Can We Have A Slow Population Growth Rate And A Full Employment Economy?

Paul Krugman is often asked why a slower rate of population growth is a bad thing.  After all, it would put less pressure on scarce resources and it would reduce environmental damage.  His answer to that question is based upon what he calls the "bicycle effect".  In order to keep a bicycle from falling over we need to maintain an essential rate of speed.  Similarly, in order to maintain a full employment economy we need to maintain an essential level of business investment.  We could maintain the necessary level of business investment, under conditions of slower population and economic growth, as long as real interest rates (interest rate minus the inflation rate) were low enough. The problem, as he sees it, is that our efforts to keep the inflation rate low are counter productive.  We need a bit more inflation in order to lower real interest rates to the level needed to keep the bicycle from falling over.

Krugman's argument is based upon the notion that businesses would invest in a slow growth economy as long as real interest rates were low enough.  A lot of people have a problem with that assumption.  Some people just have inflation phobia, but others wonder why businesses would invest in a slow growth economy even at low real interest rates. Krugman's concept of a steady state economy that can maintain full employment is a tough sell.  It will require more than a dependence upon low real interest rates.  Some environmental economists have offered their version of a steady state economy but they have been relegated to the academic fringe in within the academy.