Last weekend I argued that Larry Summers was unqualified to be Fed chair. Lots of people pushed back, pointing to his obvious brilliance. But that’s not enough. In my post I pointed to this column by Summers:
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.
. . .
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.
Now Matt O’Brien and Matt Yglesias are criticizing the same column. Here’s Yglesias:
Unlike Summers’ monetary policy analysis, I think this [fiscal view] 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.
Matt O’Brien is also appalled:
In other words, he thinks the Fed pushing down real interest rates might only push companies to make bad investments they otherwise wouldn’t make. It’s a very Austrian view of things — the idea that pushing interest rates “artificially” low makes businesses make mistakes.
No wonder our neo-Austrian president loves Larry. Two peas in a pod.
Bob Murphy must be rubbing his hands together with mischievous joy. An Austrian cabal has taken secret control of the Democratic Party at the highest levels of the US government.
But seriously, I hope people are beginning to understand why I’m horrified by the thought of a Summers Fed.
Let’s hope this backlash is in time.