One of my colleagues at the Rational Standard recently shared an article written by the Business Insider UK editor-in-chief entitled The failure of negative interest rates is a devastating intellectual defeat for conservatives. This bold title came across as quite bizarre, knowing the argumentative gymnastics in which the author would have to participate in order to move from their premises to that conclusion. Normally I would never write so pompous a title for an article, but the title given to that article was too bold and overconfident not to parody.
For those who don’t feel like wading through the article (if you need the ‘tl;dr’ as it were), the author’s argument is essentially the following:
Having negative interest rates in Europe is a bad policy, and many people (especially bankers) see this as a detrimental failure. Negative interest rates have come about as the result of monetary policy. It was political conservatives in the 1980s who advocated the use of monetary policy. Therefore, a large part of political conservatism faces an ‘intellectual defeat’.
On monetary policy as a ‘conservative’ tool
In making the above claim, the author failed to demonstrate why the use of monetary policy necessarily follows from conservative political philosophy, and why it is that conservatives do not favour fiscal spending in its place, for example. This is especially important when linking the failure of monetary policy back to that philosophy. That is to say, for the benefit of his own case, the author should have been a bit more thorough.
Nonetheless, let’s suppose that the author is correct in his claim. There is, after all, some reason to believe that it may be true. As chairman of the Federal Reserve during the Reagan Administration, Paul Volcker used monetary policy to significantly raise interest rates and curb inflation. It was largely the same story in the UK under Margaret Thatcher’s watch. So, for the sake of argument, we can assume that the use of monetary policy is necessarily a consequence of political conservatism.
Follow the logic…
Left-leaning governments have dominated – or at least, enjoyed as much success as conservative governments – in the European arena over the last 10-15 years. It is reasonable to assume that those facilitating monetary policy would be left-leaning as well, or at least carrying out the wishes of those left-leaning European governments.
If conservatism has failed by ‘introducing’ and encouraging the use of monetary policy, how much more has the Left failed for fully embracing it? Yet the failure is greater, still, because of how the Left has continued to implement policy which apparently contradicts their values and what they believe works. If the author’s claim is true, then this has effectively been a concession by the Left that the Right’s ideas are better.
This brings us to another important question: even if conservatives introduced governments to the idea of relying on monetary policy, are they also to blame for subsequent poor implementation? The author’s argument is akin to claiming that the whole idea of motorised transport is a failure, because some drivers are incapable and end up crashing into others. In retrospect, it just seems silly.
There is one respect in which I strongly agree with the author. Negative interest rates reflect a profound failure: on the part of European governments for neither setting the correct economic agenda nor understanding where economic activity and growth actually originate, and on the part of central banking technocratic ‘wizards’ who conceitedly believe that their monetary machinations will mend, rather than wreck, the economy.
Where to from here, and what about South Africa?
The conclusion of the article is essentially this: there are two ways in which the government can steer economic activity, namely fiscal policy and monetary policy. Since monetary policy has failed, we should revert to big government spending.
This dichotomy is completely false; there is no hallowed wisdom of big government policy that the world needs to discover anew. Anyone really interested in finding a solution, or at least demonstrating where the root of many economic problems lies, would realise that big government policies over the last century have failed the very citizens they purport to help.
Government spending can be harmful because government does not operate on the principle of profit and loss; its revenues are acquired forcibly, and its expenditure tends to be determined on an ad-hoc, politically expedient basis. It therefore does not receive the signals which indicate where spending and investment add the most value to society, or where such spending actually costs society more than it adds in value. While wasteful expenditure on flights, cars, hotels, meetings and the like are a problem, large infrastructural projects and upgrades can be even worse. As we can attest in South Africa, the government simply does not know what to build, which methods of production to use, how to optimise resources, how maintenance must be carried out, and so on. Such big government projects can form a massive and permanent drain on resources.
Monetary policy is no better, though – especially because of how it is used to influence interest rates. In a free market, interest rates are determined by the interaction between those who save, and those who seek loans. This has the incredibly important function of co-ordinating production – not just present production, but also future processes requiring different time periods to completion. When central banks, which are quasi-governmental institutions, are given free reign to influence interest rates, they wreak havoc with that important time co-ordination function. The origins of what we now call the ‘business cycle’, which is the systemic and repeated expansion and contraction of economic activity, can be traced back to monetary policy.
Clearly, big government ‘solutions’ have no place in a healthy economy. Moreover, big government policies are profoundly European; they are not suited to South Africa in particular, nor Africa in general. Yet the tragic failure of big government can be seen all across the continent. The best approach for South Africa is the Austro-Libertarian one: get government out of the sectors where it has no legitimate role.
Perhaps the author of the article in question was too hasty in declaring ‘devastating intellectual defeat’, especially since his own ideas on government fail; some humility would certainly go a long way in this regard.
Contrary to the author’s concluding assertion, now is not the time for any sort of ‘resurgence’. The tried-and-tested methods have failed. It’s time for some fresh thinking when talking about the economy.