Five arguments against negative interest rates.

First, they induce the cash rich to buy stuff they don’t really want with the sole objective of disposing of cash. A minor example of that is the rise in demand by households for safes in Japan: bought with a view to storing physical cash. That’s similar to Keynes’s tongue in cheek idea for creating employment, namely putting cash in bottles and burying them underground, and then paying people to dig them up again.

In contrast, helicopter drops, assuming they’re distributed fairly widely among the population enable the less well-off to buy stuff they DO WANT OR NEED.

Second, the idea that heavy reliance should be put on interest rate adjustments is debatable because there is no prima facie reason for thinking that given a recession, it’s primarily a shortage of INVESTMENT spending that’s to blame, rather than a shortage of household or CURRENT spending or government spending.

And even if it’s determined that a drop in investment spending IS TO BLAME, there is then the question as to whether that drop is justified or not: corporations may have cut their investment spending for perfectly good reasons. Thus ideally the authorities need to do a lot of research to determine whether that drop is justified. Of course the authorities never do that research. And if they did, it might not be possible to come up with a definitive answer.

So why not just boost demand for ALL GOODS AND SERVICES (public and private), and leave it to employers to decide for themselves whether that increased demand warrants more investment? Or do we take it that bureaucrats working in central banks and treasuries know more about the optimum amount to invest in the chemical industry than chemical engineers with twenty years’ experience?

Third, adjusting interest rates with a view to adjusting demand might make sense if the desired effect (i.e. change in spending) was much quicker in the case of interest rate adjustments than in the case of tax cuts or increases in public spending. However the lags seem to be about the same in both cases.

Fourth, as Jamie Galbraith put it, “Business firms borrow when they can make money, not because interest rates are low”.

Fifth, there is empirical evidence that the effect of interest rate adjustments is not impressive. See here and here. In particular, the second of those backs Galbraith’s point.

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P.S. (an hour after publishing the above). The above mentioned increase in demand in Japan for safes is not of course PRIMARILY motivated by the desire to turn cash into physical assets (i.e. safes). The main motive is to dispose of money held in digital form in banks and turn that into physical cash.

Also: a sixth flaw in negative interest rates is thus. As interest rates fall, it obviously becomes viable to make investments that produce lower and lower returns on capital. This process (at least in theory) becomes absurd when rates go negative. Reason is that it is then possible to make investments which produce a NEGATIVE return on capital: that's investments which actually destroy wealth rather than produce wealth.


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