Two articles in the last two days demand attention.
The first is on Bloomberg. The argument is from Stephanie Schmitt-Grohe and Martin Uribe. They claim that higher interest rates may increase inflation expectations and as a result stimulate current consumption. Somehow, at this point, the Fed’s promising to leave interest rates for too long will lead to an intolerable inflation level (per people NPR talks to, here), but also, if we raise interest rates, we’ll stimulate inflation expectations. Low interest rates and raising interest rates will both increase inflation expectations. I hope no one in the Fed takes news clippings too seriously.
The mechanism proposed in the Bloomberg article isn’t the confidence fairy that higher interest rate advocates usually rely on, which is a nice change. However, in the Bloomberg article at least, the mechanism isn’t mentioned at all, which isn’t a nice change. At least in confidence fairy explanations, there’s a solid, visible claim to argue against, but some egregiously incomplete journalism has created a strawman out of Schmitt-Grohe’s and Uribe’s paper. Contending that the current U.S. and decades-long Japanese experiences show that low interest rates on their own don’t stimulate inflation expectations or growth is reasonable, but the reasonable response is that fiscal policy — with zero risk of crowding out, by the way — makes sense. The argument as presented in Bloomberg is that the reason banks don’t want to lend currently is that it’s just too damn cheap for them to do so, so the way to convince them to lend is to make it more expensive.
The second article is by Catherine Rampbell in the Economix blog. It fits strongly in the “label the residual” school. The “fiscal cliff” looms, taxes are going to rise on top earners, and we have data that shows them slowing spending now, so, must be the taxes! One reason to doubt this explanation is that those surveyed in the Gallup poll Rampbell references weren’t asked why they spent more or less than the previous day, previous week, etc. Another reason is the consistency of this dive in average daily spending with the last few years’ trends. Per this chart, from Gallup:
…the upper income group has sharply decreased its spending around the end of the year in each year since 2008-09. The looming fiscal cliff doesn’t explain the similar phenomenon observed in the previous three end of year periods. This chart isn’t visible in Rampbell’s article though. She quotes a chart going back three weeks:
But look how much more dramatic it looks in that context! Mid-year and end-of-year slumps appear to be pretty normal in the longer-run chart, but consistent outcomes aren’t as exciting to explain.
Anyway, JOURNALISTS, man.