AILSA CHANG, HOST:
Interest rates have more than doubled since 2020, and many Americans are wondering whether they will come down again. Planet Money's Greg Rosalsky has the story of one leading economist who radically changed his mind on the subject.
GREG ROSALSKY, BYLINE: Up until recently, we saw a historic trend. For 40 years, interest rates just kept falling. Larry Summers, the former U.S. Treasury Secretary, gave a speech in 2013 that offered an influential theory for why interest rates had fallen so low.
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LARRY SUMMERS: I wonder if a set of older ideas that went under the phrase secular stagnation are not profoundly important.
ROSALSKY: Secular stagnation. It's an esoteric way of saying long-term economic sluggishness - simple enough. But for Summers and a large number of economists after he gave the speech, the theory also explained why interest rates had fallen so abnormally low. Interest rates are essentially the price of borrowing money, and Summers says there was a huge pool of money out there to be borrowed - so lots of savings - but not a lot of demand to actually borrow and invest it. So high supply, low demand, and the price of borrowing interest rates just kept going down. Investment was low, Summers says, because, for one thing, technology just made it cheaper to do business, so companies didn't have to invest as much.
SUMMERS: My $600 cellphone has more computing power than a $50 million supercomputer did 25 years ago. So even if somebody wants to buy the same amount of computing power, they're going to absorb a lot less savings.
ROSALSKY: Even more important, the economy wasn't growing much. I mean, there was stagnation. There were fewer businesses investing in new things like buildings, machines or factories. Meanwhile, there was a ton of money available to be borrowed, lots of savings. One reason - people were getting richer, so they were willing and able to save more. Another reason - baby boomers were saving a lot for retirement.
SUMMERS: When people are expecting to age, they save more.
ROSALSKY: For almost a decade, Larry Summers was what you might call the chief secular stagnationist (ph). But in 2020, something big happened that Summers believes rocketed the economy out of the rut of secular stagnation - COVID.
SUMMERS: The government injected over two years more than $5 trillion in fiscal stimulus.
ROSALSKY: Now the question is, is secular stagnation dead, or is it just taking a little nap? Now, some economists believe this period of higher interest rates is just a blip, and this 40-year trend of lower interest rates will pick up where it left off. But despite pushing the theory of secular stagnation for almost a decade, Summers now believes secular stagnation is probably dead. He thinks we're in for a period of more investment and less savings going forward. First, he says, all those boomers who were saving for retirement - well, they're increasingly retired.
SUMMERS: Once people have aged and they're retiring, then they draw down their savings and spend.
ROSALSKY: Also, he says, we're going to be investing more in green technology to combat climate change and in the military due to factors like the war in Ukraine. Bottom line, Summers says, he thinks there's a very good possibility that it's just going to cost a lot more to borrow than it did in the recent past. And that could have big consequences for everything from the housing market to the capacity of the government to borrow and spend. Greg Rosalsky, NPR News.
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