Scott Sumner on Interest Rates

Episode Summary

Executive Summary: Russ Roberts and Scott Sumner examine why interest rates are so low and why that is not necessarily a paradox. Sumner argues that low rates reflect weak investment demand, low inflation, demographic and global savings forces, and regulatory barriers—not simply easy money from the Fed. The discussion extends to secular stagnation, Silicon Valley’s role, housing shortages, and how regulation and intellectual property shape investment, inequality, and returns.

Main Topics: Why low interest rates are not a puzzle (Priority: 5/5): Sumner argues Robert Shiller is reasoning from a price change: low rates can reflect reduced demand for borrowing/investment rather than increased credit expansion. Interest rates and investment are pro-cyclical, so low rates often accompany recessions and weak investment. Supply and demand in credit markets (Priority: 5/5): The conversation uses basic microeconomics to explain that shifts in savings and investment schedules determine equilibrium interest rates. Roberts emphasizes that a price change alone is not informative without knowing which curve shifted. Real vs. nominal interest rates and inflation (Priority: 5/5): They distinguish nominal rates from real rates. Lower inflation explains some of today’s low nominal rates, but Sumner sees the real-rate decline as the deeper issue tied to slow growth, global savings, and lower investment demand. Global savings, demographics, and secular stagnation (Priority: 4/5): Sumner links lower rates to aging populations, slower population growth, Asia’s high savings, and fewer traditional investment opportunities. Roberts questions whether secular stagnation fully explains the dynamism visible in parts of the economy. Silicon Valley, intangible capital, and uneven growth (Priority: 4/5): The hosts debate whether the new economy’s software, network effects, and intellectual property mean high growth can coexist with low macro-level investment. They note that new firms may require less physical capital and fewer workers than old manufacturing firms. Housing, regulation, and suppressed investment (Priority: 5/5): Both emphasize that zoning, permitting, environmental review, and land-use restrictions reduce housing supply, raise rents, and deter investment. Sumner adds that regulation can favor large incumbents and worsen inequality. The Fed, safe assets, and low returns to savers (Priority: 4/5): Sumner argues the Fed mostly follows market forces over time and cannot hold rates far from equilibrium without inflation/deflation. He notes that safe assets now yield near-zero returns while riskier assets and housing can still do well, creating a split financial world.

Key Arguments: Low interest rates are not surprising if investment demand falls; a lower equilibrium rate clears the credit market without needing a credit boom. You cannot infer the effect of a price change unless you know whether supply or demand shifted first. Nominal rates are low partly because inflation is low, but the real-rate decline likely reflects slower growth, aging populations, and a global savings-investment imbalance. Monetary policy is not plausibly holding rates artificially low for years without inflation or overheating; market forces dominate over longer horizons. The high-tech economy may generate strong profits with relatively little physical capital, fewer workers, and more network effects, so it does not necessarily raise economy-wide interest rates much. Housing shortages and restrictive regulation reduce building, push up rents, favor incumbents, and may depress investment while increasing inequality. Safe assets such as Treasury bonds have become unattractive, while risky assets and some real estate have done well, producing a bifurcated return environment. Copyright, zoning, and permitting rules create artificial barriers to entry that can slow innovation and advantage large firms over small ones.

Data Points: Conversation date: April 14, 2015 - Episode introduction Historical real interest rate: 2% to 3% - Roberts notes economists traditionally thought real rates were around this level Inflation in the 1970s: Very high - Used to explain high nominal interest rates in that decade Population growth in Australia: Highest among developed countries - Example used to link higher population growth with higher interest rates Negative interest rates: Slightly below 0% - Observed in Europe, showing nominal rates can go below zero Housing market build-out: Far fewer houses than in prior decades - Used by Sumner to explain reduced demand for mortgage credit Corporate bond / safe asset returns: Close to zero - Safe assets and bank accounts discussed as low-return instruments Treasury bonds in late 2008-2009: Rising in value - Used as an example of safe assets benefiting during crisis Copyright protection term: 100 years for Mickey Mouse (example cited) - Illustrates expanded intellectual-property protections Original copyright term: 14 years - Used as a contrast with modern extended copyright law House-building in Israel: 3.5 years (and sometimes about half a decade) - Example of how regulation and bureaucracy can slow construction Land zoning example: 10,000-square-foot lot zoned for 2 units vs. 1 - Used to show zoning restrictions can be worth hundreds of thousands of dollars

Pivotal Quotes: "You're doing what I call reasoning from a price change." — Scott Sumner: Sumner’s critique of Shiller’s interpretation of low interest rates "If you don't know the cause of the appreciation or depreciation of the currency, how would you have any idea of what the implications are for the U.S. economy?" — Scott Sumner: Explaining why exchange-rate changes cannot be interpreted without identifying the underlying cause "The net effect of the shifts in those schedules is we're probably ending up with a little bit less investment and savings than before but at much lower interest rates." — Scott Sumner: Summary of the savings-investment framework for low rates

Implications: Listeners should treat low interest rates as a symptom, not a standalone signal. The discussion suggests future growth, investment, and inequality will depend heavily on regulation, housing supply, demographics, and the changing structure of innovation—not just Fed policy.