Andy Haldane, the Bank of England's chief economist, has admitted that ultra-loose monetary policy is a drag on productivity. So why won't the Bank change course?
Productivity is the key to prosperity. Increased wealth comes from producing more using less effort, time, and resources. If productivity stagnates – as it has in the UK – prosperity will follow suit.
One of the drivers of low productivity growth is cheap credit. Inefficient companies that would otherwise have failed, and replaced by better competitors, have been sustained by artificially low borrowing costs.
Haldane's case for record-low interest rates is that they prevented mass unemployment. Perpetuating zombie companies was worth it, he claims, to safeguard jobs.
That argument had some force in the immediate aftermath of the financial crisis. Less so nearly a decade later. Keeping interest rates at record lows indefinitely means making low productivity growth the norm, while at the same time creating the conditions for another job-destroying financial crisis.
Cheap money is not the only reason for poor productivity. Another, which Haldane neglected to mention, is corporate welfare. Tax credits incentivise employers to use cheap (often imported) labour, rather than invest in new technology – as UKIP's Economy Spokesman, Mark Reckless, explains in a recent paper.
But the economic effects of artificially manipulating the price of capital shouldn't be underestimated. Experience has shown that official price controls create either gluts or shortages. Market prices always allocate resources better.
Capital is no different. Lower productivity is one of many dangerous imbalances caused by ultra-loose monetary policy. They need to be corrected, not excused.
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