from The City Journal, America’s Lost Decade by John Michaelson:
A main culprit was all that cheap money. Economist Sébastien E. J. Walker and I studied the impact of ultralow interest rates on economic growth, publishing our findings in 2012. Despite an almost religious faith among economists and central bankers in the benefits of near-zero rates, an extensive search of the literature failed to turn up any previous empirical studies showing that ultralow rates were beneficial. The conventional and unchallenged economic wisdom—the lower the rate, the greater the subsequent growth—was wrong, at least at recent rate levels. It’s true that, when adjusted for other variables, lower real interest rates were associated with faster economic growth in subsequent periods—but only up to a point.
Contrary to expectations, rates below the normal rate actually retarded subsequent growth. The relationship between real interest rates and subsequent economic growth is defined by a curve, not an upward sloping line. Ultralow rates ease the pressure on enterprises to adopt productivity-enhancing innovations, restructure inefficient operations, and dispose of unproductive assets. That’s a major reason that productivity growth has been so poor. Ultralow rates also distort capital allocation. Governments overborrow, and large corporations favor debt over equity in their capital mix. Speculation abounds. Yet because of the bifurcation of the credit markets caused by the withdrawal of smaller lending institutions, interest rates are far from zero for small and medium-size businesses, which, through this entire period, have paid relatively high rates.
Job growth historically has come from innovative new enterprises. The number of new firms has fallen substantially since the crash. The percentage of employment in start-ups has dropped dramatically (see graph below). Limited access to credit by smaller enterprises is a factor in this decline, as are the intertwined constraints of low growth prospects, high costs of regulation and health care, and difficulties penetrating markets against entrenched players and limited incentives for many customers to change.