Paul Krugman: Antipathy To Low Rates
Paul Krugman, last June:
Antipathy To Low Rates - : Richard Serlin, in comments at Mark Thoma’s place, makes a very good point about the efforts of Rajan and others to come up with a reason to raise interest rates even in the face of high unemployment and incipient deflation. He suggests that it reflects a general distaste for anything that looks like government intervention to support the economy:
I think the thinking of the libertarians and freshwater believers is that if there’s a recession, then the free market has a good reason for it. It’s a “real” business cycle phenomenon, and the best thing to do is let the free market have its recession or depression for as long as the free market wants (and we had some doozys before Keynes, and often). The Fed shouldn’t tamper with the free market, just like the fiscal branch of government shouldn’t. The Fed should just maintain zero inflation, or go on the gold standard. It shouldn’t try to manipulate the interest rates of the free market, or get involved in business cycles at all.
That sounds about right. The attitude on display from quite a few economists bears a distinct resemblance to Depression-era liquidationism, as described in Brad DeLong’s excellent but somehow never published book on the economic history of the 20th century:
the unwillingness to use policy to prop up the economy during the slide into the Depression was backed by a large chorus, and approved by the most eminent economists.
For example, from Harvard Joseph Schumpeter argued that there was a “presumption against remedial measures which work through money and credit. Policies of this class are particularly apt to produce additional trouble for the future.” From Schumpeter’s perspective, “depressions are not simply evils, which we might attempt to suppress, butforms of something which has to be done, namely, adjustment to change.” This socially productive function of depressions creates “the chief difficulty” faced by economic policy makers. For “most of what would be effective in remedying a depression would be equally effective in preventing this adjustment.”
And Hayek found it:
still more difficult to see what lasting good effects can come from credit expansion. The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production.If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand resources [are] again led into a wrong direction and a definite and lasting adjustment is again postponed.The only way permanently to ‘mobilise’ all available resources is, thereforeto leave it to time to effect a permanent cure by the slow process of adapting the structure of production.
These days, relatively few economists are willing to say straight out that they regard persistent high unemployment as a good thing. But they find reasons to oppose any and all suggestions to use government policy — including monetary policy — to alleviate the slump. Same as it ever was.
