Alex Rosenberg Interviews Miles Kimball for CNBC: Could Negative Interest Rates Be Next on the Fed’s Policy Menu?
Here is a link to Alex Rosenberg’s distillation of his interview with me about negative interest rate policy (if you ignore the video at the top and focus on the words beneath that). He did a great job of representing our wide-ranging conversation in a compact way. (In the interview, I did give other economists, especially Willem Buiter, more credit for working out the key ideas for eliminating the zero lower bound than Alex indicated; it is a standard journalistic trope to simplify the story of collective efforts to make it sound like the work of one individual.)
I found one error, or at least misleading bit, in the article. It says:
At the same time, the government would have to remove the requirement that businesses accept cash as legal tender.
This is a common misconception about legal tender. For the most part, “legal tender” laws only affect the treatment of debt. Except perhaps in a few states, shopkeepers are legally allowed to refuse payment in cash. (On many plane flights I have been on recently, they have announced that they would only accept payment by credit or debit card, for example.)
Here is the explanation from the US Treasury website about legal tender (found with the help of my brother Chris Kimball):
The pertinent portion of law that applies to your question is the Coinage Act of 1965, specifically Section 31 U.S.C. 5103, entitled “Legal tender,” which states: “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.”
This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. For example, a bus line may prohibit payment of fares in pennies or dollar bills. In addition, movie theaters, convenience stores and gas stations may refuse to accept large denomination currency (usually notes above $20) as a matter of policy.
This means that adjusting “legal tender” itself, while desirable, is less crucial for the type of policy I am recommending. The legal tender issue for debts can be handled by putting appropriate clauses in debt contracts, if lawyers wake up. For payments to the government, legal tender is also an issue, but I think once people started showing up at the IRS with suitcases full of cash, the government would quickly fix that loophole.
Update: In response to my questioning of this passage, Alex corrected it to “At the same time, the government could not require that businesses accept cash as legal tender.”
Here I would say that it is important that businesses not be required to accept cash as legal tender for large-ticket durables and investment goods; it causes less trouble if the government requires businesses to accept cash for goods that people typically use cash for now (indeed, I have argued that businesses might in any case voluntarily continue to accept cash at par for a long time even in the absence of any government constraint), and below-par cash as legal tender for debts, while an undesirable side effect, does not create a zero lower bound, since one cannot get an unlimited supply of new debt contracts on the same terms as old debt contracts.
