Macro nihilism

In a recent Bloomberg View article, Noah Smith makes what seems to be a sensible point that investment spending has been held back by capital “rationing.”  Despite low yields, mortgages are privileged to the upper end, and business lending to the already-highly- capitalized.  (This is less so than it was, in fairness.)

Largely as a result, financial conditions have not been as a stimulative as low interest rates might imply. Investment spending, for example, has not recovered much, he claims.


I have two thoughts on this.

First, YES!  The fact that interest rates have been low is not necessarily evidence that financial conditions have been particularly stimulative. This point would better have been made in 2010, when everybody was swallowing the Fed nonsense that policy was “extremely accommodative” and effusing about the marvels of QE. But better late than never.  Maybe next time the macroeconomics community – generalizing badly, and not pointing to Noah per se – could show less extreme gullibility.

Second, I really wish Noah had not concluded on this:

This type of research (ed note: on what drives capex)  is fraught with difficulties, and causality is very hard to determine, so it’s important not to read too much into this. But one conclusion seems clear — if we want to increase business investment, policies to promote access to capital seem more promising than policies to reduce interest rates. The latter approach has been tried, and it didn’t work. We might want to give the former a chance. That would mean encouraging venture capital, small-business lending and more effort on the part of banks to seek out promising borrowers — basically, an effort to get more businesses inside the gated community of capital abundance.

The idea that low interest rates “didn’t work” is an odd assertion to make as though self-evident, given that the economy has returned to full employment, the rate of growth of the capital stock has fully renormalized, and prospective demand growth now looks sufficiently buoyant that the Fed has to raise interest rates to tame it.

Rather than say what matters and what doesn’t matter, why not take a general equilibrium approach? For various reasons, investment demand weakened (for any given cost of capital), and so the cost of capital had to be driven down in part by lowering interest rates. This happened, so the economy returned to its Not So Great Moderation equilibrium.

Such a perspective is hardly certain. But it is the standard story on which policy seems to have operated, and the macro data  are hardly inconsistent with it being true.


We can concede that the prevailing equilibrium is unattractive and then have a good debate about how to make it better. Deregulate? Massive public infrastructure program? Break up monopolies? Get globalization going again? Huge tariffs to reverse globalization? Income redistribution towards those with more propensity to spend? Tax cuts for the job creators only? I am all ears.

But the Fed had to dance with the one what brung it. And they did, eventually.  There is not much value in confusing having moved too timidly with too aggressively or in being nihilistic about the whole thing.

Not to pick on Noah, but this idea that interest rates don’t matter is pretty widely held and mistaken for sophistication. You can’t just swing from OH MY GAWD, policy is so accommodative to, meh, rates “didn’t work.”

Yeah but

Hat tip to the former boss. Whenever an analyst was caught making a dumb mistake, he would say “yeah but.”


Yeah, but what does this have to do with Hillary’s emails? James Comey said she may still be using email, even after the election. How come there is no mention of that, given that emails were so clearly the most important issue in the late election?