Tom Palley. Exactly.

Not sure what I did to get on Thomas Palley's mailing list. Oh, I contacted him by email one time, I'm sure of that. But I don't remember what economic detail I focused on, or what I might have said about it. And I don't know whether Palley liked what I said (and put me on his mailing list because he liked what I said) or hated what I said (and put me on his mailing list as a form of harassment) or none of the above.

But here's what I do know: About once a month, maybe less frequently, I get an email from Thomas Palley that opens with the words "Dear Friends & Colleagues," and, for some reason, that opening is just exactly right. I'm not a colleague, so I must be a friend.

And the once-a-month thing is nice. It doesn't feel like I'm being harassed. It doesn't feel like spam. It is something that, quite frankly, I'm starting to look forward to. (And I am a total curmudgeon.)

Opening my email early this morning, this is part of what I found, from Palley:

My own website has a new PERI working paper titled “Negative interest rate policy (NIRP) and the fallacy of the natural rate of interest: Why NIRP may worsen Keynesian unemployment” which I hope is of interest.

Which I hope is of interest, he says. Such understatement! Palley's ego is so small that you can't even see it. I like that. Then this:

Abstract: NIRP has quickly become a consensus policy within the economics establishment. This paper argues that consensus is dangerously wrong, resting on flawed theory and flawed policy assessment. Regarding theory, NIRP draws on fallacious pre-Keynesian classical economic logic that asserts there is a natural rate of interest which can ensure full employment. That pre-Keynesian logic has been augmented by ZLB economics which claims the natural rate may be negative in times of severe demand shortage, so that policy must deliver it since the market cannot. In contrast, Keynes argued investment could become saturated so lower interest rates cannot increase aggregate demand (AD) and no natural interest rate exists.

Okay. Here's what I think:

1. Not knowing anything, we should still know that "consensus" can be a problem. Ten years ago, the consensus was that the financial crisis was not a problem. Eleven years ago, the consensus was that the central problem of depression-prevention has been solved. Consensus is a dangerous thing.
2. Ooh look at that: Palley said "that consensus is dangerously wrong".
3. Palley's view:
• NIRP draws on fallacious pre-Keynesian classical economic logic that asserts there is a natural rate of interest which can ensure full employment.
• That pre-Keynesian logic has been augmented by ZLB economics which claims the natural rate may be negative in times of severe demand shortage, so that policy must deliver it since the market cannot.
• In contrast, Keynes argued investment could become saturated so lower interest rates cannot increase aggregate demand (AD) and no natural interest rate exists.

Ooh.

And then he says

Regarding policy assessment, NIRP turns a blind eye to the possibility that negative interest rates may reduce AD, cause financial fragility, create a macroeconomics of whiplash owing to contradictions between policy today and tomorrow, promote currency wars that undermine the international economy, and foster a political economy that spawns toxic politics.

Saving the best for last, he adds this thought:

Worst of all, NIRP maintains and encourages the flawed model of growth, based on debt and asset price inflation, which has already done such harm.

Exactly.

"the flawed model of growth, based on debt"

Exactly.

"debt and asset price inflation, which has already done such harm"

Exactly.

Exactly.

//

The link at PERI