Real Interest Rates and Fiscal Prudence | Steven J. Davis, Kenneth Rogoff | Hoover Institution

Steven J. Davis (0:10)

I'm here now with Ken Rogoff. Ken is former chief economist at the IMF, professor at Harvard, world-renowned economist, I think it's fair to say. And he gave a talk here for lunch at the Jackson Hole Economic Policy Symposium.

I'm going to characterize this talk, Ken, and welcome, by the way, welcome.

You've been on this podcast before and you're a great guest. But I'm going to characterize this talk as I was right. So tell us how you were right and give us the context. Yeah.

Kenneth Rogoff (0:44)

I mean, so during the 2010s, well into the pandemic, there was this very prevalent view on Wall Street, in central banks and absolutely emanating out of academic economics that interest rates were not only low, real interest rates, they were going to be low forever. Actually, nothing to worry about, they're going to get lower still. The most famous person who espoused this was Larry Summers. He's a great mind.

I okay, criticize him in every way. But and he, to his credit, eventually reversed course, although he certainly didn't indicate that.

Steven J. Davis (1:29)

Not with the same forcefulness as initial views.

Kenneth Rogoff (1:34)

We did debates on it, and he will come back to that.

Steven J. Davis (1:37)

Well, you had a good line at your speech that I lost every debate, but I think I was right.

Kenneth Rogoff (1:43)

No, absolutely.

Steven J. Davis (1:45)

He's an absent debate.

Kenneth Rogoff (1:47)

Then Paul Krugman was positively disingenuous, and what he was doing of claiming we had mistakes, and it was just nonsense.

But there was a lot of good, very smart young economists. It was an interesting problem. How can you write a model so that interest rates will go down and down? They wrote very nice models about demographics, inequality, productivity, and they were science. It was good. But when you come to Jackson Hole, which they did, you're talking about policy. Can we rely on these things? And I would look at history. That's what a lot of my work is.

Steven J. Davis (2:28)

Right.

Kenneth Rogoff (2:29)

And if you look at history, real interest rates are sometimes high, they're sometimes low, until they're not.

And the idea that we're going to create a new theory of the world, forgive me, this time is different, that interest rates are always below was such nonsense. But it was so politicized.

Steven J. Davis (2:49)

Yes.

Kenneth Rogoff (2:50)

That it was very hard to push back.

Steven J. Davis (2:52)

So two points there. When you talk about history, you've got a paper with others in, thanks to the AER, goes back centuries. So you're looking at a very long span on real interest rates on long-term government.

Kenneth Rogoff (3:03)

What do you need to do? Because it's not enough to say, exactly today, they were the same as in 2003 That's not really telling you statistical data. But if you look at a really long period, there's regression to mean. If that's not too jargonistic a word, things go back to normal.

Steven J. Davis (3:21)

But I thought the more fundamental point is just that real interest rates are volatile.

Kenneth Rogoff (3:25)

And they're variable.

Steven J. Davis (3:26)

So they can move around. They have moved around.

Kenneth Rogoff (3:28)

Moved around. And by the way, that goes to the Fed.

I was talking about fiscal policy there, but the Fed had all this science of our star, what should our load star, what should our target be. And I made a hate to pick on the Taylor rule, but I'm going to.

You need to have some kind of interest rate that's there. A real interest rate is critical to instructing it. And it's incredibly volatile. It collapsed during the financial crisis. It's way higher now. One of the struggles Kevin Warsh has is not only does he have to think about raising the Fed funds rate relative to what it started getting cut from, but where does it land? And we're probably in a world where interest rates are higher. So yeah, I mean, this conference is a great conference, but definitely there were 10 or 12 papers about this.

Steven J. Davis (4:27)

Over the years.

Kenneth Rogoff (4:28)

Over the years. And then they had papers on debt where debt is a zero issue. No one should ever think about that. Barry Ikenbreen, he's a great scholar, had this paper that debt is very, very high.

So should we care? More probably okay for advanced countries. And I'd worry about Nigeria. And I'm sorry, you know, that's overblown.

Steven J. Davis (4:51)

So, well, let me, I want to underscore this point, which you've made in a couple of different ways this way, that the most interesting science, the things that gets published in the top economics journals, it's often interesting, not necessarily the right basis for robust policy making.