Do U.S. Negative Rates Call For a Permanent Expansion of the Government?

From the IMF video, starting around 1h 2m 15s:


I remember another course we had at MIT with Mr. Samuelson, who I think is a relative of yours [laughter], where he explains…why the real interest rate couldn’t be negative indefinitely. He said there was always the possibility of leveling a hill so that a locomotive could get to a destination [faster]…

If the real return is negative, first of all, monetary policy can get negative interest rates with positive inflation. But on the fiscal side, the return to public investment, as long as it’s real, as long as it’s above zero, would always be an approach. It would always be profitable at negative interest rates.


[…] If you think about it as a private investment, it requires that there are perfect property rights, that you can get the benefit of that through all of time, which is reasonable to suppose you don’t. If you think of it as a public investment, it’s sort of the point that there may be a case for what, in some ways of thinking, be a permanent fiscal expansion, where you are constantly undertaking projects of that kind. It is precisely how one should think of medium-term and long-term fiscal policy that the kind of argument that I made goes to, to a very substantial extent.

[…] if you generate inflation, you can have as negative of a real interest rate as you want. It’s often assumed, from that, that monetary policy can necessarily solve the problem alone. But that depends on the ability of pure monetary policy to achieve any desired inflation.

There’s no question… if you drop enough dollar bills from enough helicopters, you can get as much inflation as you want, but in the classic economic lexicon, that’s expansionary fiscal policy, because you are making a transfer. And we’ve done a lot of quantitative easing, and the inflation rate is not conspicuously higher than what it was before it started.

I would normally edit a transcript a bit more, but I wanted to make sure you saw that Summers has a triple hedge (“it’s sort of the point that there may be a case for what, in some ways of thinking”) before he says that we may need a permanent, or at least a permanent enough, fiscal expansion. This is a long way away from the “timely, targeted, and temporary” mantra Summer had for fiscal stimulus in 2008. Stimulus should still be very well targeted, but now temporary and perhaps even timely are up for grabs.

Of course, if we needed to expand government for our new era, we have a lot of projects, like fighting global warming and rationalizing our safety net with some kind of basic income, with which we could start. So we aren’t lacking for genuine investment opportunities. But would a serious and sustained expansion of the size of government be a necessary or sufficient condition for combating the issue of secular stagnation? I’m curious what everyone thinks and why.

I can imagine the steam coming out of Ryan Avent’s ears at Summers’s description of quantitative easing and the inflation rate (see Avent’s response to the Summers speech here). I will say that 11 months ago, when the Evans Rule and QE3 were announced, I thought there would be a small but reasonable chance that we’d experience anemic growth but above-trend inflation (say 2.25 percent). The question then was why people should be happy about this, and whether it would translate into wage growth. Instead, we have anemic growth and record-low inflation, and I don’t know how to explain that.

The old complaint was that Bernanke was targeting volumes instead of prices (I’ll buy so many bonds, but not set the 10 year interest rate at 1.75 percent and the mortgage rate at 3 percent), in part because he was afraid of failing to hit a target and, perhaps, was afraid of the optics of it. But the one target he has gone for, 2 percent inflation, he hasn’t hit. I imagine that’s a big problem for bigger actions going forward.

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