I’d actually argue for zero rather than “near zero”. And there are two
arguments for that, apart from the arguments put by Warren. They are as
follows.
The optimum rate of interest is the free market rate (unless market
failure can be proved). And governments interfere big time in the free market
rate when they borrow to fund current spending (as opposed to capital spending).
That “current” strategy is senseless: that is, it makes no more sense for
government to borrow to cover current spending than it does for a household to
do likewise.
As to capital spending, the arguments there are more complicated. There’s a paper
by a Swiss academic which attacks the conventional idea that governments should
borrow to fund capital spending.
But even if government capital spending is funded by borrowing, those
capital projects should be treated in exactly the same way as if they were
PRIVATE projects. So it makes no difference if we classify those projects as
private.
So if we adopt that classification, that means that government (on the
above narrow definition of the word) borrows nothing: the government / central
bank machine simply issues enough liabilities (monetary base) to bring full
employment. I.e. it issues enough “private sector net financial assets” (to use
MMT parlance) to bring full employment, but it pays no interest on those
liabilities.
In contrast, where private sector entity X wants Y to build up savings
and lend those savings to X, then X will probably have to pay Y interest for the forgone consumption (and the
risk involved in lending).
Second: why increase AD just via extra investment spending?
A second argument for a permanent 0% rate is thus. The conventional
wisdom is that the government / central bank machine should influence aggregate
demand by adjusting interest rates. However there’s no logic in channelling
stimulus into an economy JUST VIA extra borrowing and investment. That is,
there is no reason on the face of it to think that the average recession is
caused by deficient investment spending rather than a decline in consumer
spending or exports. Ergo, come a recession, it’s ALL FORMS OF SPENDING that
should be expanded, not just investment. Ergo central banks should leave
interest rates to find their own level, while adjusting AD just via fiscal
measures, in as far as that is possible.
So is it possible? Well as far as the lag between the decision to
implement stimulus and the actual effects go, there isn't much to choose
between monetary and fiscal measures.
There may be other practical ways in which monetary measures are better than
fiscal or vice versa. Doubtless an entire book could be written on that.
But certainly in THEORETICAL grounds, aggregate demand should be
adjusted via fiscal measures rather than by adjusting interest rates.
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