Lawrence Summers makes a Keynesian argument for holding the interest rate to zero:
Tightening policy will adversely affect employment levels because higher interest rates make holding on to cash more attractive than investing it. Higher interest rates will also increase the value of the dollar, making US producers less competitive and pressuring the economies of our trading partners.
This is especially troubling at a time of rising inequality. Studies of periods of tight labour markets like the late 1990s and 1960s make it clear that the best social programme for disadvantaged workers is an economy where employers are struggling to fill vacancies.
The grave ills Summers cites as reasons to not raise the interest rate are already facts of reality because of the low interest rate. Cheap money policies, making access to liquid cash easier for those who qualify for loans, are what boosted inequality to start with. The increased money supply isn’t passing through hands, jumpstarting trade and economic activity; money velocity has fallen since ZIRP was implemented. Why does Summers think more of the same will change these trends? (Insert Einstein quote about doing the same thing expecting different results.)
In a functioning economy, the rich risk their money in free market experiments implemented by hired men. Inequality rises as the rich’s capital gains outpace workers’ rising wages and rising standard of living. That’s not the kind of inequality we’re experiencing now. In a nonfunctioning economy, the rich park their wealth in sumps and bubbles, like the stock market, out of the reach of the worker offering his labor in exchange for wages. For example, Caterpillar sales dropped for 31 straight months, but its stock price increased until quantitative easing tapered in 2014. Share “value” was driven not by productivity but by stock buybacks in a gravity well of cheap money. Since QE ended last October, Caterpillar shares have fallen 20 percent, finally reflecting economic fundamentals.
The Federal Reserve’s policies didn’t support the recovery, such as it is. They are the recovery. Every effort to normalize Fed policy results in market panic, which necessitates the continuation of abnormal policies like QE and ZIRP. Fed justification for continued intervention is a tidy logic circle: Intervention revives the economy, signaling the Fed to normalize policy, which degrades the economy, necessitating Fed intervention, which revives the economy, and so on. If equities could stand on their own, they wouldn’t tip over when the training wheels come off.
The “slowdown” economists doomsay is the inevitable withdrawals of an unsustainable high dropping back to reality. In short, there is no real recovery. There’s no real recovery to protect with Keynesian stimulus. Maintaining ZIRP would contribute to rising inequality, declining innovation and economic activity, and the displacement of real investment by speculation in sumps of wealth. The best thing for the real economy is to restore a rational cost of money to make savers whole and to allow genuine price discovery.