Ross Douthat thinks the age of cheap money is over, that federal spending will have to be reduced as a result, and that both progressives and populists will suffer. Paul Krugman, on the other hand, thinks the current regime of inflation and higher interest rates is just a blip. Who is right?
Two observations here. First, I noted in a series of posts years ago that the American economy was hooked on low interest rates, and that any change in conditions would have significant implications to asset prices and government spending programs. I was right and will take a bow. Second, this is a very important question, with no clear answer. We can only talk in probabilities, not certainties.
Low interest rates were caused by low rates of inflation, which in turn were caused by demographic and technological change and by globalization. These trends earned the name “secular stagnation,” and were a universal phenomenon among highly developed countries. The demographic changes are still with us. The pace of technological change is still about the same. Globalization will change as the result of our uneasy relationship with China, but will not disappear. The war and the pandemic, on the other hand, will go away at some point. In my opinion, therefore, the balance of probabilities falls in Krugman’s favor.