Summers on Monetary Policy

Matthew Yglesias has an article responding to a Matt O’Brien’s article making the case against Summers for Fed Chair.

[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.

[Yglesias]: 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.

Now I think the case against Summers (vs Yellen) is fairly strong; Yellen has a background in monetary policymaking, and Yellen was more prescient about the housing bubble in 2005/6 and the potential for a financial crisis in 07. Summers, while a brilliant economist, has made a few notable mistakes in his career–his push for deregulation in the 90’s, his structuring of the stimulus to favor tax cuts over investment (and the size of the stimulus package), and his tenure at Harvard are notable blemishes. More importantly, in the few comments that Summers has made about monetary policymaking, he has expressed skepticism about quantitative easing.

However, I think Yglesias is misinterpreting, to some extent, what Summers said above. The economy is suffering from a lack of demand. I think Summers is making the point that many businesses are operating under potential as is; instead of undertaking more investment at really low interest rates, we are more likely to see businesses take on a ton of debt in the favorable interest rate climate and return the money to shareholders via dividends and stock buybacks. Because these activities primarily benefit the already wealthy (who have a lower marginal propensity to consume), they might not be the best way to stimulate demand. Which is a fair point.

Of course, the flip-side is that Quantitative Easing has had a beneficial impact on home-ownership and to the economy through the expectations channel–which could have been emphasized to a greater extent by Summers. But let’s not get carried away misconstruing Summers’ statements.


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