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.