national economic policy, but there probably is too much of a bias towards the national level, this is true for academics and policy makers. I think this bias in the US comes after the WWII, the Manhattan Project and Vannevar Bush (he basically asked to brutally fund his Ivy League schools to bring national victory through science – he was a very intelligent person), and the traditional nationalistic tendencies of the European countries (I’ll put also a little blame to the Marshall Project for funding them at national level). But anyways, the fact is a professor has more chances to succeed if he focused on the national level, (or even regional level in the case of Wales, Catalonia or Basque Country for their political-economic system – is in it a coincidence that the Regional, instead of National System of Innovation, was created in those places?), instead of cities. Also the national media plays an important role into tell citizens, that they’re not citizens of a city, but of a country. It was not until my research in Latin America for my Master thesis that I started realizing of the importance of the city-region, instead of the national level.

However, sometimes I can not avoid to think about the policies at the national-global level. Today I would like to comment on how screwed up can be the monetary policies of the Central Banks or Federal Reserve during the last decade.

I remember a decade ago, all the pressure that the Euro Zone was receiving to lower the interest rates. I remember all the economic press on how stupid the Euro was going to be with such a high interest rate. For many years Frankfurt, had to defend itself. The idea was fighting inflation and control the economy. After all, Japan had 0% interest rate for almost 15 years, and this did not help them. The American economy was growing well, and everyone though it was because of quasi-god Greenspan, who so smartly had the interest rates low.

What happen when we have low interest rates? Nobody wants to save. If you put the money in the bank they will give you a 0,5% a year, with an inflation of 2% a year, this is loosing your money. You have to spend it, as fast as you can. And yeah, consumption… and the economy grows… Fantastics isn’t? (True much better than in the 1980s, with double digit rates.)

Wall Street also loves the idea of lower intererest, for two reasons. First, beacuse people with savings instead of puting in their savings account in the bank, they will put it in the stock market, you can make up to 10% a year!! without any effort!!. Second, the investment firms they can play, yeah play, easier with cheap money.

There is someone else who likes a low interest rate: The US government. And this is for two reasons. First because they can do all the projects they want printing money, instead of having to tax the people. Something that of course it’s against the “freedom” of the American people. Second, because they borrow so much money to foreigners (especially Asian), if they raise their interest rates, then they have to pay them back more Billions, (or is it Trillions?) in interest.

So, is it a good idea to low interest rates in the face of deficits and high unemployment?. This question is highly relevant in 2010. Here it is Nobel Prize in Economics, Dr. Paul Krugman answering:

“it is quite possible to reduce the deficit and increase employment at the same time. All you need to do is cut interest rates, so that private spending takes up the slack” (Krugman, 1998; The Accidental Theorist, p. 37)

This is found in the Chapter “Unmitigated Gauls: Liberte, Egalite, Inanite” in which Krugman bashes the French for maintaining relatively high interest rates. Many Anglos, (German and Spaniards too) will think that one can not go wrong criticizing the French, but I have to admit that they were not that wrong, and their influence to have the ECB maintain realistic interest rates. Even though finally after all the pressure, they took it almost as low as the Fed. Which was a bad decision in my opinion.

Looking at the statement of Krugman, sounds pretty ridicule today. Yes, we have to give him that this was after the 1990s US economic growth, but are these articial low interest rates the cause of this? (hint: look at the cities), Was not this low rates the cause of the dot.com bubble? Are not these artificial interest rates the trigger of the today’s housing bubble? Did they not greatly affect the financial mess in which we are? Did not the low rates helped governments, firms and families into into a huge amounts of debt? With all my regret I have to say, yes, yes, yes, yes and freaking yes.

Yeah, Krugman and others “foresaw” the housing bubble when it was in its last throats, but that was not that hard. Heck, I tried to convince all my family and friends to don’t buy an overpriced house!. It was not until yesterday (literally) that I read Krugman saying that the G-20 should consider rise interest rates. (I guess the only one in favor would be the Chinesse economists who always take the wrong decisions against the mainstream – please note irony)

Having expressed all these things, I have to say that I really respect and admire Krugman. Specially for stand against many of the Bush policies and supply-side economics (I think now they go by the name of Tea Party :), and the academic field for his proposition in geographical economics, importance of the cities, and his efforts to bring together Economists and Geographers. And of course because his theories convinced the Swedes to give him that golden medal :)

 

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4 Responses to “Infinite economic growth: “Keep interest rates low” (Krugman, 1998, 2010)”

  1. RecessionCone Says:

    Always good to hear your thoughts.
    But you don’t quite understand the Tea Party. =)

    The Tea Party rejects Bush’s economic policies, which were far from conservative. Under Bush, Federal Government expenditures grew from 2.0 to 3.1 T$, or 55%. Under Clinton, expenditures grew from 1.45 to 1.9 T$, or 30% (and the government actually had a surplus!) Clinton’s fiscal policy is actually much more in line with the Tea Party’s philosophy of restrained federal government spending.

    Although I think Tea Party people and Krugman probably reject Bush’s fiscal policies for different reasons. =)

  2. RecessionCone Says:

    Just for fun: here’s some explanation of where the Tea Party came from:
    http://pajamasmedia.com/victordavishanson/where-did-the-teaparty-anger-come-from/?singlepage=true

    You’ll notice not a single mention of supply-side economics… =)

  3. carlos9900 Says:

    I had a small conversation (by email and face to face) with my friend RC, and I will only say that he’s not a hardcore supporter of the Tea Party, at least for their economic policy ideas. In my opinion, they’re just another branch of the supply-side economists, even though if the vast majority of them don’t even know it.


  4. […] Infinite economic growth: “Keep interest rates low” (Krugman, 1998, 2010) June 2010 3 comments 4 […]


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