"A powerful point I had never seen before: Evan Soltas:The problem is that the Austrian position is that malinvestments occur in the boom, not the bust, so this point would actually militate in favor of the Austrians. The bust is allegedly the period where markets are corrected and malinvestments are liquidated. Austrians would expect investments in this period to be more sober-minded and longer lasting.
How to Think About Malinvestment: If the central bank holds interest rates artificially low, it can in fact induce malinvestment--the central bank is creating an incentive to invest in projects which have negative net present values…. That's a bad thing, and it's not "Austrian" to fear that. Nor is it the irrational response of a private sector to malinvest under those conditions…. But all else isn't equal…. [E]vidence that… NPV-related malinvestment is nothing to worry about comes from the fact that businesses founded during recessions are more likely to last and be successful… discrimination towards higher-NPV [projects] during recessions, not negative ones…"
Now Soltas is right that you hear a lot of Austrians (not all, actually) complaining that money is too loose right now, but that's out of fear that an unsustainable boom associated with malinvestments is going to develop. You hear less of that lately out of Austrians - and more monetary disequilibrium and market monetarism from them - precisely because this case is starting to look ridiculous. Where is the incipient unsustainable boom?
My read of the empirical literature on this (and there's a surprising amount of it, albeit of varying quality - I think I looked at twenty empirical studies for my forthcoming article - details on that below) is that the length of the capital structure (the principal metric along which capital gets malinvested that Austrians care about) is indeed pro-cyclical, as Austrians predict. There are two main problems, though:
1. I have no idea how significant the fluctuations in length of the production process are and I don't know anyone that has a good answer to this. I know how to assess whether a fluctuation in unemployment or GDP is "economically significant", as people say. Austrians need to do more work on precisely how to think about the economic significance of the fluctuations in the length of the production process, because so far it's mostly hand-waving.Both of these points are elaborated on in much more detail in an article on Hayek's business cycle theory that I have coming out in Critical Review, volume 25 nos. 3-4 later this year.
2. Austrians need to do a better job justifying why the relatively lengthened capital structure in booms is "too long" and not "just right" and why the relatively shorter capital structure in busts is "just right" and not "too short". In other words, I would have thought boom years are the "natural" years and bust years are the "unnatural" years. This seems like the obvious assumption. Everything is working during booms and it's not working and people are in a panic during busts. So Austrians need to better justify the logic of flipping that on its head. A Wicksellian way of putting this is why do you think we're hitting the natural rate during recessions and below it during booms?
UPDATE: Here's a draft of the article.
UPDATE 2: Doing some final edits last night before handing this back again to the editor, I found some funky sentences in the last section... so... proceed with caution. Or better yet don't read it and wait for the final version :)