Matt O’Brien praises Janet Yellen’s work on monetary policy over the years (I agree) and unearths an odd Reuters column in which Lawrence Summers expresses a view of monetary policy at the zero bound that I think is very misguided:
However, one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to undertake with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative real interest rate. There is also the question of whether extremely low safe real interest rates promote bubbles of various kinds.
O’Brien characterizes this as an “Austrian” view in which stimulus merely leads to malinvestment. But it’s odder than that. The entire point of this column is to argue for fiscal stimulus:
It would be amazing if there were not many public investment projects with certain equivalent real returns well above zero. Consider a $1 project that yielded even a permanent 4 cents a year in real terms increment to GDP by expanding the economy’s capacity or its ability to innovate. Depending on where it was undertaken, this project would yield at least an extra 1 cent a year in government revenue for each dollar spent. At any real interest rate below 1 percent, the project pays for itself even before taking into account any Keynesian effects.
Unlike Summers’ monetary policy analysis, I think this is correct. But the conjunction of the views is remarkable. He’s saying that in a low interest rate environment we dare not leave investment decisions up to the private sector, which is going to just blow the money on boondoggles and white elephants—the state needs to step in and plan the economy. Socialism, in other words. But does Summers really think that? It sure doesn’t sound like something he thinks.
If the choice were up to me and this was what I had to go on, I’d consider this viewpoint to be nearly disqualifying. Of course if the choice were actually up to me, I could ask Summers what he thinks about monetary policy! The frustrating thing about this debate is that Summers has rather clearly been deliberately trying to avoid clear statements on monetary policy (even in this column he says additional QE “may be appropriate”) as part of a strategy for getting the Fed nomination. That may be clever on his part, but it makes his candidacy essentially impossible to evaluate.