Having read the second half now I’ve found more of which I’m a little more skeptical, but this comment seemed so key: “It's quite possible for the equilibrium real interest rate to be negative, if lots of people want to transfer purchasing power to the future, but the actual prospective productivity of the future economy is looking somewhat bleak.”
I think we should expect this to be common in a world with a shrinking ratio of working age to retired population. Population growth has accounted for a large fraction of all real growth for all of reliably measurable economic history. We must expect that any claims we put on the economy’s output will shrink over time as the number of workers supporting us dwindles compared to the claims accumulated by our cohort. Productivity can make this far less uncomfortable and potentially prevent declining living standards, but only if we make the most of it by, for example, making sure that we stay closer to equilibrium real interest rates and keep the economy efficient.
Also we should do more to encourage and support parenting a larger future population but that’s a whole other can of worms in terms of societal narrative besides inflation.
Exactly right! The key is that it's possible for the Wicksellian equilibrium risk-free real interest rate, the werfrir, to be negative, because the amount of claims to future purchasing power that people want to buy exceeds the amount of claims to future purchasing power that people are willing to sell.
Why would that happen? Demographics is a big factor. People's desire to transfer purchasing power to or from the future depends on the life cycle. It's especially in middle age that people are most likely to want to move a lot of present purchasing power into the future. Young people tend to want to move purchasing power to the present, from the future, to buy homes, get college educations, start businesses, etc. ... And maybe also foolishly, from mere myopia and present bias. Entrepreneurs with brilliant ideas want to bring purchasing power into the present, and have lots of it to offer in future, at least if all goes well. Inventors too. But it depends on technology: sometimes big ideas take a lot of capex, sometimes not.
I think demographics is part of the reason why interest rates have been low for a while, (and ought to have been lower!) but another reason is that the technologies that are most forward driving and transformative have not been very capital intensive. Software characteristically has zero marginal costs and a lot of network externalities, so it's a winner take all market, and that makes investment risky, but the sheer amount of capex isn't huge compared to steel mills or carmaking or airplane manufacture or a lot of other things.
We may have caused technological progress to take low-capex forms through regulatory strangulation that makes it impossible to do big things that affect the physical environment. That's a larger story. But it might just be a function of the terrain of the technological space that we're in.
It’s late and I’m not sure when I’ll be able to read the second half, but I have rarely been in more thorough agreement with you than in your first half, including your caveats.
I echo Nato's comment. I don't think I've agreed more with anything you've ever written. Great job!
Having read the second half now I’ve found more of which I’m a little more skeptical, but this comment seemed so key: “It's quite possible for the equilibrium real interest rate to be negative, if lots of people want to transfer purchasing power to the future, but the actual prospective productivity of the future economy is looking somewhat bleak.”
I think we should expect this to be common in a world with a shrinking ratio of working age to retired population. Population growth has accounted for a large fraction of all real growth for all of reliably measurable economic history. We must expect that any claims we put on the economy’s output will shrink over time as the number of workers supporting us dwindles compared to the claims accumulated by our cohort. Productivity can make this far less uncomfortable and potentially prevent declining living standards, but only if we make the most of it by, for example, making sure that we stay closer to equilibrium real interest rates and keep the economy efficient.
Also we should do more to encourage and support parenting a larger future population but that’s a whole other can of worms in terms of societal narrative besides inflation.
Exactly right! The key is that it's possible for the Wicksellian equilibrium risk-free real interest rate, the werfrir, to be negative, because the amount of claims to future purchasing power that people want to buy exceeds the amount of claims to future purchasing power that people are willing to sell.
Why would that happen? Demographics is a big factor. People's desire to transfer purchasing power to or from the future depends on the life cycle. It's especially in middle age that people are most likely to want to move a lot of present purchasing power into the future. Young people tend to want to move purchasing power to the present, from the future, to buy homes, get college educations, start businesses, etc. ... And maybe also foolishly, from mere myopia and present bias. Entrepreneurs with brilliant ideas want to bring purchasing power into the present, and have lots of it to offer in future, at least if all goes well. Inventors too. But it depends on technology: sometimes big ideas take a lot of capex, sometimes not.
I think demographics is part of the reason why interest rates have been low for a while, (and ought to have been lower!) but another reason is that the technologies that are most forward driving and transformative have not been very capital intensive. Software characteristically has zero marginal costs and a lot of network externalities, so it's a winner take all market, and that makes investment risky, but the sheer amount of capex isn't huge compared to steel mills or carmaking or airplane manufacture or a lot of other things.
We may have caused technological progress to take low-capex forms through regulatory strangulation that makes it impossible to do big things that affect the physical environment. That's a larger story. But it might just be a function of the terrain of the technological space that we're in.
It’s late and I’m not sure when I’ll be able to read the second half, but I have rarely been in more thorough agreement with you than in your first half, including your caveats.