Negative interest rates are even more of a brain-twister than zero interest rates. Here is what Herman Daly has to say about that:

Suppose for a moment that GDP growth, economic growth as we gratuitously call it, entails uneconomic growth by a more comprehensive measure of costs and benefits — that GDP growth has now begun to increase counted plus uncounted costs by more than counted plus uncounted benefits, making us inclusively and collectively poorer, not richer. If that is the case, and there are good reasons to believe that it is, would it not then be reasonable to expect, along with Summers, that the natural rate of interest is negative, and that maybe the monetary rate should be too? This is hard to imagine, but it means that savers would have to pay investors (and banks) to use the funds that they have saved, rather than investors and banks paying savers for the use of their money. To keep the GDP growing sufficiently to avoid unemployment we would need a growing monetary circular flow, which would require more investment, which, in turn, would only be forthcoming if the monetary interest rate were negative (i.e., if you lost less by investing your money than by holding it). A negative interest rate “makes sense” if the goal is to keep on increasing GDP even after it has begun to make us poorer at the margin — that is after growth has already pushed us beyond the optimal scale of the macro-economy relative to the containing ecosphere, and thereby become uneconomic.

A negative monetary interest rate means that citizens will spend rather than save, so savings will not be available to finance the investments that produce the GDP growth needed for full employment. The new money for investment comes from the Fed. Quantitative easing (money printing) is the source of the new money. The faith is that an ever-expanding monetary circulation will pull the real economy along behind it, providing growth in real income and jobs as previously idle resources are employed. But the resulting GDP growth is now uneconomic because in the full world the “idle” resources are not really idle — they are providing vital ecosystem services. Redeploying these resources to GDP growth has environmental and social opportunity costs that are greater than production benefits. Although hyper-Keynesian macroeconomists do not believe this, the micro actors in the real economy experience the constraints of the full world, and consequently find it difficult to follow the unlimited growth recipe…

These painful choices could be avoided if only we were richer. So let’s just focus on getting richer. How? By growing the aggregate GDP, of course! What? You repeat that GDP growth is now uneconomic? That cannot possibly be right, they say. OK, that is an empirical question. Let’s separate costs from benefits in the existing GDP accounts, and develop more inclusive measures of each, and then see which grows more as GDP grows. This has been done (ISEW, GPI, Ecological Footprint), and results support the uneconomic growth view. If growth economists think these studies were done badly they should do them better rather than ignore the issue.

Herman Daly weighs in with a brain twister on money, interest rates, economic growth, and environmental degradation.

There are many things wrong with a zero interest rate. Remember that the interest rate is a price paid to savers by borrowing investors. At a zero price, savers will save less and receive less return on past savings. Savers and pensioners are penalized. At a near zero price for borrowed funds, investors are being subsidized and will invest in just about anything, leading to many poor investments and negative returns, furthering the economy’s already advanced transition from economic to uneconomic growth. Zero interest promotes an infinite demand for savings with zero new supply. But the “supply” is provided artificially by the Fed printing money. The infinite demand would be checked by the rising costs of natural resources and environmental damage if those costs were internalized, but they are not. Yet the environmental costs are real and do not disappear just because they are not counted. With free money and uncounted environmental costs, why not invest heavily in fracking? A very unequal distribution of income does check demand, at least for non-luxury goods. Rich people have an increasing surplus of money to invest, which also helps hold down the interest rate. Yes, mortgage rates fall, and that benefits citizens as home buyers, but they lose more in terms of their retirement accounts. And there is still a significant spread between the zero rate paid to savers and the positive rates charged on credit card and other debt, so the banks are doing quite well.

I’m with Mr. Daly all the way on his concept of “uneconomic growth”. Our primary measure of economic activity, GDP, is simply a sum of how much money changes hands. Some of the reasons money changes hands are good (benefits), and some are bad (costs). Let’s take the example of a factory that makes something that makes peoples’ lives happier or better. The money that changes hands to buy the product is a reasonable estimate of the value of that product, so since it is good we can call this the benefit. However, if the factory produces pollution, that is a cost. However, if people get sick and have to go to the hospital because of the pollution, we will count the money they spend as part of GDP. We will add the cost and benefit, when we should be subtracted the cost from the benefit, to get a net benefit. So we could try to measure net benefits each year and see if they are increasing, and that would be a better measure of human wellbeing than GDP. There are some attempts to do this, but they don’t have widespread acceptance.

I am basically agnostic on monetary policy though, because (like 99.9% of the population) I just don’t understand it well enough. My basic understanding is simply that turning the printing press over to the politicians is very risky, so we allow it to be controlled by a technocratic public/private hybrid entity instead. When money is created, it has to be repaid with interest, which creates some level of discipline and restraint in its creation. If there is not enough money, that creates a serious problem. If there were no discipline or restraint in its creation, it would cease to have any value at all. Both are dangerous. This may be a case of “if it ain’t broke, don’t fix it”, although the system is clearly imperfect. To be fair, Herman Daly’s proposal appears to be to create some sort of technocratic rule based on inflation (which he also has ideas on how we can measure better) that politicians can’t override. Maybe that would work, I will leave it to the experts.