Saturday, 7 December 2013
Warren Mosler argues for permanent near zero percent interest rates.
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.