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Granting that secular stagnation is a problem, there is the question of policy response. I am not certain of the right approach and I wish there was more evidence to bring to bear on the question. shar.es/amlT11
I can certainly see the logic of the “zero is just another number” view, that holds that the current environment poses no new fundamental issues but just may require technical changes to make more negative interest rates possible.
I am skeptical because (i) I am not sure how large the stimulus effect of rates going more negative is because of damage to banks, reduced interest income for consumers, and because capital cost is already not the barrier to investment. 1/3
(ii) I wonder about the quality of any investment that was not made at a zero rate but was made at a negative rate. 2/3
(iii) I suspect that a world of significantly negative nominal rates if sustained will be a world of leveraging, risk seeking and bubbles. I have trouble thinking about behavior in situations where people and firms are paid to borrow! 3/3
I am inclined to prefer more reliance on reasonably managed fiscal policies as a response to secular stagnation: government borrowing at negative real rates and investing seems very attractive in a world where there are many projects with high social returns.
Moreover, we are accustomed to thinking in terms of debt levels but it may be more appropriate to think in terms of sustained debt service levels. With near zero rates these are below average in most industrial countries.
The content of fiscal policies is crucial. Measures which run up government debt without stimulating demand like large parts of the Trump tax cut are ill advised. In contrast measures which promote investment and raise the tax base down the road are much more attractive.
There are of course other measures beyond stabilization policies like fighting monopolies, promoting a more equal income distribution, and strengthening retirement security for which the desire to maintain macroeconomic stability provides an additional rationale.
