I see that Arnold Kling is exasperated when I cite continuing low interest rates as evidence that concerns about crowding out are wrong, citing the Reagan years as a counterexample.
Let me exasperate right back. The Reagan years were marked by two things: large budget deficits — although much smaller as a percentage of GDP than we’re seeing now — and a huge disinflation, engineered by Paul Volcker. So we need to look at real, not nominal interest rates — and real rates were in fact very high by historical standards during the Reagan years. 10-year bond rates ranged between 8 and 9 percent in the later Reagan years, while inflation generally ran under 4 percent.
And may I say, I thought that this was part of what every economist knows — the story of the tight-money loose-fiscal mix of the Reagan era is, literally, a textbook case that’s in just about every undergrad macro book.
Meanwhile, this time around real rates are by contrast extremely low. In fact, for 5-year Treasuries they’re actually negative:
Oh, and about the idea that we’re keeping rates low thanks to big inflows of foreign capital — um, those inflows, which are the flip side of the current account, are actually way down from pre-crisis levels:
I know many people are unwilling to give up the loanable-funds, crowding out story; but this evidence, at least, doesn’t help their case.
