Has the United States ruined the era of low interest rates? — Quartz Brief of the weekend — Quartz
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Rising prices and the Fed’s efforts to combat them have put the economy in a difficult situation. A recession is looming if the global economy does not catch breaks in the form of unblocked supply chains, additional oil and gas production or a deal to allow Ukraine to export more wheat.
Like most problems, inflation is easier to solve in advance. The causes of today’s rising prices are not necessarily avoidable, but it is possible, even easy, to imagine that the US economy is in a better position to deal with this pressure. When historians assess US economic policy in the 2010s, they will see a decade of missed opportunities.
For example, if gas prices are the main issue today, wouldn’t it be better if the United States decarbonized its economy more quickly? If rent is a major contributor to inflation, wouldn’t more houses help bring it down? If the supply chain is blocked, would deeper ports and better airports help?
Looking back on policy debates over the past decade, it is increasingly clear that the decision to let public investment fall to its lowest level since World War II between 2014 and 2020 was a major mistake. The “jobless recovery” after the 2008 financial crisis left the Federal Reserve to hold interest rates near zero for five years before the slow rise began. These low interest rates have made public investment even more attractive than it might otherwise be.
To be clear, the idea of a missed opportunity should not suggest that now is not the right time to invest in infrastructure. It would have been better to build now than not to build at all, but it would have been better to have started building five years ago.
- After the accident. When the mortgage bubble burst in 2008, the US government responded with a stimulus package that included just over $100 billion in infrastructure investment. Environmentalists, executives, city planners and farmers could all find reason to support spending on transport, energy, communications and even health and education infrastructure. An additional $300 billion package was passed in 2015, which everyone agrees fell short.
- “Secular stagnation”. The budget battles of the 2010s (remember the Tea Party?) led to public spending caps. Economists began to worry about “secular stagnation” – a fear that globalization, slowing population growth and advanced technologies would lead to a permanent decline in investment. The Fed’s inability to meet its price target raised fears of deflation. The bipartisan desire for an “infrastructure week” has become a running joke under the Trump administration, but nothing has happened.
- It’s pandemic time. The coronavirus pandemic has upended the global economy and unprecedented US relief spending has helped people pull through, but the booming recovery has led to the highest inflation in 40 years. Now, the rising cost of living is driving up Fed rates, but Chairman Jay Powell worries that the current drivers of inflation are spiraling out of his control. Wouldn’t it be nice if the US economy had just a little more transportation capacity, green energy and livable space to help ease the pressure?
The US government is not investing as much as it used to, especially at the federal level.
What to watch next
- Budget wars are back. The cost of government spending will be more visible in an era of high inflation and high interest rates, but even if they weren’t, a Democratic president and Republican congressional pollsters forecast in the fall that they will fight over taxes, expenses and… God help us all—the debt ceiling.
- How high will the rates go? The fed funds rate, at 1.58% today, isn’t that tight by historical standards, but the Fed expects it to hit 3.8%, last seen in 2005, by next year. But as we saw with the surprise rise of 0.75 percentage points instead of 0.5 this month, the central bank could react to signs of continued price increases with bigger hikes.
- How high will the rates go? Financial conditions are tightening and businesses are preparing for a recession by cutting costs. If the Fed halts rate hikes due to a recession and slowing price increases, the trends that drive the long-term neutral interest rate down could resume: an aging population, progress technology and globalization (probably!)
- There are investments going on right now. The US Congress signed into law a $550 billion infrastructure bill in 2021 and bullied them. Although the bill lacks important climate policies and contains glitches, its successes and failures will influence future investment choices. A bad sign: inflation is already eroding how far money can stretch.
- The supply-side agenda. There is a lot of talk about building more, “supply-side progressivism” and an “abundance agenda”. Will it lead to increased production of the goods and services needed to reduce the cost of living and fight climate change, or is it just a passing fad?
A 🚗 case study
A great case study in the power of timely public investment? The US government all but rescued Tesla with a $456 million loan after the 2008 crisis, a move decried by conservatives as government pick winners. Everybody wins: Tesla went public, paid off the loan sooner, and became a leading maker of electric vehicles, spurring other automakers to step up their commitments to green vehicles. Experts say a similar trick could help drive innovation in other aspects of green power, battery and carbon removal projects. Meanwhile, electric vehicles are approaching 9% of the global market share, which is low, but there is still less competition at the pump and lower emissions in the future.
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Thanks for reading! And feel free to send us any comments, questions, or topics you want to learn more about.
Don’t waste your weekend,
—Tim Fernholz, Senior Reporter