In standard Austrian business cycle theory, artificially low rates of interest, as driven by monetary policy, induce investors to engage in too many long-term activities and overextend the structure of production. A comeuppance later ensues, due to the malinvestments.

I suggest a very different fiscal version of this story. Imagine a government that is perpetually in debt, and with voters who do not like new taxes, if you can stretch your mind that far. There are also some constraints of borrowing. The fiscal policy of this government thus is relatively active when interest rates are low, but contractionary when interest rates are high. When interest payments eat up a smaller share of the federal budget, more goodies are given out.

In other words, with low interest rates, the government does indeed expand its activity, but in a manner oriented toward the present, through the medium of transfer spending. Unlike private entrepreneurs the government is not a profit maximizer and instead it will pursue more votes when it can.

When interest rates eventually rise, money is taken away from transfer recipients and sent back to high-saving bondholders. That is a kind of aggregate demand shock, or in Austrian terminology you could say that the structure of production had been geared too much toward the short term and now that is unsustainable and some adjustment costs will ensue.

The active agent here is government, and lower interest rates bring too much consumption, not too much investment. An eventual reversal again creates some economic disruptions. I think of that as Hayek’s theory in reverse. When you mix that with the standard Hayekian account, I wonder how/whether those two kinds of disruptions interact.