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Easy Money Is Like Insulin

Narayana Kocherlakota is a Bloomberg View columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
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Critics of global monetary policy regularly argue that the current level of interest rates is artificially low. A simple medical analogy might help them understand how wrong this thinking is.

Picture a young woman diagnosed with Type I diabetes, in which the body fails to produce the insulin needed to metabolize sugar. Her life changes completely. She must constantly monitor her blood sugar levels, adjust her diet and take insulin via injection or pump. Otherwise she will die.

Unthinking observers could argue that her insulin intake is “artificial" -- in the sense that a typical human doesn’t need it to survive, and that she has done fine without it in the past. They might even argue that she should follow a simple dietary rule of eating regular healthy meals at fixed times, rather than basing her insulin intake on constant measurement of her blood sugar.

Happily, we don’t have such outside observers in the world of medicine. Doctors and patients follow courses of treatment that vary as needed to achieve desirable outcomes. There is no hue and cry among legislators, financial market participants and academics to eliminate the “artificial” levels or variations in insulin being prescribed.

Monetary policy makers are not so lucky.

A disease -- persistently low demand for goods and services -- has afflicted the world economy.  Monetary policy makers need to use low interest rates, their version of insulin, to at least manage the symptoms. Yet they are constantly hounded by those who want them to stop the treatment, or to administer it in unhealthily regimented ways, such as following a mechanical rule rather than observing the data and using their judgment.

Sadly, many central banks are succumbing to this pressure. Here in the U.S., the Fed is planning to continue the tightening of monetary policy that it initiated in mid-2013. Its main goal is to gradually eliminate the use of monetary insulin, even though the symptoms of low prices and low employment persist unabated.

The insulin analogy is imperfect in two important ways. First, Type I diabetes is chronic, while there are reasons to hope (though not to be certain) that economic forces will eliminate the syndrome of low aggregate demand, in which case the long-term treatment would no longer be necessary. Second, there is no known cure for Type I diabetes, whereas governments have ample tools to heal inadequate demand -- including investment in education and infrastructure -- if only they would use them.

It's puzzling and deeply disturbing that fiscal policy makers aren’t doing what they can to cure the global economy's disease. But forcing central bankers to stop treating the symptoms would be a terrible mistake.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Narayana Kocherlakota at nkocherlako1@bloomberg.net

To contact the editor responsible for this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net