The Guardian has an editorial today that marks the fact that we have had a o.5% bank base rate in the UK for five years now, a wholly unprecedented period both in terms of the rate being so low and, in any modern era, for consistency.
The web link for the editorial supposedly summarises its argument as follows:
Given the scale of the calamity that hit the economy in 2008, worklessness has been nothing like as bad as we had any right to expect
I can't disagree, but in a very qualified way given the arguments the Guardian makes. I was far from alone in expecting unemployment rates to rise well above current levels as the crisis emerged between 2008 and 2010. Of course I am pleased that has not happened, but let's be clear about two things. The first is that this may not have much to do with low interest rates and second that there have been massive opportunities that such low rates offered that have been foregone during this period and the Guardian has overlooked these issues.
Why have unemployment rates being lower than expected not been the sole result of low interest rates? I'll suggest three reasons. First, as my research has shown, that containment of unemployment has been in no small pat due to the creation of an army of self employed people earning very low profits in what are likely to be very low productivity businesses utilising very little capital where interest rates have little or no impact on the cost base as a result.
Second, we know that many more jobs have been kept going because of zero hours and minimum wage contracts that have again passed the cost of unemployment onto employees whilst preserving the profits of UK businesses, which have seen an upward trend over this period in terms of GDP share once the initial blip of 2008 was cleared.
Third, the behavioural trend no one expected was the inclination of business to hang on to staff in this recession. This was made possible by the changes in terms and conditions noted above but also another factor that the Guardian ignores, which is that whilst interest rates remained positive (at least nominally, and in the market place for all borrowers but the government, actually in practice) wage rates have fallen considerably, with most in the UK seeing their standard of living fall over this period as a result.
It is these three factors which have prevented rising unemployment, albeit that they have not helped the young, who were not in the market in 2008 and so were not in the happy position of being retained by anyone.
For them though the second issue, the failure to exploit low interest rates for economic advantage in a variety of ways has been the big issue which explains why they have been and are still being denied economic hope. This is where the failure to embrace the fundamental Keynesian logic of keeping long term interest rates low to stimulate investment as the return on money is deliberately kept low has not been grabbed by either business or, most particularly, government.
We know business has not done this: big business is sitting on an enormous cash pile it has no clue what to do with and which it has certainly not been pushing into new productive investment.
We know small business has not been investing because the benefit of low interest rates has not been passed onto it in the form of affordable credit by the UK banking system.
And, worst of all, government has been dogmatically refusing to invest when doing so had no net interest cost to it, such have been gilt yields. So, far from interest rates having helped employment the opportunity for them to do so has largely been squandered. Nearly free money has, quite literally, gone to waste when it could have been transforming the UK economy.
We have instead had all the adverse affects of this monetary policy. Pensioners, in particular, have suffered. But so too have we all, and mainly because of the rhetoric surrounding this issue rather than any necessity flowing from it.
First of all that is because austerity has been promoted because of an artificially promoted fear of borrowing that was supposed to push the cost of interest and the burden of debt repayment onto future generations. And yet, as the FT notes today in an article to mark the same anniversary, quantitative easing (which the Guardian editorial ignored) has neutered much of that argument. In an effective admission that something I have long argued to be the case has actually happened, the government has now decided that the cost of interest paid on gilts purchased by the Bank of England under quantitative easing arrangements will no longer be treated as a cost to the government because it simply round trips back into the government's own coffers. This £375 billion of gilt funding has therefore, effectively, been monetised as a result and this part of the national debt has, for all practical purposes been cancelled for good. You can now safely assume it will never be repaid.
And yet, despite the fact that it was always obvious that this was going to be the case, it was said that we had to have austerity to keep debt and interest payments under control. It is now obvious that this was a straightforward lie. In that case now is the time for all politicians to admit that debt is not the problem it has been claimed to be, and nor are interest payments the burden on the public purse that has also been claimed. What is more, now that this can be admitted it is also time to admit that we could now issue more debt if we wanted to in exactly the same way that was done with quantitative easing but on this occasion to promote employment. The way to ensure that would work would be to issue this through what I have long called green quantitative easing.
This would have been the way to use low interest rates to achieve three things: lower unemployment, sustainable economic growth and the investment in infrastructure that this country really needs. That opportunity has been squandered and in my opinion that is the point to note on this anniversary. Yes, it's good that unemployment did not reach 4 million, but there is nothing to celebrate in the reasons for it not doing so. Nor is there anything to celebrate in the opportunity lost over the last five years to rebuild our economy at almost no cost. Celebrating a near miss is not the same thing as celebrating a success, but a near miss is the best that we got. No one should not be hanging out any flags.
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One point I feel people fail to mention. The War, even on this anniversary year. Okay not actually the war, the baby boomers. They aren’t unemployed they are retired. Yes some have gone onto being consultants (self employed) working when they want to and therefore not earing a considerable about of money. However with many now retired, this has enabled companies to down size without affecting the unemployment figures.
I think the main reason unemployment ‘seems’ lower than it might be as that WORKING now feels like unemployment. Median wages are pitiful in many areas (17,000 in my area where housing costs are higher than average) so people in work need benefits -this is the root of the Government’s cynical channeling of anger to benefit claimants.
With regard to debt, austerity policies rely on the fallacy of composition argument which in the end increases private debt because of debt deflation. The ONS has forecast private debt to reach an average of £80,000 by 2019 whilst QE has handed out additional £80,000 to each of the richest 5%.
In effect , low paid jobs ARE Unemployment disguised.
Of course, youth unemployment at 20% is a staggering disaster that should bring us to our knees in shame-instead we get guff about ‘green shoots’ and other nauseating cliches.
“And, worst of all, government has been dogmatically refusing to invest when doing so had no net interest cost to it, such have been gilt yields. So, far from interest rates having helped employment the opportunity for them to do so has largely been squandered. Nearly free money has, quite literally, gone to waste when it could have been transforming the UK economy.”
I couldn’t agree more! It has never been cheaper at any time in history for the government to borrow money.
We could have invested like never before in infrastructure and manufacturing. This could have been done without a high debt burden…..not that this would matter anyway as only the interest of the national debt is ever paid; the rest is just rolled over and re-financed. There is so much rubbish talked about the national debt.
In the name of junk neoliberal economics, this opportunity had been shamefully squandered!
Whist I agree with the early party of your analysis, I can’t go with your suggested solution. You seem to ignore the international dimension and experience. Put it simply UK not too great but non disastrous, rest of world to varying degrees worse.
I don’t like easy something- for-nothing solutions.There is no model for successful Green Quantitive Easing, if there were then the usual copy cat behaviour would happen. I don’t want Austerity for the sake of it, but I do want discipline in
Government expenditure to release funds for productive investment and not be wasted
by the usual suspects.
So you’d rather poverty?
“I don’t like easy something- for-nothing solutions. ”
What!!! What do think has been going on in banking and corporate finance for year. QE has gifted the richest 5% with another 80,000 a year. When people say what you say they mean: ” I don’t like the needy getting something that has not gone through the wealth syphoning mechanism”.
Richard,
Have you seen this post on Yves Smith’s blog?
Tax Havens Make US and Europe Look Poorer than They Are, Exaggerate Size of “Global Imbalances”
http://www.nakedcapitalism.com/2014/03/tax-havens-make-us-europe-look-poorer-exaggerate-size-global-imbalances.html
I can’t vouch for the maths, but the implication seems to be that tax havens make the economic situation appear worse than it really is, encouraging even more ill-advised austerity
It is an argument TJN has made for years
We missed a lot of buses in 2008. We have a bank that could have made loans to the self-employed, drawn back from the evils of investment banking & insisted on paying all its employees by civil service rates (since, after takeover they were, effectively civil servants). All too late &, it should be said, most of the wrong decisions were made under a Labour Govt.
Differential poverty will always be with us. For example once a upon a time it was a luxury to have a fridge,now it is a necessity. But apart from those who cannot help themselves, we should be helping people to help themselves, hand ups not hand outs.
On can always complain about bogie men, it’s all the banks fault, it’s all the neo liberals fault etc. One improves an economy by all those boring factors like good education system, efficient government, efficient and fair tax system, hard work discipline, leadership. Your contributors should stop blaming others, and go out
into the real world and well………….contribute.
Stephen
Sorry: you’re confusing absolute and relative poverty here
And are getting dangerously close to what looks like trickle down
In short, a very confused, and equally obviously failed neoliberal logic
Richard
Stephen
you literally couldn’t be more wrong. Working hard in a failed system will achieve nothing.
Your dogma is the economic equivalent of England’s football mantra, confronted with superior concepts & understanding, the response was always “if we just work harder, train harder..” Won’t work.
We have a bizarrely unproductive system that favours investment into houses that have been standing for 100 years over investing in real businesses, that leaves large stretches of our crowded island workless whilst pushing those wanting work into the South East & pays lipservice to the need to export while giving almost all inducements, financial & honorary, to a financial “services” (ha ha) industry which keeps most of us poor & is, quite rightly, regarded with a mixture of bemusement & disgust by everyone outside this country.
So working harder in the current system is, really, not a very good idea. Is it?
Sorry. Just noticed the comma after ‘mantra’ should, of course, have been a semi-colon.
Bye for now
At present the UK borrows at 3%. I don’t understand why you think the UK can or has borrowed at 0.5%??
That has increased over the last year and inflation has fallen
Government borrowing costs are net of inflation – it can make money, after all