NS&I last week cut interest rates on their savings products to negligible levels. Which prompts the question: who’s to blame for this?
Many answers to this question are blighted by two widespread errors.
One is what psychologists call the just world illusion – the notion that the economy is fair. In truth, though, the economy is not a morality play in which we get our just deserts. Even if savers deserve a reward for their prudence (which some doubt) there’s no reason to suppose we’ll get it.
The other error has been pointed out by David Leiser and Zeev Kril. They show that non-economists are terrible at making causal connections, believing instead in simplistic stories of how good things cause good things and bad ones bad things.
In fact, though, NS&I are not to blame for their rate cuts. They are just responding to market forces. Before the cuts their rates compared favourably to many banks, with the result that they received big inflows. But these were an unnecessarily expensive way of funding government borrowing: why should the government borrow at rates above 1 per cent when it can borrow in the gilt market at negative yields? NS&I are merely aligning their rates with others.
Nor is the Bank of England to blame for low rates.
It is perfectly possible, sometimes, for the Bank to cut rates too much. When it does so, we get an inflationary boom. Which is exactly what we are not seeing. Even before the pandemic, economic growth was lacklustre and CPI inflation was below target. This fact tells us that the Bank was, like NS&I, responding to market forces that have for years been pushing down the natural or equilibrium rate of interest.
Exactly what these forces are is a matter of debate. Economists variously blame a shortage of safe assets, a global savings glut, ageing populations, falling profit rates and a dearth of investment and innovation – a dearth that itself is the product of several factors such as falling productivity in R&D, difficulty in monetising innovation or fear that future inventions will render current ones unprofitable.
The pandemic has reinforced these longstanding trends. In closing shops, pubs or restaurants (or making us fearful of going into them), it has forced many of us to save more. That drives down rates – and is a big reason why NS&I saw big inflows over the summer. Worse still, the pandemic might reduce longer-term economic growth – if, for example, it shifts the pattern of demand from sectors where there are capacity and skills to ones where resources are slow to move to.
All this suggests that nobody is to blame for the NS&I’s cut. Returns on savings are the product of emergent processes. No single individual aims for low interest rates. Instead, these are the unintended result of people doing other things for other motives. A free(ish) market economy does not always deliver the results we would like.
If you want somebody to blame, though, there is a culprit – the government. If it were to borrow more – to give more support to those at risk of losing their jobs and to the self-employed – it would boost current and future demand, thus raising interest rates. Better still, well-targeted efforts to help create jobs (for example in construction or in decarbonising the economy) might raise longer-term growth, which would also raise rates.
If savers want better returns on their money, therefore, they should abandon discredited ideas about 'fiscal responsibility' and call on the government to borrow even more than it is.
