In reference to his column today:
Dear Dr. Krugman,
This may be a naive point of view. It seems to me that, in the long run, the economy is a function of the knowledge accumulated and distributed within the society. Growth occurs because new techniques are learned and disseminated. The economy suffers when bad techniques are learned and dissseminated.
Of course, we don’t know which techniques are good or bad until we’ve experimented with them a bit. It seems to me that interest rates are a rough marker of our tolerance for experimentation. When interest rates are high, we trust few new ideas, i.e. we don’t give them very long to prove themselves. When interest rates are low, we trust many new ideas and give them a lot of leeway.
From this perspective, there is a set of superior (though not necessarily uniquely optimal) interest rates. These rates match the distribution of ideas currently in the economy by locally maximizing the discriminatory power of lenders. That is, they minimize the # of false positives (bad ideas that get funded) and false negatives (good ideas that don’t).
Appropriate monetary policy in this perspective would be evaluated in terms of deviation, short term and long term, from these maxima rather than strictly in terms of the risks of inflation/deflation in the consumer sphere.
For example, rates have been low for at least a decade. This means it’s very likely that the market is flooded with bad ideas, because we’ve been favoring false positives over false negatives. To correct this imbalance, we need to raise interest rates, not to curb inflation for businesses and consumers, but to re-direct capital to well thought out projects.
Sincerely,
Drew Margolin
0 Responses to “Letter to Krugman: Interest Rates”