Do you agree that higher interest rates will reduce demand and output/employment? Simon Wren-Lewis asked in this recent twitter feed. (Itself a rich source of all sorts of education!)
I replied perhaps, possibly. And I’m beginning to wonder if even that was much too certain….
For a start, since the interest rate on my credit card is pushing 20% and the Bank of England ‘bank rate’ is 0.75%, I’m really not sure the bank rate is, individually, of much consequence.
For small business it might be, but we know there is precious little small business bank lending going on – it is mostly mortgages, or loans to the financial sector itself.
(Data from the BoE is the most up to date I can find.)
Does a change in interest rate really have the desired effect? I can see it might actually make investment less likely – because it could become too expensive. So that could well mean you actually employ more people. The expenses are day to day and if the employees are zero hours or temporary you can actually put all the risk onto your employees – what joy! Any major capital expenditure needs paying for, always, until finally paid for. People, do not.
And with so much borrowing currently required in order to live our lives at all, then what we might be engendering is not reduced demand or employment but actually increased poverty. Indeed privatisation of anything is generally based on borrowing so, as we have seen with Carillion and Interserve this is not a safe way of providing services, so even at a government level, increased interest rates are beneficial to no-one but the financiers.
Interest rates are, by definition, always paid by those who have insufficient money to those who have enough. So interest is always a method of enriching those who have. Why Simon Wren-Lewis, as someone sympathetic to Labour, thinks this is such a good idea I struggle to understand.
He goes on about interest rates at ‘the lower bound’, Why doesn’t he therefore start to think about a demurrage system like that with the Wörgl scrip currency, designed to increase the velocity of money? That would have been properly radical, but, Oxford academic that he is, this seems to be consigned to the too difficult category and he proposes just a simple ‘financial adjustment’ of interest rates. An interest rate increase looks a lot more dangerous and possibly life changing when seen through the lense of real life.
Oh for humanity first.
And economic theory last.