Tyler Cowen is skeptical of spending more when interest rates turn negative.

I have read so many posts saying yes.  But is it so obvious?  let’s put aside the stimulus argument, I’d like to focus on the rate of return argument alone.

Let’s say I could borrow money at negative two percent real, but my seven cousins, three of whom are crazy, would get together and decide how to spend it.  I would get a vote too and they would agree to spend it on me.  I would have to pay it back.

I say no.

There are at least two issues here

1) Should you spend more. Well at the margin I would think so. Your crazy cousins were crazy before presumably and discretionary spending wasn’t zero. If it becomes cheaper relative to other things then we should do more of it.

2) I’m always saying that zero ain’t nothin’ but a number. And, that’s still true when you consider government spending on projects and other real goods for which it expects a return. Not the same when considering direct transfers or tax cuts.


Because zero also happens to be the interest rate paid on cash. If its cash that we are handing out then zero tells us whether we are doing it at a baseline profit or loss.

However, more generally I see that debates over public choice and industrial policy get wrapped up in other things. When arguing against stimulus or government spending under very low or negative interest rates people point out that government is bad at picking winners and loser.

Ok. So?

Did it government get magically worse now that the interest rate collapsed because if not then anyone of that winner picking or infrastructure spending that you were going to do is better done now than when interest rates or employment is higher.

When arguing for stimulus I also see people immediately jump to infrastructure, if not outright industrial policy. We should build a green economy!.

Ok. Why?

Did a green economy magically become more urgent now that people are unemployed? Doesn’t it make more sense to give people back what they lost before moving on to something new?

Which is way payroll tax cuts or increases in transfer payments seem like a good idea to me. More cash that people can do with as they please, including making up for the fact that things generally just got harder.