The latter discussion that has been going on about the possibility of the Fed pursuing a negative target of interest rate seemed shallow at first. But, honestly, there would be a few advantages of having inflation at a positive level soon.
So far we are certain that inflation is not a problem -though we are that it WILL BE because of debt issuing- so why is it too hard to think about having negative -real- interest rates?
Mankiw poses the thought in a provocative way and he says that it attracted a number of negative comments. So which is the right approach to conclude that negative interest rates are useful? First, you should be a dove in terms of inflation, that is, you price higher unemployment than inflation. Second, you must be convinced that a demand pull will put the economy on a stable path. Third, you have to neglect the fact that excess of borrowing got the U.S. Economy in to this mess, and the negative interest rate will not solve this.
Once those three conditions are met, then yes, a negative interest rate can pull the economy out of recesion. Lets assume that this is the case. Then it is useful to analyze some advantages of the scheme. First, inflation is better that deflation, and recent numbers show that deflation is already here. Even if future inflation can be a big issue, deflation should be avoided because the latter will imply that the former will not appear, by definition.
After deflation is avoided, a second possible advantage of having positive inflation in the current environment is that public debt would be inflated away, and this would prevent a default from the U.S. Treasury. This second possibility deserves deeper analysis, observe however, that it is equivalent in a certain fashion, to a rise in taxes without Congress. Lets not forget that this is one of the most regressive taxes there are. So the lower income layers of population will shoulder a considerably high part of the tax burden.
Furthermore, a negative interest rate scheme implies that capital tax revenues will not be positive. Another shock to inflation that may be overlooked is that in strict terms it is natural to expect dollar to depreciate. This would help to balance the current account of the U.S.
It is rather hard to forsee all consequences of negative interest rates, however, it is fairly straight that it would work as an increase in future taxes, the most distortive kind, the only positive side would be to inflate away debt.