Krugman writes: "The era of Friedmanism, of free-market views paired with tolerance for monetary stimulus, was temporary and unsustainable, and no amount of sensible argumentation will bring it back."
Paul Krugman. (photo: The New York Times)
21 October 15
avid Beckworth pleads with fellow free-marketeers to stop claiming that low interest rates are “artificial” and comparing them to price controls. No, the Fed isn’t imposing a price ceiling on interest rates, he says; in fact, the zero lower bound is acting like a price floor.
He’s completely right about the economics. Monetary policy, in which the central bank buys and sells securities to change the monetary base, is nothing at all like price controls. Furthermore, we have a very clear model that tells us what interest rates would be in the absence of distortions and rigidities, the Wicksellian natural rate — the rate of interest consistent with an economy subject neither to inflationary overheating nor deflationary excess supply. And with inflation consistently below the generally accepted 2 percent target, this model says that the actual interest rate, at zero, is above the natural rate, not below.
But the question Beckworth should be asking himself is why almost nobody on the right is willing to think clearly about this issue.
