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The downside of low interest rates
Federal Reserve Chairman Ben Bernanke holds a press conference announcing that the Fed will take no action on interest rates until 2014 at the Federal Reserve Bank on Jan. 25, 2012 in Washington, D.C.
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Kai Ryssdal: On the theory that there's nothing like a little monetary policy to whet your appetite for the news of the day, we're going to start this Thursday by quoting the Federal Reserve Bank of the United States. They wrapped up a two-day meeting on interest rates yesterday by saying this: There will be "exceptionally low levels for the federal funds rate at least through late 2014."
That means the Fed's main interest rate is going to stay near zero for almost another two years. Ben Bernanke and his colleagues are trying to goose the economy by making it cheaper to borrow for a house, a car or, if you own a business, to buy computers or fancy new robotic machines to make your company more efficient and profitable.
But Marketplace's Mitchell Hartman reports, low interest rates have a few downsides, too.
Mitchell Hartman: For Jim Poterba, worry about low-low interest rates hits pretty close to home.
Jim Poterba: My dad, who’s living on income from CDs: For those who are depending on relatively safe interest income, this is a message that it’s going to be a continued period of difficulty generating that income.
Poterba teaches at MIT and heads up the National Bureau of Economic Research, so you might spare some worry for the retirees in your life, too. Interest rates average just over 0.5 percent now on savings accounts and CDs. In fact, some economists worry the Fed’s policies will lead retirees to shift their nest eggs into riskier investments to get a higher return.
But for businesses, low interest rates are an unmitigated good. They can borrow cheaply: for buildings, or new machinery and the software to run it.
Brookings economist Gary Burtless says in some cases, this may actually keep companies from hiring more people in the long run.
Gary Burtless: The theory is these investments have made businesses so much more efficient that they do not add as much to their payrolls as they otherwise would.
But Burtless says this process generates jobs, too.
Jim Poterba agrees.
Poterba: There’s also someone who’s producing that machine, right? Someone’s assembling the robot, somebody’s writing the software code. And those are the folks that are getting the jobs that are immediately stimulated by the investment.
Poterba says we just have to hope some of these high-paid engineering and technology jobs making all the fancy new equipment stay in the United States.
I’m Mitchell Hartman for Marketplace.
The other problem with artificial and low interest rates not mentioned in the story is that it prevents the restructuring that needs to take place in order to get the economy back on track. Just like pure oxygen can sustain a dying patient with a failing cardio vascular system, near zero interest rates can sustain failed and failing businesses. Of course you can depend on the support of the businesses being sustained by these measures and their political allies, but what you don't see is the damage being done to the economy being keeping otherwise useful resources sequestered in inefficient business activities. The losses are bore by smaller growing businesses and other activities yet to be created. By stifiling the creative destruction that is critical to a capitalist system, you cause the economy stagnate in support of the established entrenched interests.
"Brookings economist Gary Burtless says in some cases, this may actually keep companies from hiring more people in the long run."
This is a very important point because it goes counter to the conventional wisdom at the Fed which is to lower interest rates when unemployment is high.
With the Washington making the cost of employing American's higher and higher by way of mandates and liability, and the Fed making the cost of borrowing money for capital equipment cheaper and cheaper, it's no wonder that labor is being displaced by automation.
The question isn't whether or not automation is good, it's whether or not it is being applied in the appropriate way considering the amount of unemployed people we have. In a real capitalist economy, that is to say, one in which a central bank isn't price fixing the price of capital (AKA interest rates), when money is cheap to borrow, it's because people are rich in savings, so there would be less need for people to work and labor would be in shortage. It's only in this manipulated world that we have the simultanious condition of money being cheap to borrow, and wide spread unemployment and people without savings.
We don't want an all powerful central bank tilting the scales in favor of equipment over people, we want the market to allocate what work is automated and what work is done by labor.
Also, the high skill work used to make the capital equipment is short lived, the labor that would have been making consumer goods and now is displaced is forever.
