Josh Hendrickson asks a good question

At The Everyday Economist, Josh Hendrickson asks What Does It Mean for the Natural Rate of Interest to Be Negative?

It's a good question. It's a How can this be? question. I like his post already.

Hendrickson points out that "Talk of the zero lower bound has permeated the debate". He brings it into focus:

Specifically, the argument holds that if the market rate of interest is higher than the natural rate of interest then monetary policy is too tight.

He has a few questions, and soon gets to the important one: "Why is the natural rate of interest negative?" He says it's not easy to imagine such a thing. He defines it...

I will define the natural rate of interest as the real rate of interest that would result with perfect markets, perfect information, and perfectly flexible prices

...and he sets up a model. I'm just gonna skip right over the model and look at the conclusion Hendrickson pulls out of it, and where it takes him:

Since the supply curve is horizontal, the real interest rate is always equal to the rate of time preference. So this brings me back to my question: How can we explain why the natural rate of interest would be negative?

You might look at the equilibrium conditions and think “sure the natural rate of interest can be negative, we just have to assume that the rate of time preference is negative.” While, this might mathematically be true, it would seem to imply that people value the future more than the present.

Okay. Models are not my thing. I like to look at ideas and see if they make sense. So, does Hendrickson's conclusion make sense? Or (since I chopped off the rest of his conclusion) does the part I quoted make sense? Does it make sense in our "zero lower bound" state, if that's where we are, to say that people value the future more than the present?

Yeah, it does. But I need to tweak his wording just a bit.


When Hendrickson asks

Are we really to believe that the the zero lower bound is a problem because the general public’s preferences change such that they suddenly value the future more than the present?

he has turned "people" into "the general public". It doesn't need to be that way. The 99% may still value the present more. Maybe it's only the 1% that values the future more. If 1% of the people have most of the money, their preferences predominate. And then what happens depends not on what the majority of the people want, but on what the people with the majority of the money want.

That doesn't invalidate Hendrickson's conclusion. Makes it more likely than not, I'd say. It's the trends of the money, not the opinions of the many, that make the world go round. When a few people make the decisions for most of the money, it might be easier to get into a situation where interest rates tell us that "people" value the future more than the present.

So let's say we restate Hendrickson's view, to accommodate the the kind of inequality that allows a handful of people to accomplish things that the general public cannot.

And suppose we take the "suddenly" out of his sentence. For it may not be that we "suddenly value the future more than the present". It may be something that creeps up on us quietly for a long time, before it reaches the tipping point that makes everyone take notice.

Hendrickson's question is essentially unchanged:

Are we really to believe that the the zero lower bound is a problem because the predominant preferences change such that they come to value the future more than the present?

I can live with it in this form.


Let me answer a question with a question: How might we show that we value the future more than the present?

That's easy: Saving is provision for the future. If you don't spend a dollar today, you're preparing to be able to spend it in the future. So if people value the future more than the present, we would expect to see a vast quantity of savings stored up.

Do we have a vast quantity of savings stored up? You know we do.

Is this vast savings widely and equitably distributed? Or is the bulk of it in few hands, so that the great shares they hold are greater even than we comprehend? If the latter, are the bulk of those funds in so few hands that a consensus could develop among the few? -- a consensus on a new and different economic view, such that their valuation of the future takes precedence over our valuation of the present?

You know it could.

But there need be no consensus, no conspiracy, no particular agreement. The Few have shared interests simply because of their financial standing. Each of the Few on his own may arrive at this new and different economic view that values the future more highly than the present. And as their savings accumulate, their view is strengthened.

If we had sudden luck and found ourselves financially among those Few, in us would naturally arise the same preference for the future, as in the others.