Five years of 0.5% interest rates have been an opportunity gone to waste

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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.