In a December 15, 2015 episode of “The Weeds,” Ezra Klein asked Ben Bernanke about my proposal to eliminate the zero lower bound. See “Ezra interviews Ben Bernanke.” About the 34:50 mark the dialogue is as follows:
Ezra Klein: There is an idea out there, which is obviously politically unlikely. But I’ve always found it interesting as a thought experiment at the very least—and it is has been pushed by, among others, economist Miles Kimball. Which is, if you could have instead of the paper dollar being the store of value, sort of an electronic dollar, we could really move on somewhere to electronic money, then it would essentially be easy as a matter of technical, operational work to have negative interest rates as well as positive ones. Are you familiar with these proposals, and I’m curious what you think of them.
Ben Bernanke: Yeah, I think that something like that would work in the sense that it could help get interest rates negative, so it would give the Fed more ability to cut rates even when rates were started out at a very, very low level. But I–first of all it’s kind of Rube Goldberg in the sense that the simpler solution would just be to have reasonable fiscal policy, that—that acts at the appropriate time. And secondly, as you point out, I think that it’s not something that the American public would be too enthralled with. I think politically, it would be very, very difficult to get—get approval for that. So its not, you know—it’s not something that I see as high on the priority list, putting aside whatever it’s—whatever the theoretical costs and benefits might be, it doesn’t seem like something that politically is feasible anytime soon.
Miles: In response to Ezra’s description, let me clarify that what is important is for electronic money to provide the unit of account. There are many stores of value, but one main unit of account.
I have many reactions to what Ben Bernanke said:
- Ben Bernanke agrees with Peter Sands and Larry Summers that, from a technical point of view, what I propose could do the job.He says: “I think that something like that would work in the sense that it could help get interest rates negative, so it would give the Fed more ability to cut rates even when rates were started out at a very, very low level.”
- The details of the implementation I propose make it much more politically feasible than other modes of implementation. When I give a seminar to central bankers, they come in thinking it might be a nice idea in theory, but would never happen, and then go out of the seminar seeing that it can really be done. For example, my proposal is fully compatible with using the current paper notes. My more recent presentations–ever since I started presenting “18 Misconceptions about Eliminating the Zero Lower Bound”–have been even better at making this point.
- The political path I foresee is an international one, as discussed in “Breaking Through the Zero Lower Bound” (pdf) and “Negative Interest Rate Policy as Conventional Monetary Policy” (pdf). I do not think the US is likely to be the first nation to use deep negative interest rates, but there is hope that some other country will have pioneered the needed monetary policy tools by the time the US needs them.
- Many central banks can do what needs to be done to eliminate the zero lower bound without any new legislation. I am currently working with Peter Conti-Brown on an article for a law review discussing the legal situation in the US. We need to dig into the law a lot more, but so far, it looks as if the Fed might be able to do what needs to be done without any new legislation. In any case, one should not assume too quickly that new legislation is needed. The law gives the Fed a lot of discretion in monetary policy.
- I disagree with Ben about the aptness of discretionary fiscal policy for stabilizing the economy. In my view, the difficulty in using discretionary fiscal policy to handle deep recessions is not a random stroke of bad luck during this past recession, but something likely to obtain quite generally for basic political economy reasons: short-run fiscal policy simply has too much resonance with long-run fiscal policy, which in turn goes to the heart of the ways in which major parties differ in many advanced countries. Therefore, developing monetary policy tools powerful enough for central banks to stabilize economies even if fiscal authorities are not very helpful seems the height of wisdom.
On Ben Bernanke’s general claim that there are other tools available besides negative rates, here is an abridged version of the section in How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide about other possible tools for stimulating the economy:
Comparison of Negative Interest Rates to Other Tools for Stimulating the Economy
- Why Austerity Budgets Won’t Save Your Economy
- Monetary vs. Fiscal Policy: Expansionary Monetary Policy Does Not Raise the Budget Deficit
- Ben Bernanke: The Fed Does Less Monetary Stimulus Than It Thinks is Warranted Because It Is Afraid of the Side Effects of Unconventional Tools
- How and Why to Avoid Mixing Monetary Policy and Fiscal Policy
- Is the Bank of Japan Succeeding in Its Goal of Raising Inflation?
- Japan Should Be Trying Out a Next Generation Monetary Policy
- QE May or May Not Work for Japan; Deep Negative Interest Rates Are the Surefire Way for Japan to Escape Secular Stagnation
- Narayana Kocherlakota Advocates Negative Rates and Criticizes the Conduct of US Fiscal Policy
- If a Central Bank Cuts All of Its Interest Rates, Including the Paper Currency Interest Rate, Negative Interest Rates are a Much Fiercer Animal
- Helicopter Drops of Money are Not the Answer
- Higher Inflation Is Not the Answer