Negative interest rates are fun for Governments

£30bn infrastructure programs! Ending taxation!

When bond yields are negative in real terms (as they are in Germany, the US and the UK) it leads to weird economic incentives.

Jonathan Portes has previously written about how interest rates this low mean that the government could embark on a £30bn infrastructure investment package for just the income raised each year by the now-defunct pasty tax. Portes, who is the director of the National Institute for Economic and Social Research, argued that:

If the government were, as I suggest, to fund a £30bn (2 per cent of GDP) investment programme, and fund it by borrowing through issuing long-term index-linked gilts, the cost to taxpayers - the interest on those gilts - would be something like £150m a year. . .

Twenty, or fifty, years from now, economic historians will look back at the decisions we are taking now. I cannot imagine that they will be anything but incredulous and horrified that – presented with these charts and figures – policymakers did nothing, international organisations staffed with professional economists encouraged them in their inaction, and commentators and academic economists (thankfully, few in the UK) came up with ever more tortuous justifications.

Today, Tyler Cowen argues that there is a dangerously underexamined hidden assumption in Portes' argument:

Keep in mind that the interest rates on quality government debt are down, in part, because the risk premium is up.  Non-governmental investments are perceived as riskier. . .

You might think the government investments are “low hanging fruit” in terms of quality.  Maybe yes, maybe no, but the low real interest rate doesn’t signal that, rather it signals merely that people expect to be repaid.

In this argument for more government investment, the notion of government investments as low hanging fruit is doing a lot of the work.

Cowen doesn't seem to be taking a fair approach to the situtation. Government investments aren't low hanging fruit so much as all other investments are unfeasibly risky. The long-term usefulness of transport, energy or education infrastructure, for instance, is little changed due to the current economic climate, so the multiplier for investment in them remains the same as it ever was.

But if investment in infrastructure is too risky, Matt Yglesias suggests another use for negative real interest rates: Stop collecting taxes. Yes, all of them:

Normally you face a tradeoff. Taxes impose costs on the present-day population that might impair wealth creation over the long-term, but to avoid taxes by borrowing you need to pay interest to creditors.

But the real interest rate we're being asked for is low. Less than zero. So what's the tradeoff?

Why not sell as many negative-yield ten-year bonds as the market will buy (sell enough bonds and presumably interest rates will rise) and let that auction revenue "crowd out" taxes as a way of financing government activities?

The really interesting thing about such a plan would be seeing the political fallout. In so many economic arguments, taxation, spending and size of government are used interchangably; lefties like big government, high taxes, and high spending, and right-wingers the opposite. But put a massive disconnect between the taxing and spending sides of government, and who knows which side of the line people will fall? Are the Taxpayers Alliance in favour of low taxes or small government? What about David Cameron?

The Bank of England at night. Could negative real interest rates change politics? Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Getty.
Show Hide image

Hannan Fodder: This week, Daniel Hannan gets his excuses in early

I didn't do it. 

Since Daniel Hannan, a formerly obscure MEP, has emerged as the anointed intellectual of the Brexit elite, The Staggers is charting his ascendancy...

When I started this column, there were some nay-sayers talking Britain down by doubting that I was seriously going to write about Daniel Hannan every week. Surely no one could be that obsessed with the activities of one obscure MEP? And surely no politician could say enough ludicrous things to be worthy of such an obsession?

They were wrong, on both counts. Daniel and I are as one on this: Leave and Remain, working hand in glove to deliver on our shared national mission. There’s a lesson there for my fellow Remoaners, I’m sure.

Anyway. It’s week three, and just as I was worrying what I might write this week, Dan has ridden to the rescue by writing not one but two columns making the same argument – using, indeed, many of the exact same phrases (“not a club, but a protection racket”). Like all the most effective political campaigns, Dan has a message of the week.

First up, on Monday, there was this headline, in the conservative American journal, the Washington Examiner:

“Why Brexit should work out for everyone”

And yesterday, there was his column on Conservative Home:

“We will get a good deal – because rational self-interest will overcome the Eurocrats’ fury”

The message of the two columns is straightforward: cooler heads will prevail. Britain wants an amicable separation. The EU needs Britain’s military strength and budget contributions, and both sides want to keep the single market intact.

The Con Home piece makes the further argument that it’s only the Eurocrats who want to be hardline about this. National governments – who have to answer to actual electorates – will be more willing to negotiate.

And so, for all the bluster now, Theresa May and Donald Tusk will be skipping through a meadow, arm in arm, before the year is out.

Before we go any further, I have a confession: I found myself nodding along with some of this. Yes, of course it’s in nobody’s interests to create unnecessary enmity between Britain and the continent. Of course no one will want to crash the economy. Of course.

I’ve been told by friends on the centre-right that Hannan has a compelling, faintly hypnotic quality when he speaks and, in retrospect, this brief moment of finding myself half-agreeing with him scares the living shit out of me. So from this point on, I’d like everyone to keep an eye on me in case I start going weird, and to give me a sharp whack round the back of the head if you ever catch me starting a tweet with the word, “Friends-”.

Anyway. Shortly after reading things, reality began to dawn for me in a way it apparently hasn’t for Daniel Hannan, and I began cataloguing the ways in which his argument is stupid.

Problem number one: Remarkably for a man who’s been in the European Parliament for nearly two decades, he’s misunderstood the EU. He notes that “deeper integration can be more like a religious dogma than a political creed”, but entirely misses the reason for this. For many Europeans, especially those from countries which didn’t have as much fun in the Second World War as Britain did, the EU, for all its myriad flaws, is something to which they feel an emotional attachment: not their country, but not something entirely separate from it either.

Consequently, it’s neither a club, nor a “protection racket”: it’s more akin to a family. A rational and sensible Brexit will be difficult for the exact same reasons that so few divorcing couples rationally agree not to bother wasting money on lawyers: because the very act of leaving feels like a betrayal.

Or, to put it more concisely, courtesy of Buzzfeed’s Marie Le Conte:

Problem number two: even if everyone was to negotiate purely in terms of rational interest, our interests are not the same. The over-riding goal of German policy for decades has been to hold the EU together, even if that creates other problems. (Exhibit A: Greece.) So there’s at least a chance that the German leadership will genuinely see deterring more departures as more important than mutual prosperity or a good relationship with Britain.

And France, whose presidential candidates are lining up to give Britain a kicking, is mysteriously not mentioned anywhere in either of Daniel’s columns, presumably because doing so would undermine his argument.

So – the list of priorities Hannan describes may look rational from a British perspective. Unfortunately, though, the people on the other side of the negotiating table won’t have a British perspective.

Problem number three is this line from the Con Home piece:

“Might it truly be more interested in deterring states from leaving than in promoting the welfare of its peoples? If so, there surely can be no further doubt that we were right to opt out.”

If there any rhetorical technique more skin-crawlingly horrible, than, “Your response to my behaviour justifies my behaviour”?

I could go on, about how there’s no reason to think that Daniel’s relatively gentle vision of Brexit is shared by Nigel Farage, UKIP, or a significant number of those who voted Leave. Or about the polls which show that, far from the EU’s response to the referendum pushing more European nations towards the door, support for the union has actually spiked since the referendum – that Britain has become not a beacon of hope but a cautionary tale.

But I’m running out of words, and there’ll be other chances to explore such things. So instead I’m going to end on this:

Hannan’s argument – that only an irrational Europe would not deliver a good Brexit – is remarkably, parodically self-serving. It allows him to believe that, if Brexit goes horribly wrong, well, it must all be the fault of those inflexible Eurocrats, mustn’t it? It can’t possibly be because Brexit was a bad idea in the first place, or because liberal Leavers used nasty, populist ones to achieve their goals.

Read today, there are elements of Hannan’s columns that are compelling, even persuasive. From the perspective of 2020, I fear, they might simply read like one long explanation of why nothing that has happened since will have been his fault.

Jonn Elledge is the editor of the New Statesman's sister site CityMetric. He is on Twitter, far too much, as @JonnElledge.