Has Keynesian economics reached the final frontier of idiocy? I may live on the other side of the world, but this article in The Telegraph found its way to me. It is a story that makes me think that if Keynesian policy has not descended to the lowest of depths it has come incredibly close. What can one really make of this?
‘Savers should stop complaining about poor returns and start spending to help the economy, a senior Bank of England official warned today. . . .
‘Older households could afford to suffer because they had benefited from previous property price rises, Charles Bean, the deputy governor, suggested.
‘They should ‘not expect’ to live off interest, he added, admitting that low returns were part of a strategy.’
It is their ‘strategy’ to discourage saving! What complete fools they are.
If there is any ‘strategy’ more calculated to make economic conditions worse than they already are, a campaign to reduce private savings would be hard to beat. If you think like a Keynesian that an economy is driven by aggregate demand, then you must think that saving is a problem when the economy is in recession. And this is not just some academic non-entity teaching at the Hayseed-on-Wye Polytechnic but a Deputy Governor of the Bank of England with the full support of the Governor, Mervyn King!
And then having read this I came across another article, this time in the Mail Online, also about the views of another Deputy Governor of the Bank of England, where I found this.
‘Negative interest rates could become a reality in an “extraordinary” move by the Bank of England to kick-start the economy, one of its senior officials revealed yesterday.
‘Deputy governor Paul Tucker said a reduction of the base rate to below zero should be considered four years after it was cut to a record low of 0.5 per cent...
‘If the base rate did become negative, it would mean major banks would have to pay the Bank of England to hold their money. The idea is that this would encourage them to lend more to stimulate both business and house buying.’
I start with the assumption that both these views are so obviously wrong that merely putting them up on the page is enough. Everyone can immediately see why lowering interest rates to inhibit saving – even going so far as to contemplate introducing negative interest rates – cannot be anything other than harmful. But after three-quarters of a century of Keynesian economics dominating our texts we may well have reached the stage where virtually no one with a degree in mainstream economic theory any longer understands how an economy works. Really, how are we going to get out of the mess we are in if these are the best ideas those managing our economies have to offer?
Steven Kates is the author of Free Market Economics: An Introduction for the General Reader.
A worrying aspect of these type of policies is their long-term effect on people's attitudes towards saving, i.e. the way they undermine a 'savings culture'. Time preferences are likely to rise as result, breeding various negative effects including greater dependence on state safety nets.
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